Market turmoil could see investors retreat into gold

New York closed Friday with the gold price at $1,108.40, up $1. This morning gold was trading at $1,108.00 in Asia. In the euro this was 976.60 down €12.99.  This morning the dollar index started the day at 95.09 one full point down from 96.09 on Friday. The LBMA gold price was set at $1,008.00 up 25 cents from Friday. The euro equivalent was €978.80 down again by €11.86 reflecting the remarkable strength of the euro. Ahead of New York’s opening gold was trading at $1,106.90 and in the euro at €978.09.

The silver price was down 25 cents on Friday down from $14.75 down to $14.50 in New York. Ahead of New York’s opening silver was trading at $14.45.

Price Drivers

The euro is rising strongly to trade against the dollar at $1.1344. Before the turmoil in the last month the euro was at $1.07 then it rose to $1.17 at the height of the turmoil. We then saw more Q.E. from the E.C.B. which should have dropped the euro. But here we are with the euro strengthening as the Shanghai Composite index resumes its fall at the start of the week.

US forward interest rates are persistently above those in the Eurozone and yet the euro is strengthening. It would appear that measures of market liquidity support the conjecture that strained market liquidity conditions are at least partly to blame for the increased volatility. We are bracing ourselves for another bout of turmoil!

The ‘carry trade’ is particularly sensitized to increased potential volatility, which appears to be imminent and likely already taking the euro higher. Perhaps this is due to the coming FOMC statement on interest rates and pushing them to adjust their positions for the worst. The most vulnerable markets are developed world equity and bond markets but the emerging world is bracing itself for body blows to their exchange rates, in particular those of gold-loving nations. With the E.C.B. buying sovereign bonds [particularly ‘bunds’] liquidity is being sucked out of these markets, making them much more volatile.

What prospects for gold and silver this week? If turmoil returns as seen in the last month, we expect investors in the developed world to retreat into these precious metals. Confidence in financial markets will be lessened by such turmoil. And this will happen at a time when global demand, particularly in Asia is moving to a seasonal high point. This should bode well for gold and silver prices.

We did not see a sale or purchase into or from the SPDR gold ETF but did see a sale of 0.45 of a tonnes from the Gold Trust, on Friday. This leaves the holdings of the SPDR gold ETF at 678.183 tonnes and 159.90 tonnes in the Gold Trust.

Silver was much stronger than gold last week and is likely to be so this one too

Julian D.W. Phillips for the Gold & Silver Forecasters

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