Commentary for Tuesday, March 31, 2015 – Gold closed down $1.70 at $1183.10 in uneventful trading as gold seems content treading water waiting for something of importance to reenter the pricing frame.
So for now we are content with an “up and down” market – gold showed some early strength despite the stronger dollar. But trading boredom was the rule of the day as no one, particularly traders, seem too worried about either the Fed interest rate threat or the $4 trillion dollar expansion of the US balance sheet.
I’m fond of comparisons when using the $4 trillion dollar number because it’s so large most cannot comprehend how much money that really is – for all us civilians such a dollar amount would purchase 5% of all the real estate in the world. Thus our recent incursion into monetary expansion since 2008 has been called “the great experiment”.
As long as we are talking about big numbers consider the sometimes agued total US debt of $18 trillion dollars. That number is equivalent to the value of all US stocks – the S & P, the Dow, the NASDAQ – the pink sheets – the whole kit and caboodle. Now I’m not saying we are facing the bigger than life financial blowup anytime soon – but you should wonder at the logic behind placing all your financial assets into such a closed system.
The absence of small gold bullion coins like the French and Swiss 20 Franc and the British Gold Sovereign continues – premiums remain high in the US because there is nothing coming out of Europe. Some speculate that demand in the EU countries and certain restrictions on cash transactions has spurred demand.
Gold is actually holding up better than I would have expected when you consider its price relative to dollar strength. The Dollar Index over the past 5 days has been generally higher moving from just over 96.00 to a high approaching 99.00 – as of this writing we are trading around 98.36. Consider gold’s closing price during this same time frame – $1184.80 / $1199.80 / $1205.10 / $1197.30 / $1191.70. The top to bottom spread in price has been $20.30 – pretty flat considering all the talk about interest rate increases by the Federal Reserve and a generally negative longer term technical picture for gold.
The two biggest factors weighing on the price of gold continue to be dollar strength and the coming interest rate hike, perhaps as soon as April or as late as the summer months. Because this possible rise in interest rates has been talked to death I really don’t expect fireworks. For sure gold will sell off on the news but you might be surprised when the dust settles.
Dollar strength could be a problem however especially if the euro tanks. But early reports out of Europe seem optimistic that the newly initiated quantitative easing program is working.
So consider that if the dollar strength/interest rate hike scenario is a push we are back to real physical demand for gold. Both China and India continue to surprise even though there is the usual talk about China being overextended. I never know what to make of these comments – the whole world is overextended – quantitative easing has become a way of financial survival. Still on the short term all of this seems to be holding together so let’s not completely knock the scheme – but at the same time let’s make sure our insurance policy (gold) does not expire.
On the shorter term I expect the price of gold will remain range-bound. The range however looks very deep – consider the one year chart in gold – something between $1150.00 and $1300.00. We can narrow that range down or perhaps consider a test of lower levels after we know for sure what the Federal Reserve is going to do with interest rates this year.
Silver also closed quietly today down $0.08 at $16.58. We are once again approaching the “silver is cheap” area relative to physical demand. It would seem that anything in the mid to high $15.00 is the beginning of the call to action. The world mints continue to produce new silver bullion products at a record rate – they would scale down if they thought the public was losing interest.
Platinum was up $26.00 at $1143.00 and palladium was up $6.00 at $735.00. The big trades of gold bullion for platinum bullion have dried up – not sure why. Platinum remains at a large discount to the price of gold ($40.00) so it may be that the absence of platinum bullion coins has muted this trade.
This from Reuters – U.S. jobs data due on Friday, when many will be away for the Easter long weekend, will be a major event this week and a robust report could see investors position for tighter monetary policy sooner rather than later. But outside the labor market, there were still signs that the U.S. economy hit a soft patch in the first quarter. Consumer spending barely rose in February as households used the windfall from lower gasoline prices to boost savings to the highest level in more than two years.
This from Neils Christensen (Kitco) – Gold Should Rally on Muted Fed Rate Hikes – BAML – “Commodity analysts from Bank of American Merrill Lynch reiterate in a report Monday their call that gold will end the year around $1,300 an ounce. The biggest influence for the yellow metal will be the U.S. dollar and global interest rates. The Federal Reserve is the only major central bank in a position to raise rates, but there is some concerns what impact a strong U.S. dollar will have on the economy and equity markets. “We believe the Fed does not live in a vacuum and is not able to run a monetary policy that is completely independent from non-US monetary authorities. As such, we see a risk that rate hikes will only come through at a muted pace, which in turn would help gold,” they say. The analysts also note that there is a risk of coordinated efforts from central banks as they use foreign exchange markets as a monetary policy tool. They say there is a risk that central banks could create a Plaza Accord 2.0. The original Plaza Accord was made in 1985 between France, West Germany, Japan, and the UK to depreciate the U.S. dollar against those respective currencies. “While the macro-economic environment has been slightly different, it is worth remembering that gold rallied in the wake of the Plaza Accord,” they say.”
This from Lawrence Williams (Mineweb) – China gold flows to hit Q1 record – Chinese gold flows as represented by withdrawals from the SGE will hit record levels for Q1 this year.
Withdrawals from the Shanghai Gold Exchange (SGE) remain exceptionally high despite being expected to drop following the Chinese New Year holiday. In the three weeks of trading since the holiday’s end, withdrawals from the exchange have totalled 149 tonnes which would seem to belie other reports that demand is slipping.
The latest figure from the SGE is for the movement of 53 tonnes out of the Exchange during week 11 (ended March 20), following 51 tonnes a week earlier and 45 tonnes in week 9. Total to March 20 is thus already 561 tonnes. So withdrawals from the SGE appear to be rising week on week at a time when they would normally expect to be falling back after the holiday buying spree has ended. Should the gold flows out of the exchange continue at this kind of rate, then the Q1 total figure will be of the order of 620-630 tonnes – comfortably a new Q1 record.
Even at the lower end of the likely Q1 flow level this would be 10% up on the previous highest Q1 withdrawal amount, which was 564 tonnes (this has almost been reached already with flows for seven working days yet to be announced) recorded a year ago when the full year figure was 2,102 tonnes. QI withdrawals will thus undoubtedly set a new record.
If this increase figure is indicative of the year ahead the China gold flows, as represented by SGE withdrawals, could this year reach a new record 2,300 tonnes or more – getting on for 75% of new mined supply assuming this is flat this year – CPM suggests, though, it will actually be 4.6% higher as recent new projects and expansions reach full capacity.
There are reports, though, that Asian demand has slipped back in the past week as the gold price rose with premiums dropping significantly in India and China. It remains to be seen as to how much this affects gold flows for the past week and in the weeks ahead.
As we noted in the recent article on the CPM Gold Yearbook findings, there is some disagreement over whether the SGE figures represent an accurate picture of total Chinese wholesale demand. CPM reckons there is a significant element of double, or even triple, counting in movements of gold from fabricators in and out of the exchange. But Koos Jansen, who probably follows the SGE figures more closely than anyone and also is something of an expert on the SGE’s rules and regulations, feels that this is incorrect, at least as far as significance is concerned. He does say though that the launch of the international section of the SGE – the SGEI – which can represent gold flows in and out of China without them landing in the domestic market, could distort the figures a little, but reckons this level is very small as his investigations have revealed that most SGEI handled gold is ending up in China in any case.
Indian demand is also said to have surged in the month following the February budget when, contrary to expectations, the import duty on gold was not relaxed from its 10% level. There are also reports that the real Indian flows are much higher as gold smugglers become more adept in getting quantities of gold into the country to take advantage of the duty-induced premiums prevailing on the open market. But again, Indian demand also looks as though it may have slipped as the gold price rose. But with the Akshaya Tritya festival coming up next month, when it is seen as auspicious to buy gold, and with prices falling back below the $1200 level on Friday, this demand could pick up again.
The walk-in cash trade was moderate to slow and the phones were exactly the same. No buzz whatsoever and reports from other dealers I talked to this morning are similar. A new popcorn machine downstairs is once again on my high priority list.
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