As we know US is flowing the market with they printed money next year. This money will expected to result in inflation so Gold price sure will be up like most of the commodities. China and India is the biggest Gold buyer in 2010 and with all the Gold in hand they can change world currency, but US may not easily give up they dollar out from world currency because if this happen they money printing plan will be no value.
Gold appears to be stuck in the doldrums for the moment, with yesterday’s lethargic and sideways trading continuing into Tuesday. Gold is drifting sideways heading into Tuesday afternoon, trading in a narrow range and on the back of thin volumes.
Yesterday saw the precious metals move higher ahead of the FOMC statement as dollar weakness combined with safe-haven demand. However, this support soon evaporated as the Fed maintained its commitment to $600bn of treasury purchases. Unsurprisingly, the FOMC reiterated that the economic recovery, while continuing, is still insufficient to reduce unemployment.
Breakeven inflation in the US, as implied by the US bond market, is edging higher. 2-year breakeven inflation is now at 1.02%, up from 0.65% less than a month ago. The Fed wants higher inflation. However, US unemployment is also edging higher which the Fed doesn’t want. While higher long-term rates are negative for precious metals and gold specifically, in relative
As anticipated, Gold lost ground ahead of the weekend close. After China’s move to raise bank’s reserve requirements investors began to move out of commodities in anticipation of the central bank raising interest rates over the weekend. However, this further tightening of monetary policy did not materialise, leaving many investors, particularly in Asia, caught short on their bets for a rate hike. Short covering has contributed to a rally in Gold.
The 10-year implied real interest rate in the US is now at 1%, up from 0.60% at the end of November. A rise in real interest rates is bearish for gold and seems to be capping upside at the moment. However, despite the latest rise in US real interest rates, the fact that the level of real rates remains low, still makes gold investment attractive. As a result we believe real interest rates will have to rise much higher before any long term negative impact will be seen on gold investment.
Gold above $1,385 has attracted physical metal selling which may provide some resistance as we head towards $1,400. We expect physical selling to turn into buying should gold decline towards $1,360 again. We continue to expect gold physical demand to prevail on dips into January - Indian demand should remain positive until at least mid-December on the back of wedding season. We also still have the festive seasons in the Western Hemisphere as well as Chinese New Year. In 2011 Chinese New Year is on 3 February.
Disappointing US non-farm payrolls figures on Friday saw investors flock to the relative safety of precious metals. Non-farm payrolls rose only 39k in November, a far cry from expectations of a 150k increase. In addition, the unemployment rate unexpectedly increased to 9.8%. The release saw the trade-weighted dollar drop by the most in six weeks, intensifying the rally in precious metals, with silver and palladium leading the charge.
We believe China’s gold production in 2010 should be close 350 tonnes. Legally gold is not allowed to be exported out of China. If the pace of imports during the first 10 months continues in November and December 2010, gold imports into China should be close 250 tonnes. This puts China’s 2010 implied gold demand at 600 tonnes. We believe the rise in gold demand is mainly on the back of increased jewellery and investment demand (industrial demand remains small).
We believe China’s gold production in 2010 should be around 350 tonnes. Gold exports are not allowed to be exported out of China. If the pace of imports we saw during the first 10 months continues in November and December 2010, gold imports into China should be around 250 tonnes. This puts China’s 2010 implied gold demand at 600 tonnes. The same calculation puts
Gold continues to edge higher in both dollar and euro-terms. We still favour euro-gold to outperform dollar-gold in the next few weeks. Investment demand is still driven by Euro-zone debt problems which remain at the forefront – the 5y CDS for Portugal, Spain and Italy is still rising.
In the gold physical market we believe buying interest will remain on dips in the physical market, while it is likely to slow somewhat when gold approached $1,375, but on balance we believe the interest will be buying, not selling. The IMF indicated they sold 19.5 tonnes of gold in October. This is part of the 403.3 tonnes the IMF in 2009 indicated they would sell and as a result we view this announcement as market neutral.
Sovereign risk remains at the forefront as bond yields in Portugal and Spain continues to rise. The 10y yield on Spanish debt rose to record levels around 5.17% yesterday. The euro is still struggling. We continue to see net physical buying of gold, especially on dips. We maintain gold in euro-terms will outperform gold in dollar-terms.
Since then an easing off in the dollar has helped precious metals, especially silver and palladium, recover. Bargain buying, mostly in the physical market, is also providing some support across the precious metals complex. However, investor demand is fading as tensions in the Korean Peninsula ease and with US markets on holiday. This seems to indicate a day of muted trading and limited price moves, barring any significant developments in the Eurozone debt situation or between North and South Korea.
Concerns remain over European sovereign debt, with 5y CDS rising for Spain, Portugal and Ireland yesterday - despite the Irish bail-out plan. These concerns are set to weigh on the euro. Credit concerns are also set to benefit gold. Based on the physical market, gold remains a buy on dips. We believe sovereign credit risk in Europe, combined with the physical market should see gold in euro-terms outperform gold in dollar-terms for the time being. We've seen strong physical selling and scrap gold coming to market during the first two weeks of November as the gold price pushed above $1,400.
We believe gold remains a buy on dips. Not only do financial market conditions support gold investment demand, but the physical gold market also remains supportive. We have seen strong physical selling and scrap gold coming to market during the first two weeks of November as the gold price pushed above $1,400. However, the latest decline in the gold price to below $1,350 last week has spurred renewed physical buying interest.
we estimate that a gold price around $1,375 fully price a QEII program of $600bn. As a result we need either greater sovereign credit problems out of Europe, combined with bond buying by the ECB, or further dollar weakness driven by events other than QEII, to push gold much higher.
Gold continue to be bolstered by investor demand, which in turn is supported by the weaker dollar. As it becomes more likely that Ireland will accept an EU bailout, fears over contagion spreading across the Eurozone’s debt markets are diminishing, improving confidence in the euro. As highlighted yesterday, buying in the physical market (especially in India) is
As noted in the Base section, fears over Chinese monetary tightening have also been reignited, keeping precious metal prices subdued this morning. Of interest however, are reports that China is looking to gradually increase its reserves of gold and oil.China currently holds around 1,064 mt of gold, compared to 8,133 mt for the US. While the scope for China to increase its gold reserves are limited in the short term, it will nevertheless be interesting to see whether Chinese reserve holdings to gradually pick up over the coming months and years.
A strengthening dollar and some profit-taking continued to weigh on Gold during Monday’s trade. In addition, the announcement that the CME would be raising initial and maintenance margin requirements on precious metals, pushed gold and silver down even further. Gold margins will be raised by 5.9% and silver by 11.5%, effective from the close of business today.
Nevertheless, Asian demand remains weak, with even some sporadic selling emerging. Rumours that the Chinese government will take action to stem inflationary pressures and limit speculation will likely keep investors on edge and mostly on the sidelines for now. The draw of gold as a safe-haven also appears to have diminished, in spite of the on-going troubles faced by Ireland and the Southern European nation. Consequently, we expect prices to remain range-bound, albeit with one-eye on fluctuations in the dollar.
Precious metals continued the see-saw pattern of the past week, falling significantly during early trade today, on the back of weaker Asian equities and a stronger dollar. With Eurozone debt fears again the focus of the market, gold and silver are in the middle of a tug of war between currency movements, in reaction to the sovereign debt issues in Europe, and from safe-haven
The precious metals moved in tandem with the dollar on Wednesday, however this morning has seen the likes of gold and silver rally, in spite of a stronger dollar, or rather euro weakness. Concerns over sovereign debt issues in Europe, and Ireland in particular, appear to be shielding gold with safe-haven buying activity propping it up and seeing it temporarily detach from its
Despite periods of dollar strength, especially against the euro, gold and silver have once again touched record highs. Silver led the way, closing on above $27.70/oz on Monday before powering through $28.00/oz during Tuesday morning. Gold also sailed through $1,400/oz on Monday without any difficulty, with the metal going on to trade above $1,420/oz ahead of US trade.
That gave a green light to most assets to make strong gains, and for gold prices to break out to record highs. Gold advanced $45.50. Gains in energy prices provided inflation suggestions to gold, suggesting that it would be needed as a hedge. Later on Thursday, Pres Obama said that he is open to extending the tax cuts to all income groups, and the Fed said it would consider allowing stronger banks to raise their dividend payouts.
Estimates for QEII are as high as $2tr, although consensus remains for around $500bn as an initial announcement next week. As stated yesterday, we believe the risk is that the Fed will disappoint the markets, and rather announce a staggered approach with smaller amounts of asset purchases on a monthly basis. If so, gold could fall next week.
The physical gold market has undergone a marked change in the past week. Until last week the physical market has provided resistance to a higher gold price - now it is providing support. We have seen strong physical selling and scrap gold coming to market since mid-September, as the gold price pushed higher.
The market still focuses on QEII. Investor commodity interpretation of QEII still look at gold. They believe the gold market is pricing $500bn of QEII already. Our estimates are based on gold's close relationship since 2004 with global liquidity of which the Fed's balance sheet makes up an important component.
Gold have been hit hard as investors take profits and adopt a wait-and-see approach ahead of next week’s FOMC meeting (2-3 Nov). Growing uncertainty over the magnitude of the Fed’s second-round of quantitative easing has seen a resurgence in the dollar and an accompanying push lower on commodities. The consensus has been for around $500bn in monetary accommodation, though conflicting signals from recent data flow and comments by Fed members seems to have dampened these expectations.
Market Commentary
Comments by US Treasury Secretary Geithner that the world’s major currencies are “roughly in alignment” saw the dollar surge briefly, prompting a slight pullback in precious metals in early trade. Soon, however, investors returned to precious metals as expectations over increased liquidity (Fed monetary easing) once again took hold.
We maintain the gold price at $1,350 is consistent with quantitative easing by the Fed of $500bn. Anything less may see the gold price lower. Empirically, we find the long-term causal drivers of gold are global liquidity and real interest rates. Lately, gold has diverged by some margin from the long-term trend provided by these causal drivers. Divergence by gold from this longterm trend is not unusual, but the speed, size and timing of its divergence coincide with the increasing expectations for further QE.
Today, comments by the US Treasury Secretary have lent the dollar some support, prompting a slight pullback across the precious metals complex. Treasury Secretary Geithner committed to working “very hard” in order to ensure that “confidence in a strong dollar” is preserved. Unlike yesterday, the dip in prices, has failed to attract significant physical buying in gold and silver.
However, with no indication as yet of the amount, market estimates vary between $100bn to $1.5tr. The average estimate is around $500bn, which we believe is consistent with the current gold price of around $1350. Expectations of further QE, and the associated dollar weakness, should keep gold buoyant for the remainder of the month.
Empirically, we find the long-term causal drivers of gold are global liquidity and real interest rates. We define global liquidity as the Fed’s balance sheet plus global foreign reserve holdings (excluding gold). Gold trades around the long term trend these two variables provide. All other factors are short term drivers. Lately, gold has diverged by some margin from the long-term trend provided by these causal drivers. Divergence by gold from this long-term trend is not unusual, but the speed, size and timing of its divergence coincide with the increasing expectations for further QE. We find that:
For some time now, we have said that the long-term causal fundamental drivers for investment demand in gold is liquidity (not necessarily inflation) and long-term real interest rates. At the moment, both support a higher gold price into next year (see Commodities Insight dated 11 Aug 2010). The BoJ’s announcement yesterday spells a higher gold price. Gold’s relationship with liquidity is confirmed visually (see graph) as well as empirically. We measure global liquidity as the US Fed balance sheet plus global foreign reserves holdings excluding gold. YTD, our measure of global liquidity is up 10%. The gold price is up 18% YTD.
A look at short-term correlations shows that much of the latest rally in precious metals was driven by dollar weakness. At the same time, metals have seen speculative length and open interest rise across the board in recent weeks. In the physical market, scrap gold is coming to the market. We would not be surprised to see a pull-back in gold towards $1,300.
With gold having reached our target of $1,300, we expect support to remain in place, mainly from investment demand. But elsewhere in the market, strong resistance to a higher gold price is building.
Gold had a consolidation day on Wednesday, trading sideways before closing just below $1,310/oz. The ongoing debt problems in Europe have undoubtedly been one of the driving factors behind gold's ascent over recent months, however, renewed concerns over Ireland and other Eurozone countries like Spain appear to be having less of an influence on prices. Moody’s downgrade of Spain to Aa1 from its top level of Aaa today was well flagged and had little lasting impact.
The market certainly appears to have become increasingly bored with the Eurozone story, particularly with the potential for QE2 in the US on the horizon. As such, the markets appear to have established a degree of immunity towards these sorts of headlines for the time being, with gold failing to benefit as much from its “safe haven” status as it has done in the past. That said, gold and silver have nevertheless benefited from buying into dips, with that activity helping to support prices.
