Central bankers hate to be seen to be wrong

With so much seeming to ride on central bank interest policies in terms of equities in general, and precious metals in particular, perhaps one should look at the motivations behind the timings of likely interest rate hikes.

If we start with the U.S. Fed – nine months ago its Federal Open Market Committee (FOMC), which calls the tune on interest rates, was predicting that the U.S. economy was recovering sufficiently to allow three, or perhaps four, small rate hikes in 2016.  Presumably the economy has not so far recovered sufficiently to do so and thus not a rate hike to be seen as yet, which is why there has been so much attention being paid to a possible September rate increase.  Perhaps this could still happen despite some poor economic data, if only to save FOMC face.  We get successive statements suggesting the U.S. economy is coming right, only for the next set of government data showing that it patently is not doing so, and the rate increase can gets kicked down the road again.

The latest data, showing disappointing retail sales in August, following on from an ultra cautious statement from Fed Governor Lael Brainard, seems to have left those thinking that there could yet be a September rate increase announcement, in the distinct minority.  But there are still lingering doubts that the FOMC may talk itself into a rise this month, hence some of the weakness seen in the gold price and equities.

Everyone rules out a November rate hike as that would come so close only a couple of days ahead of the Presidential election date and now apparently some 70% of analysts believe that the FOMC will bite the bullet and implement a small increase in December – probably whether the data would seem to justify this or not.  While the Fed’s forecasting credibility is perhaps near zero, to do this might be a tiny face-saver, although there are still analysts and commentators out there who believe the Fed may hold off any tightening for a few months beyond that date.

Here in the UK we have the opposite scenario post the Brexit vote.  The establishment spent so much time telling everyone what a disaster a vote to leave the EU would be economically that not surprisingly, in the immediate aftermath of the referendum, economic nervousness prevailed.  Bank of England (BoE) Governor, Mark Carney, was at the forefront of the dire warning brigade, as was the Chancellor of the Exchequer (Finance Minister), George Osborne who had suggested there would have to be an immediate increased austerity budget should Britain vote to leave the EU.  George Osborne is no longer Chancellor and his successor, Philip Hammond, does not seem to be considering drastic changes ahead.

To almost everyone’s surprise, the UK economy is yet to show much, if anything, in the way of a downturn after an initial stutter which we would put down to the ‘Project Fear’ Remain campaign.  Even so the BoE lowered interest rates ‘just in case’ as an economic stimulus in August and although it has kept them steady this month as the data so far has notGovernor  supported the necessity of a further cut, Carney is still forecasting the likelihood of an additional drop before the year-end – presumably taking the bank’s base rate down to zero percent – or very close, although his most recent statements have perhaps been slightly less negative.

Consider the data.  The stock market is up post Brexit, employment has risen, property prices appear to be on the rise again, we are still in a GDP growth phase, the latest Services PMI for August (i.e post Brexit) has shown the biggest month on month rise in its history;  the August manufacturing PMI also grew at the fastest rate in its 25 year history to 53.3 when the market had been expecting a contraction;  inflation has not yet taken off, despite the fall in the value of the pound sterling against the euro and the US dollar.  Indeed the pound seems to be just about the only sufferer so far from the Brexit vote, although this is a two-edged sword in that it makes UK exports more competitive, and boosts tourist spending as foreign currencies go further making the UK an even more attractive destination.

Now Carney, the BoE  and the other Brexit naysayers will warn that this is a phony temporary outcome.  Inflation is almost certainly going to increase as lower sterling means higher costs of imports and if that starts filtering through to consumer spending we could well see difficult times ahead.  It is early days yet, and the UK is still in the EU so the real exit fallout is perhaps still two years or more away.  But so far the figures have confounded virtually all the ‘expert’ predictions and perhaps they will continue to do so when some of the potential positives of Brexit are at last taken into account.

However, this doesn’t stop the Brexit doom and gloom merchants from still trying to talk things down in order to justify their dire predictions – and Carney and the BoE are among these and thus may yet decide to cut rates again whether the data really justifies this or not.  Conversely the U.S. Fed may well raise rates to pursue the so-called legitimacy of its own forecasts.  That’s what happens in global economics and politics.  The experts and the establishment hate to be seen to be wrong and will often follow their pre-conceived paths regardless with no thought for the general public and the investment community if it may affect them adversely in the process.

What is doubly worrying is that this same analysis may well apply throughout the global political arena – even down to going to war!  Once national leaders are set on a particular path they tend to continue regardless, even though intelligence data may change and not ultimately support their decisions.  One might argue that the Iraq wars and the interventions in Afghanistan, Libya and Syria have indeed followed this kind of route with no planning or perception of the potential consequences, not only for the combatants, but probably even more importantly for the domestic populations of those nations. They just create a power vacuum allowing extremist organisations to take control, if not of the whole country, but large swathes of it.

NATO could find itself embroiled in something similar in the Ukraine when it could talk itself into lining up against Russia – altogether a different, and far more alarming, confrontation for all concerned.  But it’s too easy for what starts as combative rhetoric to lead to an ultimate nightmare scenario with neither side willing to back down for fear of losing face.

But that’s something of a digression, albeit an alarming one.  Both the U.S. Fed and the BoE, and perhaps the European Central Bank too, could be talking themselves into economic policies which are to the ultimate detriment of their own domestic communities and will likely also adversely impact the world’s emerging economies.  Arguably the Bank of Japan has already accomplished this having implemented policies which have driven this key economic and industrial powerhouse into years of average zero growth.

But until we hear the results of the FOMC deliberations before the end of this week, precious metals and equities may remain volatile – even with the week-long moratorium on Fedspeak ahead of the meeting so there won’t be FOMC participants muddying the waters with their conflicting statements.  If, as most expect, there’s no decision on rates this time, the markets may breathe a collective sigh of relief up until the weeks ahead of the December FOMC meeting when we’ll see this all play out again.

The above article is an updated and edited version of one which first appeared on the Sharps Pixley website last week

Gold Reacts to Jobs Report – What’s Next? – The Holmes SWOT

By Frank Holmes, CEO and Chief Investment Officer for US Global Investors

Strengths

  • The best performing precious metal for the week was platinum, which recorded a slight loss of 0.24 percent after falling on Friday in sympathy with the pullback in precious metal prices.
  • The Austrian Mint had its third best year on record in 2015, according to its annual gold sales report, showing 756,200 troy ounces of Vienna Philharmonic gold coins sold. Although the bulk of sales are to Austrians, the report is used as a barometer for overall European and global physical gold demand. Sales of silver coins have also seen positive market reaction, with sales of the Perth Mint’s 2016 Australian Kangaroo coins surging to 10 million coins, when expectations were just 5 million for the year, reports GoldCore. According to Bloomberg, investors also amassed the most silver on record in exchange traded funds in July.
  • The Bank of England cut key rates this week for the first time in seven years, sending gold higher on the news. The yellow metal also moved in reaction to details of a stimulus package in Japan, reaching a three-week high before the release of the U.S. jobs report on Friday. BullionVault reported that its Gold Investor Index (which measures a balance of client buyers to sellers) rebounded from an eight-month low this week, rising to 53.4 versus 51.4.

Weaknesses

  • The worst performing precious metal for the week was silver with a loss of 3.10 percent. Relative to the 1.14 percent pullback in gold, the move was about as expected.
  • Gold declined from its highest level in more than two weeks as the U.S. jobs report came out much better than expected on Friday. According to Deutsche Bank’s GDP growth model, the bank’s economists were expecting a much slower pace of job additions, around 150,000 in July, when in reality the U.S. created 255,000 jobs last month. Most economists are modeling the expected jobs number off relative GDP levels and they have come in below expectations for the second quarter, thus they were expecting the jobs number to fall too.
  • Indian gold demand continues to slow, according to analysts at Desjardins. Gold imports fell for a sixth consecutive month, with purchases slumping 77 percent to 22 tonnes in July from this time last year. One explanation could be the surge in gold price by 29 percent so far in 2016. “Customers are staying away, as they feel these prices are too high and they are waiting for a correction,” said Bachhraj Bamalwa, a director at the All India Gems & Jewelry Trade Federation.

Opportunities

  • HSBC has a positive outlook for silver in 2017, according to its latest Global Commodities report. In regards to supply and demand of the metal, the group notes that one side of the equation is anticipated to remain consistent while the other is expected to rise, reports ValueWalk. Francisco Blanch of Bank of America Merrill Lynch says that investing in gold right now makes sense for two important reasons. Not only does gold make an attractive investment when one-quarter of global bonds are offering negative yields, he told Bloomberg News, but gold’s carry costs are even lower compared to some currencies. “The negative carry on gold is actually smaller than the negative carry on, say, the euro or some other currencies,” Blanch explains.
  • Barclays points out that inflows into precious metals in 2016 have topped previous records for the amount of money flowing into exchange-traded products featuring precious metals. Just in the last two months, nearly $8 billion has poured into these products, bringing the tally for the first seven months of the year to $50.8 billion. As the chart below illustrates, gold’s returns have dominated other asset classes and done so with less volatility than Treasury bills and just slightly more volatility than the S&P 500 Index. Note that volatility is graphically represented by the size of the circles.

swotaug8

  • Dovish central bank policies by the Federal Reserve, the Bank of Japan and the Bank of England are lending support to gold, says UBS. The group says that, overall, the regime has not changed, and as such, the macro story for gold remains intact, noting that bouts of weakness are potential buying opportunities. The report reads: “Weaker growth outlook and lower real yields—especially with potential tolerance for inflation to overshoot—in a sense reinforce the themes that have driven investors towards gold this year.”

Threats

  • “We take the seemingly unpopular view, and contend that gold has already seen its 2016 peak,” said Christopher Louney, commodity strategist for RBC Capital Markets. In a report released by RBC last week, Louney notes that investors should be cognizant of just how much/little runway remains for gold appetite, reports Bloomberg, especially since its rally has stemmed almost entirely by investor demand. He does not see the metal moving significantly higher, at least not absent another significant risk-off event.
  • Japan’s Government Pension Investment Fund, the world’s largest retirement savings pool, lost $50 billion last year, reports ValueWalk. A root of the issue stems from Prime Minister Abe’s redirection of the country’s financial assets from Japanese bonds to equities, searching for higher returns. The markets that Abe said would go up declined instead, and now the fund’s plans include buying junk bonds and emerging market debt. The bottom line is, the fund now pays out to retirees more than it takes in, the article continues.
  • Alan Greenspan says we’re seeing the early stages of inflation, Bloomberg reports, noting things like slow productivity around the world, a pickup in wages and a pickup in money supply. Greenspan said the U.S. won’t be able to pay for entitlements, pushing the idea that the economy won’t be able to recover until politicians deal with the issue. He added that it’s crowding out and scaring off investment.

Gold picks up a little after BoE drops interest rates, adds stimulus

Gold TodayGold closed in New York at $1,358.10 on Wednesday after Tuesday’s close at $1,364.50.  

    • The $: € was up at $1.1135 from $1.1197.
    • The dollar index rose to 95.67 from 95.09 Wednesday.
    • The Yen was weaker at 101.48 from Wednesday’s 101.06 against the dollar.
    • The Yuan was weaker at 6.6409 from 6.6291 Wednesday.
    • Yuan Gold Fix

 

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  08  4

2016  08  3

SHAU

SHAU

289.78

291.04

289.08

291.42

Dollar equivalent @ $1: 6.6409

$1: 6.6291

$1,357.22

$1,365.55

$1,353.94

$1,356.11

Shanghai prices saw prices consolidate at lower levels ahead of the Bank of England’s statements today. But the main driver of the day was a correcting U.S. dollar in what we see as a normal market reaction to its recent weaknesses.

LBMA price setting:  $1,351.15 after Wednesday 3rd August’s $1,364.40.

The gold price in the euro was set at €1,213.75 up €4.46 from Wednesday’s €1,218.21.

Ahead of the opening in New York the gold price stood at $1,356.90 and in the euro at €1,219.03, but moved back up to over $1,360 as trading progressed.

Silver Today –The silver price closed in New York at $20.41 on Wednesday down from $20.61 on Tuesday.  Ahead of New York’s opening the price was trading at $20.32, but again silver advanced during the day to stand at around $20.38 at midday in New York.

Price Drivers

The Bank of England lowered interest rates by 0.25% and said it had scope to do more if needed, including taking the key rate close to zero, they also announced a plan to lend as much as £100 billion ($132 billion) to banks to ensure the measures reach the real economy. In addition, the Monetary Policy Committee will buy £60 billion of government bonds over six months and as much as £10 billion of corporate bonds in the next 18 months. In total, the balance sheet could expand by £170 billion.

The bank cut its growth forecast for next year to 0.8% from 2.3% and lowered its 2018 prediction to 1.8% from 2.3%. The pound dropped over a percent to $1.3135 immediately after the statement, but this still higher than its level immediately post the Brexit vote..

The dollar’s performance is largely going unnoticed as it continues to trade between 95 and 97 on the dollar index. On the basis of its economy’s performance it should be much stronger. On the basis of its Trade balance the dollar should have collapsed long ago, but the U.S. accounts as the dominant world power which has made the dollar a haven for all other currencies. But this situation is starting to change as its role as the sole currency with which to pay for oil is changing, as is its role as the last resort currency haven. The credibility of currencies as the monetary expression of government is weakening in line with the destabilization of the monetary world.  Gold is not a monetary alternative for many reasons, but it is a vehicle with which to shore up confidence, particularly if it can be eliminated as competition to currencies.

Gold ETFs – In New York on Wednesday there were sales of 0.052 of a tonne sold from the SPDR gold ETF but no change in the Gold Trust holdings. This left their respective holdings at 969.648 tonnes and 219.65 tonnes.

Silver –Silver prices were more cautious today than gold prices ahead of the Bank of England’s announcement.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance [Gold Storage geared to avoid its confiscation]

BoE disappoints. Gold and silver fall back. Pound rises.

Gold TodayGold closed in New York at $1,332.20 on Wednesday after Tuesday’s close at $1,332.20.  In Asia the gold price tried to rally as you can see below  

  • The $: € fell to $1.1096 up from $1.1151.
  • The dollar index fell to 96.32 from 96.53 Wednesday.
  • The Yen was weaker at 105.44 from Wednesday’s 104.32 against the dollar.
  • The Yuan was slightly weaker at 6.6855 from 6.6845 Wednesday.
  • The Pound Sterling was initially weaker at $1.3225 down from Wednesday’s $1.3271 waiting for Governor Carney’s expected easing of the B. of E. interest rates.  A hope that was dashed with a no change decision leading to a pick up to the $1.3400 level before easing back again.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  07  14

2016  07  13

SHAU

SHAU

288.94

286.90

287.60

288.16

Dollar equivalent @ $1: 6.6855

$1: 6.6845

$1,344.26

$1,334.97

$1,338.02

$1,340.83

The Chinese gold market was not convinced by the fall in New York and lifted the gold price, reflecting internal Chinese demand. After the close and ahead of London’s opening the gold price was ‘marked down’ pretty heavily and after the LBMA price setting was trading at $1,326.65. No doubt, if Shanghai prices remain higher, its banks in London will move physical gold from their London bases to Shanghai to arbitrage prices and shift more bullion into China.

The attempt to break the gold price down further in New York with no physical sales is a risky mark down of prices as the Technical picture degenerated and pointed down. The bears who have engineered this break down of the Technical position are relying on no further stimuli and hope that physical demand will stay on the sidelines. Get ready for a dramatic day in New York!

LBMA price setting:  $1,325.70 down from Wednesday 14th July’s $1,340.25.

The gold price in the euro was set at €1,192.71 down €17.56 from Wednesday’s €1,210.27.

Ahead of the opening in New York the gold price stood at $1,328.05 and in the euro at €1,195.20.  

Silver Today –The silver price closed in New York at $20.38 on Wednesday up from $20.09 Tuesday.  Ahead of New York’s opening the price was trading at $20.15.

Price Drivers

The extraordinary features of the gold market are that they do not reflect the balance of demand and supply, either totally or even the marginal amounts outside those amounts ‘subject to contracts’. So called ‘efficient markets’ are supposed to reflect these fundamentals and changes in physical demand and supply.

Shanghai is trying to do that, but is hesitant to impose their fundamentals on the global gold price, even though they should be entitled to do so in view of the fact that they have the largest, most active physical market in the gold world.

No, the biggest influence on the gold price is the ‘paper’ gold market on COMEX where 5% or less of the transactions require a physical settlement. However, we are seeing U.S. demand for physical gold for the gold ETFs based in the U.S. have a decidedly strong impact on prices, despite such gold being bought and sold in London.

This makes the global gold market far from an ‘efficient’ market and one likely to remain so until Shanghai exerts it potential influence on gold prices. What’s holding them back? We believe it is their desire to acquire as much gold as possible for the retail, institutional and retail Chinese gold markets, as all such sources are considered ‘China’s gold” [easily available for confiscation should the authorities decide to do that].

But the gold price is far from just a ‘commodity’ price. It is a monetary metal.  As we said yesterday, “The prime drivers of the gold price remain macro-economic and monetary factors which will not change overnight.”

The degradation of the value of currencies give a facet to the gold price which ‘reverses’ the gold price, making gold a pricer of currencies, not currencies pricing gold [which is how the majority of investors view the gold price]

Gold ETFs – In New York on Tuesday there were no sales or purchases into either the SPDR gold ETF or the Gold Trust, leaving their holdings at 965.221 tonnes and at 214.54 tonnes respectively.

We expect activity in this market to pick up later today in New York.

Since January 4th this year, the holdings of these two gold ETFs have risen by 382.17 tonnes.

Silver –Silver prices could be extremely volatile and have slipped along with gold after the BoE decided not to raise rates.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance [Gold Storage geared to avoid its confiscation]

Physical gold liquidity stretched.  Are central banks meeting the supply shortfall?

Gold TodayGold closed in New York at $1,367.20 on Friday after Thursday’s close at $1,359.10.  In Asia the gold price also fell slightly further as you can see below  

  • The $: € rose to $1.1048 down from $1.1075.
  • The dollar index was rose to 96.60 from 96.17 Friday.
  • The Yen was weaker at 102.48 from Friday’s 100.55 against the dollar.
  • The Yuan was slightly weaker at 6.6902 from 6.6830 Friday.
  • The Pound Sterling stayed almost the same at $1.2942 as Friday with more falls expected this week as the B. of E. adds further easing of interest rates! Or has this been discounted.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  07  11

2016  07  8

SHAU

SHAU

294.97

291.58

293.48

292.05

Dollar equivalent @ $1: 6.6902

$1: 6.6883

$1,371.35

$1,355.97

$1,364.32

$1,358.16

The fall in the Yuan continues. Other exchange rates are relatively stable, ignoring the U.S.  jobs report last Friday. The big event of the week is expected to come from the Bank of England on interest rates, later in the week.

LBMA price setting:  $1,358.25 up from Friday 8th July’s $1,356.10.

The gold price in the euro was set at €1,229.41 up €4.16 from Friday’s €1,225.25.

Ahead of the opening in New York the gold price stood at $1,355.75 and in the euro at €1,227.65.  London is trying to establish a pattern of lower prices ahead of New York when it feels physical buying may not appear in New York and in particular the gold ETFs. The moment physical interest is shown in the ETFs the gold price is lifted.

Silver Today –The silver price closed in New York at $20.19 on Friday up from $19.67 Thursday.  Ahead of New York’s opening the price was trading at $20.27.

Price Drivers

This week starts with a warning from China to the G20 calling for them to lead the global economy back to growth. But a look at the last 8 years of the G20’s failure to supply such leadership and the inactivity on that front and absence of any plans to promote such growth in the future makes such warnings rather pointless.

The Technical picture shows us that the latest period of consolidation appears to be ending ahead of the next strong move. With Friday seeing more physical gold being purchased after a sale, the time is right for another purchase. The question is, will it wait for the Bank of England’s announcement or hit the market on any ‘dip’ in prices before then?

The U.S. Jobs report on Friday was very good [but subject to re-adjustment in the days to come]. The effect on global markets was negligible and dissipated today. The feel of the market remains positive for gold and silver prices.

In India the monsoon is now 1% higher than the ‘normal’ level seen on average. If this continues demand for gold in India from the agricultural community will be as high as it has ever been.

As we said last week, the only restraint we see on the gold price is an Indian propensity to hold back when prices are rising strongly.

Gold ETFs – In New York, Friday, there was a purchase of 2.97 tonnes into the SPDR gold ETF (GLD) leaving its holdings at 981.256 tonnes. In the iShares Gold Trust (IAU) a purchase of 0.9 of a tonne was seen on Friday leaving its holdings at 214.09 tonnes. Perhaps it was the lower price that prompted the purchase? If so we are likely to see more buying this week.

It was reported to the SEC that older bars are now being put into the Custodian of the SPDR gold ETF. It may simply be a market coincidence, but older bars are usually synonymous with central bank holdings. Is it possible that London’s liquidity levels are dropping to the point where central banks are propping up its liquidity level?

We must point out that when the U.S. SPDR gold ETF and others together with the U.S. banks sold gold from 2012 peaks to the heavy falls in April 2013 the gold sold did not sit in the developed world’s gold markets but made its way primarily through Switzerland [where it was refined into metric sizes] to the Far East [China in the main].

This meant it was not going to come back when demand was resuscitated again. The tonnages of gold bought back into U.S. gold ETFs is over 500 tonnes, in total, so far this year. With most previously sold gold not available and the bulk of gold supplied into the market continuing to be absorbed by the Far East, the additional amounts needed for this new U.S. gold ETF demand has to come out of a new source.

We have watched liquidity levels of gold in the markets drying up, assisted no doubt by the Chinese Bank [ICBC-Standard] which has taken over from Barclays as a sub-Custodian for HSBC [Custodian of the SPDR gold ETF]. So where is this gold coming from? Older gold bars are likely to come from older stocks thus increasing the strain on London’s gold liquidity levels.

Since January 4th this year, the holdings of these two gold ETFs have risen by 397.75 tonnes.

Silver –Silver prices are still pausing, but we expect for only a short while before moving higher, again.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance [Gold Storage geared to avoid its confiscation]