Gold consolidating above $1,250 as Shanghai leads

 Gold Today –New York closed at $1,249.40 yesterday after closing at $1,251.5 Wednesday. London opened at $1,254.00 today. 

Overall the dollar was slightly weaker against global currencies, early today. Before London’s opening:

         The $: € was slightly weaker at $1.1145 after Wednesday’s $1.1155: €1.

         The Dollar index was weaker at 97.36 after Wednesday’s 97.57

         The Yen was stronger at 111.21 after Wednesday’s 111.39:$1. 

         The Yuan was weaker at 6.8374 after Wednesday’s 6.8258: $1. 

         The Pound Sterling was stronger at $1.2732 after Wednesday’s $1.2659: £1.

Yuan Gold Fix
Trade Date     Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    6    23

     2017    6    21              

     2017    6    20

SHAU

SHAU

SHAU

 

/

275.61

276.21

 

Trading at 278.1

275.91

276.18

 

$ equivalent 1oz at 0.995 fineness

@    $1: 6.8374

       $1: 6.8258

       $1: 6.8154     

 

   

/

$1,250.89

$1,255.54

 

Trading at $1,265.08

$1,252.25

$1,255.40

Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle East eastward metric measurements are used against 0.9999 quality gold. [Please note that the 0.5% difference in price can be accounted for by the higher quality of Shanghai’s gold on which their gold price is based over London’s ‘good delivery’ standard of 0.995.]

Shanghai is leading the way up again, albeit the rises are not that significant except to give the next direction. The gold price appears to have bottomed in all three global gold markets. We therefore must adjust our assessment of the gold price’s direction accordingly. While the Technical picture still remains a guide, the gold price is showing it must wait for Shanghai to lead the way.

On top of that we do not expect volatility in the future to give us the dramas we have seen since 2013. This is because the changes in Shanghai’s costs for trading have risen significantly, discouraging such speculation there. Any shorting or sales into the western gold markets are seeing that gold being taken out of the market to Asia.

Even central banks are having to pause in their attempts to control the gold price through sales of physical bullion into the market. We believe that the dealers are fully aware that any offers into the gold market of physical are taken up by China. We suspect such offerings are being either reduced or removed because of this eventuality.

What is becoming clear is that Shanghai’s pricing power over the gold price is being proved this week and last, as it has been leading the way both ways.

Silver Today –Silver closed at $16.50 yesterday after $16.41 at New York’s close Wednesday.

LBMA price setting:  The LBMA gold price was set today at $1,256.30 from Wednesday’s $1,246.50.  The gold price in the euro was set at €1,124.21 after Wednesday’s €1,117.74.

Ahead of the opening of New York the gold price was trading at $1,258.00 and in the euro at €1,125.63. At the same time, the silver price was trading at $16.76. 

Price Drivers

Oil

We mentioned the decline in oil early this week, but there is a need to highlight that it is generally recognized that oil prices have slid into a bear market. It is unlikely to come out of this, as oil production continues to rise  worldwide. It is also clear that as U.S. oil producers reduce their break even points supply will continue to increase as the oil price drops to those new levels. Libya and Iraq are continuing to increase supplies, so the OPEC cuts are having no impact. There will have to be greater cuts to offset production increases elsewhere. But the structure of supply now points to lower prices.

U.S. tightening

As oil prices drop and despite the growth that lower oil prices induce, inflation will fall alongside oil price falls. The Fed is unlikely to maintain the hawkish tone it put out at the last FOMC meeting last week as they see yields in the market continuing to fall. Any rate hike in this environment would therefore be excessively aggressive and could hurt the economic recovery.

Impact on Gold

Overall the market is reading this as positive for gold prices and negative for the U.S. dollar.

Market mood and volatility

Investors in all markets watch the Technical picture because it describes investor attitudes as they see fundamentals and trends. Fundamentals in themselves often have little bearing on prices in the very short term. One of the features they describe is momentum. Like a cyclist pedaling up and down hills the momentum he goes is often dictated by the inclines he faces. So after cruising downhill with rising momentum until he slows as he planes at the bottom his subsequent climb uphill is carried by the momentum he gained as he descended until he arrives at a point where his momentum slows to a near halt before he slips back down again. Markets behave like this.

They get tired near the top and see there is no more reason to climb, that has not already been discounted. At the moment markets have discounted a further rate hike this year by the Fed. If reasons are given not to hike, then markets will rise further. But eventually they will have reached their peak and will then fall. But in the U.S. equity market the rises have been phenomenal. The reasons they are rising now are not robust growth but because the yields equities offer are higher than found in fixed interest markets [Treasuries, etc]. If interest rates do move higher in this market there is a very strong likelihood that bond and equity markets will not just adjust down but fall heavily.

Gold will benefit as institutions see the dangers and invest in gold. With Asian central banks and investors buying all the gold they can at these prices it appears unlikely that gold and [by extension] silver prices will fall much more. However, if western investors join Asian investors in buying gold the upside is tremendous for gold.

In all markets a change of direction or major moves are preceded by a darkening of attitudes. The trigger

for such moves can be small and thought of as insignificant. Likewise in global markets. At the moment in the gold market volatility is very low, with prices holding narrow trading levels as markets remain in balance. We pointed out that short, medium and long term trend are coming to a resolution and will establish a future direction soon.

Gold ETFs – Yesterday for the first time in several days, we saw small purchases into the SPDR gold ETF of 0.296 of a tonne, not sufficient to move the gold price. In the Gold Trust we also saw purchases totaling 0.90 of a tonne. Their holdings are now at 853.980 tonnes and, at 207.96 tonnes respectively.

 Julian D.W. Phillips 

 GoldForecaster.com | StockBridge Management Alliance 

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