Global demand driving gold prices higher.

Gold Today –New York closed Friday at $1,269.40. London opened at $1,266.45 today. 

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

         The $: € was weaker at $1.1725 after the Friday’s $1.1709: €1.

         The Dollar index was weaker at 93.50 after Friday’s 93.71

         The Yen was stronger at 110.67 after Friday’s 111.23:$1. 

         The Yuan was stronger at 6.7282 after Friday’s 6.7415: $1. 

         The Pound Sterling was stronger at $1.3122 after Friday’s $1.3090: £1.

Yuan Gold Fix
Trade Date     Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    7    31

     2017    7    28           

     2017    7    27

SHAU

SHAU

SHAU

/

274.60

275.15

Trading at 275.60

274.79

274.74

$ equivalent 1oz at 0.995 fineness

@    $1: 6.7282

       $1: 6.7415

       $1: 6.7377     

  /

$1,261.93

$1,265.18

Trading at $1,269.06

$1,262.81

$1,263.29

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.]

 New York closed $6.60 higher than Shanghai’s close on Friday with Shanghai catching up today. London opened $2.60 lower than Shanghai was trading at the same time. All three global gold markets are advancing as global demand is driving gold prices higher.

Silver Today –Silver closed at $16.75 Friday after $16.57 at New York’s close Thursday.

LBMA price setting:  The LBMA gold price was set this morning at $1,266.35 from Friday’s $1,259.60.  The gold price in the euro was set at €1,079.31 after yesterday’s €1.075.20.

Just before the opening of New York the gold price was trading at $1,268.35 and in the euro at €1,081.10. At the same time, the silver price was trading at $16.78. 

Price Drivers

The week has started on a strong note with gold prices re-attacking the $1,270 level. We expect prices to rise today as the dollar weakness continues to be the main feature of the gold market. But the dollar weakness is not the sole factor, because the gold price is also rising in the euro.

Toppy developed world financial markets

A lifetime of experience in global financial markets has taught us to recognize when a market is over extended either way. It has also taught us that it can stay over-extended for a long time.  The clear signs are when a market has discounted a very rosy future and expected returns are small relative to the price of assets.  But in a climate where prices are very high, fund managers have to decide if the reasons are because they are over-bought, or if the money used to buy them is depreciating in value.

Right now equity prices relative to fixed interest rate returns are not excessive. But the prospects of higher rates that will change this have been put off, allowing equities and other assets to remain too high for longer. Indeed the temptation this brings is that prices can go, unjustifiably, quite a bit higher. But this brings into view that when markets eventually do turn down they will fall precipitously. In such a climate ‘stop loss’ protections should be replaced with short positions. Once that happens on a large scale interest rates will become irrelevant and permit markets to fall precipitously simply because markets are falling. What will trigger such a change will simply be slowing momentum on the rise followed by sellers seeing the turn. We are very close to that in developed world equity market right now. Institutions are taking measures to guard against that now, which warns us that the turn when it comes will be fast and furious.  

Another lesson we learned over a lifetime in the markets is that it is always wise to leave the last few percent of rises and falls to someone else.

The attraction of gold when  other markets fall

At that point profit seekers, wealth protectors and safe haven seekers will run to gold. The weakness of the dollar and the realities that no other currency provides a safe haven will push investors into gold and silver. Bear in mind the gold and silver markets are very small relative to other financial markets, so such a change in outlook could produce extraordinary rises in their prices.

A look at global gold markets shows that each of these market’s fundamentals are different. In China, gold is bought for wealth protection and financial security. In Europe gold is bought to protect wealth owners from the unforeseen events that attack wealth, almost as a hedge against financial crises. In the U.S. gold is bought when it begins to rise because there is a profit to be made.  [Perspicacious investors in the U.S. buy for the long term.]

For all these to converge at the same time is rare, as we have seen in the sales of over 71 tonnes of gold over the last few weeks in the U.S. The net result, when all are added together, is that gold is not an alternative to equities any more [the U.S. perspective], the safe haven aspect has not kicked in yet, but the gentle flood of gold demand in China [and after September in India] is driving gold prices higher and will keep doing so as the country’s middle classes continue to grow. Hence the risk reward ratio for gold is very attractive.

Gold ETFs

We do expect U.S.investors to return fairly soon to the precious metals markets as they have sold off almost their entire 2017 purchases already. It seems that the institutions responsible for the buying are seeing greater profits in the U.S. financial markets still. We believe that, that will change in the relatively near future.

The SPDR gold ETF and Gold Trust holdings are at 791.875 tonnes and at 210.87 tonnes respectively.

 Julian D.W. Phillips 

GoldForecaster.com | StockBridge Management Alliance 

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