Yuan devaluation

Gold has behaved remarkably steadily in the face of global market turmoil

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It is important to get a balanced perspective on the global financial market actions in the last few days because we tend to be emotional when such volatility happens. First, the Shanghai Stock Exchange has been treated as a casino where investments are expected to yield short-term trading gains [with government backing]. When China moved to float the Yuan the ripple set off global reactions. Government stepped in to try to show its support even allowing Pension funds to invest in the market [they have yet to do so].  In backing off support for the equity market, China removed support for short-term traders.

Please note the Shanghai exchange does not impact the Chinese economy but it is a side market that is not taken as seriously as it is in the developed world. Far more important is the capital liberalizing process at Municipal level where capital injections do reach the overall economy.   The process of removing Capital Controls in China is set to see a cheaper Yuan, but in the process enhance the Yuan’s relevance in the global monetary system.

What is most disturbing is that the Chinese equity market action should have set off sell-offs in the developed world! This tells us that the influence of short-term trading [prompted by demands for performance] is excessive in the developed world. Market liquidity is insufficient to prevent high frequency trading from creating the huge volatility that we have seen this week.

As for gold being part of this scene, it hasn’t been. It has behaved remarkably steadily in line with chart patterns. Gold is for long-term investing mainly, as we have seen this week.

Of more importance to the gold price is the approaching ‘gold season’ beginning next month.

There were no purchases or sales into or from the SPDR gold ETF or the Gold Trust yesterday. This leaves the holdings of the SPDR gold ETF at 681.105 tonnes and 162.07 tonnes in the Gold Trust.  -

Gold and Silver markets

On Wednesday New York closed at $1,124.10 down $15.40. The dollar was stronger at $1.1335 at the close up from $1.1496, against the euro, with the dollar Index stronger at 95.19 up from 94.10 yesterday. This morning the LBMA gold price was set at $1,128.50 down $5.90. The euro equivalent was €999.03 up €8.98. Ahead of New York’s opening, gold was trading at $1,126.40 and in the euro at €998.67.  

The silver price closed at $14.18 down 46 cents over Wednesday’s close in New York. Ahead of New York’s opening today it was trading at $14.24.  Silver is seen as turning positive now.

Julian D.W. Phillips for the Gold & Silver Forecasters - www.goldforecaster.com and www.silverforecaster.com

 

Gold rising in devalued yuan

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On Monday New York closed at $1,103.30 up $11.20. The dollar was unchanged at $1.0978 with the dollar Index weaker at 97.46 down from 97.85. The dollar continued to weaken during London’s morning. This morning the LBMA gold price was set at $1,113.25 up $18.45. The euro equivalent was €1,009.52 up €8.51. Ahead of New York’s opening, gold was trading in London $1,114.00 and in the euro at €1,010.48.

The silver price closed at $15.24 up 47 cents in New York. Ahead of New York’s opening it was trading at $15.28.

Price Drivers

There were no sales from the SPDR gold ETF but 0.45 from the Gold Trust on Monday. The holdings of the SPDR gold ETF are at 667.694 tonnes and 161.38 tonnes in the Gold Trust.  The rise in the gold price came in the U.S. but on small turnover on COMEX. The dollar continued to weaken in London this morning but the gold price is running ahead of this fall, likely due to short covering on physical positions. We see very little selling happening in the short-term, leaving the market wide open for a short position closures. With these positions at record highs the first short to break ranks may start a stampede.

China devalued the Yuan by 1.9% yesterday in a reform that will allow the Yuan to move as the market makes it as opposed to the central bank deciding the rate. This reform is necessary for the Yuan to qualify as a currency that forms part of the IMF’s SDR currency. The change resulted in a move of the Yuan against the dollar from 6.2094 to 6.3233 yesterday.

Gold in the Yuan will rise by the extent of the Yuan’s fall. With so few Chinese dollar borrowers ‘covered’ against exchange rate moves we expect the current small move to prompt them to do so. Thereafter, we expect greater falls in the Yuan as it reflects market valuations more efficiently, benefiting gold even more.

Silver is running ahead of gold still.

Julian D.W. Phillips for the Gold & Silver Forecasters - www.golforecaster.com and www.silverforecaster.com