Commentary for Thursday, March 26, 2015 ( www.golddealer.com) – Gold closed up $7.80 at $1205.10 as safe haven buying increased over Middle East tensions. Saudi and coalition forces directed airstrikes against Yemen in an attack directed against Iranian backed rebels.
There was some concern early on in trading that this would seriously affect the price of oil but Yemen is a relatively small player – 39th in the world oil market and the attacks are not close to oil reserves. Still more Middle East tension underpins the price of gold which recently has been taken off life support in the technical hospital.
The World Gold Council said that smugglers will likely move 200 tonnes of gold into India this year in an attempt to evade the current 10% tariff. This month has been a barnburner for gold imports and will likely exceed 150 tonnes. The expected 945 tonnes which should legally be brought into India this year would be the biggest number in four years. Also helping the price of gold has been nervousness in equities both here and in Europe.
The overnight market in gold was strong – at one time trading above the $1215.00 mark but dollar strength likely capped all the price activity. The Dollar Index traded in a range between 96.17 and 97.55 and is 97.40 as of this writing.
Silver closed up $0.14 at $17.12 and this reaction to higher silver prices is a bit counterintuitive. The buying pattern in a defensive market usually slows as prices increase. Silver’s most recent low was $15.34 on March 11 th and as the market bounced above $16.00 this is what happened – buyers slowed down – but then this pattern reversed. You would think the buying public would slow down in the $17.00 range – and maybe they will – but not today.
Platinum closed up $7.00 at $1153.00 and palladium was higher by $8.00 at $773.00. Our entire allotment of the platinum Platypus (Australia) has sold out even before it arrived – which is tomorrow. The American Platinum Eagle in any size remains unattainable – the US Mint continues to claim that they stopped production because there was little demand.
Chicago Mercantile Exchange reports for the last 5 trading days – so we are looking at the trading volume numbers for the April Gold contract: Thursday 3/19 (203,231) – Friday 3/20 (192,515) – Monday 3/23 (180,814) – Tuesday 3/24 (155,010) – Wednesday 3/25 (111,698). The trading volume has significantly slowed over this past week.
This from Kati Pohjanpalo (Bloomberg) – ECB’s Bond-Buying Is Already Helping Economy, Liikanen Says – (Bloomberg) — The impact of asset purchases by the European Central Bank is visible in the euro-area economy, according to Governing Council member Erkki Liikanen.
“Monetary-policy decisions and the measures taken have already had a clear, positive impact on the economic outlook,” Liikanen, who also heads the Helsinki-based Bank of Finland, said in an e-mailed statement Wednesday. “The ECB is committed to delivering on its primary mandate: Price stability.”
Sovereign-bond purchases by the Frankfurt-based central bank started this month as it seeks to jolt the 19-member euro area toward faster price growth. The ECB has pledged to spend 60 billion euros ($66 billion) a month on government debt, covered bonds and asset-backed securities for a total of more than 1.1 trillion euros.
“The large-scale asset purchases will be carried out at least until end-September 2016 and in any case until the Governing Council judges the pace of inflation is returning sustainably to a level in line with the price-stability objective,” Liikanen reiterated. “We are committed to that resolutely and without doubt,” and “we believe this is going to be enough if we hold on to the commitment,” he said.
In the first two weeks of the program, the ECB settled 26.3 billion euros of public-sector bond purchases.
QE Marathon – “If QE was a marathon, we’ve now run 1 kilometer and we have 41 km left to go,” Liikanen said. “That’s why a steady, calm, determined pace is extremely important.”
While inflation won’t reach the ECB’s goal of just below 2 percent until 2017 with consumer prices falling 0.3 percent in February, ECB President Mario Draghi has said that a sustained recovery is taking hold. Euro-area business activity expanded faster than economists forecast this month, and confidence improved in Germany and France.
Economic growth in 22 countries encompassing the euro area, Sweden, Denmark and the U.K. will accelerate to 1.6 percent this year and 1.9 percent in 2016 after expansion of 1.2 percent in 2014, the Finnish central bank forecast. That’s slower than global growth, which it projects accelerating to 3.5 percent by 2016 from 3.1 percent last year.
From the World Gold Council (www.gold.org) – Gold Investor – In this eighth edition of Gold Investor, we take a closer look at gold’s performance and its relevance for investors in the current environment. In particular, we explore: Gold in a rising dollar environment: Generally, there is an inverse correlation between gold and the dollar. However, our analysis shows that the gold price increases more when the dollar weakens than it falls when the dollar strengthens. In our view, the dollar’s relationship with gold has changed dramatically over the past decades and is likely to shift further as demand moves East and the world moves to a multicurrency system.
The market may be wrong about gold and US interest rates: Many investors believe that a rise in real US interest rates will certainly be bad for gold. Our analysis shows that other factors – some positively correlated to the economic growth that often accompanies rising rates – can have more influence on the gold price. We also highlight gold’s benefits in a portfolio at a time when stocks and bonds may deliver lower-than-average returns in coming years.
We have broken down the drivers of gold into key factors: currencies, inflation/deflation, interest rates, consumer spending and income growth, systemic and tail risks, and supply-side factors.
Currencies – While gold is no longer an official anchor of currencies, it has many key currency related features. It is a well-established unit of exchange and it trades in a deep and liquid market. Of particular value to investors is gold’s negative correlation to the US dollar and other developed market currencies, as well as its use as a store of value in countries with volatile foreign exchange rates. In addition, the quantity of available gold stocks can only grow by its annual mine production – in contrast to fiat currencies that can be expanded at will. This scarcity helps investors protect against losses in purchasing power.
Inflation/deflation – Variables such as inflation have a profound impact on how investors and consumers view gold. Inflation and inflation expectations at the local level dictate consumers’ purchasing power, driving the decisions of whether they buy something today or defer until tomorrow. High inflation can be disruptive and expectations of such an environment have a significant influence on gold demand. Yet, because gold demand is global, the effect that inflation has on gold needs to be analysed not on a country by country basis but at the global level. In addition, and perhaps surprisingly to some market participants, gold performs better than other assets (with the exception of cash) during deflationary periods.
Interest rates – Interest rates are a key component in the valuation of financial assets because they measure the opportunity cost of holding cash (and high-quality short term bonds) relative to any other asset. High interest rates can increase the opportunity cost of investing in gold, but the economic environments in which they develop also coincide with strong periods of gold jewellery and technology demand. In addition, global interest rates – not only US rates – ought to be taken into consideration.
Consumer spending and income growth – Jewellery, bars, coins and technological applications make up the majority of demand. Growth in disposable income and consumer spending promote purchases of these goods. As emerging market economies (which account for the largest share of demand) grow, higher levels of wealth can increase demand for gold.
Systemic and tail risks – As systemic shocks and tail risks affect global markets, investors seek high-quality, liquid assets such as gold. These types of events do not occur regularly and are difficult to predict, but they can have a devastating effect on investors’ wealth. Gold has been shown to help investors mitigate these losses. In addition, the occurrence of systemic risks may structurally change investors’ risk tolerance and their portfolio management practices, and favour diversifiers – like gold – as strategic components in their asset allocation.
Momentum (short-term investment flows) – Short-term investment flows, driven by momentum and other technical drivers can exacerbate short-term movements in the gold price – especially in periods when flows are largely driven by leveraged (often derivative) securities. While these flows can be a conduit of ‘price discovery’ and provide liquidity, they are not always correlated with the long-term drivers of demand and supply. As such, short-term flows tend to cause transient departures on the gold market long-term trend.
Supply-side factors – The factors above relate to the motivations for purchasing gold. On the other side of the equation, the supply used to meet the demand for these purchases is also a factor that can influence the gold price. Gold supply can come in the form of mine production or recycled gold. All else being equal, a decline in the supply curve may increase scarcity and result in buyers being willing to pay more for gold.
These seven drivers interact with each other through various channels to affect the gold market and its price. For example, US interest rates and inflation have a large impact on the attractiveness of the US dollar. Interest rates and inflation have an impact on consumer spending and miners’ decisions to expand production. Prolonged periods of low rates may inadvertently result in certain markets overheating and result in subsequent contractions. These relationships are just a few examples that could potentially complicate investors’ attempts to base investment decisions involving gold on individual variables. Further, the changing nature of the gold market means that the importance of each driver and interactions among them must be revisited when structural shifts occur.
The walk-in cash trade was surprising average and so were the phones. Under normal circumstances any airstrikes in the Middle East should be worth $50.00 in the price of gold but the world may just be tiring of constant strife.
The GoldDealer.com Unscientific Activity Scale is a “ 5” for Thursday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Thursday – 4) (last Friday – 7) (Monday – 5) (Tuesday – 4) (Wednesday – 8). The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be busy and see a low number – or be slow and see a high number. This is true because of the way our computer runs what we call the “book”.
Our “activity” is better understood from a wider point of view. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.
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