Would not be surprised to see gold push lower

While we continue to believe that gold, structurally and fundamentally, remains in an upward trajectory, we would not be surprised to see gold push lower, and even push towards its 200-day moving average of $1,600. There are two factors which are putting downward pressure on gold. The first is weak EM currencies in general, and the Indian rupee (INR) in particular.

The second is funding stress in Europe. Physical demand is much weaker than it was six weeks ago. Much of the demand weakness is from India where the rupee has depreciated by more than 7% since the start of November. This has pushed gold denominated in rupees to all-time
highs this month. Even now, with gold coming off in dollar terms, gold denominated in rupees is still very close to its all time highs. In August, with gold around INR80,000/oz — INR83,000/oz, we saw strong demand, especially from India. Currently the gold price is at INR88,000/oz. If the rupee stays around the current INR52/$ level, and gold falls to $1,600, gold denominated in rupees would be back at the INR83,000 level. We expect stronger demand from India once again at those levels.

As far as investment demand is concerned, funding stress, especially for European banks remains, as is evident from the Euribor/OIS spread which remains at elevated levels. We continue to believe that the dominant fundamental driver of gold is global liquidity, followed by real interest rates. Funding stress puts pressure on liquidity and thereby, gold too. Funding stress also raises real interest rates. If this stress becomes to acute, gold (and all other commodities for that matter, will come under extreme downward pressure). However,
we believe that major central banks would try to prevent a money market breakdown akin to 2008. We also believe that this assistance would prevent gold from collapsing.

As a result, we would see a price dip towards $1,600 as a buying opportunity.

Comments

Post a Comment

Popular posts from this blog

Gold edges up on weaker dollar, dovish U.S. Fed policy bets

Image
 Gold edged higher on Monday, helped by a weaker dollar and expectations that the U.S. Federal Reserve will reiterate its dovish monetary policy stance this week. Spot gold was up by 0.1% at $1,943.58 per ounce. U.S. gold futures rose 0.1% to $1,950.10 per ounce. “Gold is firm on the basis that the Fed could adopt a further dovish message with respect to average inflation targeting,” said Michael Hewson, chief market analyst at CMC Markets UK. “If you want to have a policy of average inflation targeting, you’re going to have to go into detail as to how you are going to arrive at that particular outcome.” The dollar retreated on Mond ay, bolstering gold’s appeal for investors holding other currencies, ahead of the Fed’s policy decision due on Wednesday. “If inflation forecasts remain at 2% or below, this could offer gold a tailwind as the zero-yielding metal thrives in a low-interest rate environment,” said FXTM analyst Lukman Otunuga. Market participants are also wai...
Read more

For the gold price, two outcomes are possible.

Image
For the gold price, two outcomes are possible. First is a return to or near the April low ($1,277.40). Second is a drop to a lower low, $1,240 - $1,260. Yet a third possible outcome is that the June and December lows were not a double bottom and one further drop may come. I account that the least likely, and look for a low here by the end of the week, but I'm no more'n a nacheral born durnd fool from Tennessee, so what do I know?   You'd think that an institution charged with promoting the gold industry would produce reports that at least cast the best light on gold's prospects. You'd think wrong, if you're thinking about the World Gold Council. They've been negative on gold for, oh, the last 14 years or so. Today they issued a report that contained a nugget about Chinese business using physical gold as collateral for bank credit ($40 bn worth) but they managed to tease a gloomy forecast even out of this inventive monetary use. That and bad ...
Read more

The price of gold advanced as high as $1,603.40 per ounc

Image
The gold price broke out to a new all-time high above $1,600 per ounce Monday morning, rising for the eleventh consecutive trading session. The price of gold advanced as high as $1,603.40 per ounce before backing off to trade just the $1,600 level. The yellow metal gained on the back of a surge in borrowing costs for Italy, the latest European nation to see its bond market come under heavy selling pressure. The lack of a deal to raise the $14.3 trillion debt ceiling also helped boost gold prices. The eleven-day rise in the gold price is the longest winning streak since January of 1980. The gold price delivered another noteworthy performance last week, climbing 3.2% on its way to a series of fresh record highs. With Monday’s advance, the gold price extended its monthly and year-to-date gains to 6.6% and 12.5%, respectively. Last week’s two-day Congressional testimony by Chairman Ben Bernanke on the economy and monetary policy revealed that the Fed remains open to the...
Read more