SGE benchmark takes gold price higher overnight

Article first published on news.sharpspixley.com 

There will be arguments as to which came first – the overnight rise in gold price on global after-hours markets, or the Shanghai Gold Exchange (SGE) pm fix – but the latest SGE figure of CNY 261.88 was at the higher end of trading being equivalent to around US$1,258 at the current CNY/USD exchange rate.  Whether the SGE gold fix is leading, or following, the general price trend is thus open to question.  But perhaps the principal driver of the overnight rise in the gold price will have been the fall in the US dollar, with the Japanese central bank keeping its monetary policy steady at its latest meeting.  The Japanese yen thus rose around 2% against the US dollar, which has a significant impact on the US Dollar Index, which fell around two-thirds of a percent.

Needless to say, though, the move above the $1,250 level, which had been strongly resisted on the U.S. and London spot markets yesterday, was breached in the overnight trade.  The CNY price differential between the am and pm ‘fixes’ in Shanghai was around 0.7%.  The big question is can gold retain these kinds of levels, or even mover higher?  (At the time of writing the spot price is sitting at a little over the $1,257 level).  Or will it be brought down again by the big players on the futures markets who could have a lot to lose should the gold price surge higher in having to unwind some big short positions?

Today’s trading will be interesting.  The statement out of the FOMC yesterday was pretty non-committal with the latest deliberations suggesting no further interest rate imposition until later in the year – perhaps even not until Q3 or Q4 – although this was hardly unexpected.  Followers of Fedspeak noted that the latest statement made no mention of the possible adverse effects of a US$ rate rise on the global economy, and particularly on emerging markets, which could have an adverse impact on the US economy.  But as usual the Fed was marginally positive on U.S. economic growth, although its forecasting record on this has not been particularly impressive in the past.

Overall it looks as though the very low interest rate scenario will continue, at least for the remainder of the year, which in effect keeps them in negative territory in real terms.  Coupled with negative and zero interest rates throughout much of the rest of the world, all this remains positive for gold in the short to medium term, and probably into 2017 at least.  To counter this GFMS reports gold demand fell to its lowest level for 7 years in Q1, primarily due to weak Asian demand.  Indian demand fell ahead of anticipated positive changes in the tax position on gold in the budget – which did not materialise, and subsequently led to a jewellers’ strike which will also have depressed Q2 demand.  Chinese demand was also down – some of which will have been due to the timing of the Chinese New Year.  Chinese demand has been reported as picking up of late.  However GFMS sees gold falling back to below $1,200 in the short to medium term, but remain above cyclical lows.  So far the gold price has not been co-operative!

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