Gold seeing heightened volatility in a shrinking market

Julian Phillips’ latest commentary on early day movements in the gold and silver markets and some of the forces he sees as currently driving prices.

New York closed at $1,189.70 on Monday, up $1.20 on the Friday close as the trading range remains tight. Today sees the dollar stronger at $1.0898 against Friday’s $1.0949 against the euro with the dollar index at 97.48. The LBMA Gold Price was set at $1,188.75 up $1.45 and the equivalent euro price was €1,082.75. Once again this was a currency play against a weaker dollar and stronger euro. Ahead of New York’s opening, gold was trading in London at $1,188.60 and in the euro at €1,078.10 with the euro recovering.

The silver price rose slightly to $16.73 up 3 cents in New York. Ahead of New York’s opening it was trading at $16.68.

Yesterday saw sales from the SPDR Gold ETF of 1.79 tonnes and nothing from or into the Gold Trust. The holdings of the SPDR gold ETF are at 714.067 tonnes and at 166.60 tonnes in the Gold Trust.  We do not believe these sales had an impact on the gold price.

What was notable yesterday was that the price of gold leapt through $1,200 at the start of business in New York on heavy volume. The buying out of Asia was heavy. While the gold price sank back to $1,189 thereafter, we are of the opinion that such bursts of buying remove large chunks of liquidity from the developed world’s gold markets. Such a process brings heightened volatility in a shrinking market. Having said that, it will take some time before we see COMEX losing its pricing power but it is on the path to losing it, we believe. With gold prices pulling back again, we see Asian demand coming in again as it will continue to do below $1,200, again, fading when prices go through that level.

In the U.S., data released yesterday was lacklustre at best. Inflation, consumer spending disappointed coming in well below expectations and well below what the Fed wants. The numbers for the second quarter of the year have become critical in deciding the direction of the U.S. economy and, by extension the Eurozone and Japanese economy. China is also weakening more than the Chinese government wishes, but they still have a lot of tools and far greater control over the Chinese economy that the developed world has over theirs. With such weakness around, an interest rate rise could have a disproportionate impact on the recovery.  If the numbers for the second quarter are poor, at a time when the recovery should show itself at its best in the year, a major reappraisal of all markets will take place.

The dollar is no longer giving signs that it is headed much higher. It is stalling at current levels. If it were to continue rising much more, it would hammer the U.S. export market and the recovery, as well as disrupt the global monetary system.

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

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