Gold and Silver waiting for Yellen!  

Gold TodayGold closed in New York at $1,219.70 on Thursday, down from Wednesday’s $1,224.20, a fall of $4.50. On Friday morning in Asia it rose to $1,223 while the U.S. dollar was almost unchanged against the euro.

LBMA price setting:  $1,221.25 down from Thursday’s $1,226.65.

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  05  27

2016  05  26

SHAU

SHAU

257.00

260.35

258.36

259.60

Dollar equivalent @ $1: 6.5669

$1: 6.5610

$1,217.26

$1,234.23

$1,223.70

$1,230.68

China saw more volatility yesterday as the Yuan weakened again. London then took it down to be set lower by the LBMA. We have no doubt that a great deal of weight will be added to Janet Yellen’s comments today as the market are now pricing in a rate rise, next month. Should this happen, we have no doubt that the Yuan will be allowed to weaken much further than we see at present. This will lead to higher Yuan prices for gold, but we doubt whether we will see much lower dollar or euro gold prices.

The gold price in the euro was set at €1,092.84 down from Thursday’s €1,098.36.

Ahead of New York’s opening, the gold price was trading at $1,219.35 and in the euro at €1,090.95.  

Silver Today –The silver price closed in New York on Thursday at $16.32, up from Wednesday’s $16.30. The silver price rose yesterday while gold fell slightly, but we could see it fall more if gold turns down again, which it still could do. At the moment it is consolidating at lower levels.

Ahead of New York’s opening the silver price stood at $16.30.

Price Drivers

Today sees Janet Yellen feature as she speaks in public on the Fed’s view on the economy and interest rates. The data coming out of the U.S. is now positive on the economy and jobs front, so the likelihood of a rate rise at the next, June, FOMC meeting looks like seeing the Fed rates rise a 0.25%. We expect her comments today may well indicate that a rate rise is close, placing speculative pressure on gold and silver.

As we said yesterday, before that meeting we expect all markets to factor is the expected rise.

This may well place downward pressure on the gold price again. However, we will be listening to see if she mentions the dollar or the global economy.

G-7 inconclusion – The G-7 is rarely the place where one gets a statement that is put into action, but it is alarming to see such diverse opinions amongst the nations. This adds to our belief that the world will move away from ‘globalization’ adding to the potential for severe, global financial crises, particularly among the emerging nations. The focal point of these crises will be seen in exchange rates in currency markets.

Mr Abe of Japan has come out openly and warned of a potential “Lehman” moment in the global economy, if nations do not do something to stimulate growth. Other nations did not subscribe to this thinking.  Overall, it is clear that there was no unity on where to go, except to state the vague intention of doing more to stimulate growth. What does come out of this inconclusive meeting is a far greater degree of disunity than we have seen from this group before. This will prove to be gold and silver positive, longer term!

 

Gold ETFs – Thursday saw no buying or selling into the SPDR gold ETF of the Gold Trust yesterday. This leaves their holdings at 868.662 and 198.89 tonnes in the SPDR & Gold Trust, respectively.  

Silver –The silver price is fighting further falls and rose slightly while gold fell slightly yesterday. But we do see it falling if gold falls heavily today.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

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UPDATE: SGE Q1 gold withdrawals at new record – ca. 623 tonnes

It now looks as though Q1 gold withdrawals from the Shanghai Gold Exchange (SGE) will have reached around 623 tonnes – a 10.5% increase on last year’s record figure of 564 tonnes.  The actual figure for the week ending March 27th (no Easter holiday in China) was just under 46 tonnes and that for week ending April 3rd 40 tonnes making the Q1 figure around 623 tonnes (assuming even daily figures across the week).

While mainstream analysts seem to discount SGE withdrawals as being a true representation of actual Chinese demand – although China gold watcher Koos Jansen is adamant from his questioning of Chinese officials that SGE withdrawals and Chinese gold demand are in effect the same.  The argument continues.  But be that as it may SGE withdrawals, whether the same as total Chinese demand or not, are very certainly a strong indicator of year on year Chinese gold flows, so it is very apparent from the latest figures that Q1 demand is very likely to be substantially higher than a year earlier.

It should be recalled though that last year, although Q1 SGE withdrawals reached the previous record level for the period, full year figures fell short of those for 2013 as demand tends to dip through the middle months of the year and in 2014 the mid-year dip was far greater than a year earlier, although the tail end of the year was particularly strong.  It had been thought perhaps that the higher gold prices of the week of March 27th might have put a bit of a dent in Chinese demand, which can be affected by gold price levels, but it obviously still remained strong.

Gold today has pulled back from the latest rise which appears to have resulted from poor U.S. non-farm payroll figures which were well below expectations.  These are seen as an indicator of when the U.S. Fed will start to raise interest rates with most observers now seeing June as unlikely – although there’s always the chance that the Fed will make the move then, but at the minimum level of 25 basis points, to test the waters.  However some see the latest payroll figures as suggesting a rate rise will now not occur until late in the year, if then.  And again, as suggested by metals consultancy Metals Focus in its Gold Focus 2015 report (see: End of bear cycle for gold in 2015 – Metals Focus , even if and when the Fed does make the move, although there may be a knee-jerk downwards reaction in the gold price, this will be shortlived.

The Fed, the Fear Trade and Gold – Frank Holmes

Latest thoughts from Frank Holmes, CEO and chief investment officer of U.S. Global Investors – www.usfunds.com

Following the recent Federal Open Market Committee (FOMC) meeting, Federal Reserve Chair Janet Yellen made it clear (again) that interest rates would not be raised until inflation gains more steam. With current inflation rates negative for the first time since 2009, and with the U.S. dollar index at an 11-year high, we can probably expect near-record-low interest rates for some time longer.

With the Dollar index at an 11-yeah high, gold prices are under a lot of pressure

Image courtesy of http://www.welovecostarica.com/watching/ 

Along with major stock indices, gold prices immediately spiked at Yellen’s news, rising nearly 2 percent, from $1,151 to $1,172. That’s the largest one-day move we’ve seen from the yellow metal in at least two months.

It’s also a prime example of gold’s Fear Trade, which occurs when investors buy gold out of fear of war or concern over changes in government policy.

As I’ve frequently discussed, one of gold’s main drivers is the strength of the U.S. dollar. The two have an historical inverse relationship, as you can see below.

Strong Dollar Weighs on Gold

In September 2011, when gold hit its all-time high of $1,921, the dollar index was at a low, low 73. With the dollar having recently broken above 100, although since fallen back a little, the yellow metal sits under a lot of pressure. However, I’m pleased at how well it’s held up compared to the early 1980s, when gold plunged 65 percent from its peak of $850 per ounce as the U.S. currency began to strengthen.

We’re seeing the opposite effect in the eurozone as well as other regions around the world. In the last 11 months, the euro has slipped 24 percent. Many analysts, in fact, expect the euro to fall below the dollar for the first time.

When priced in this weakening currency, gold has climbed to a two-year high.

Gold Prices in Euro Terms Strengthens as the Currency Falls

Inflation consumes the returns on your five-year treasury bondAs I write in last year’s special gold report, “How Government Policies Affect Gold’s Fear Trade”:

One of the strongest drivers of the Fear Trade in gold is real interest rates. Whenever a country has negative-to-low real rates of return, which means the inflationary rate (CPI) is greater than the current interest rate, gold tends to rise in that country’s currency.

To illustrate this point, take a look at the current five-year Treasury yield and subtract from it the consumer price index (CPI), or the inflationary number. You get either a positive or negative real interest rate.

When that number is negative, gold has tended to be strong. And when it’s positive, gold has in the past been weak.

This month, real interest rates in the U.S. have turned massively positive, putting additional downward pressure on the yellow metal.

HOw real interest rates drive gold

When you look at the yield on a five-year Treasury bond in March 2013, you see that it was 0.88 percent. Take away 1.5 percent inflation, and investors were getting a negative real return of 0.6 percent. This made gold a much more attractive and competitive asset to invest in. March 2013, by the way, was the last time we saw gold above $1,600 per ounce.

Because inflation is in negative territory right now, returns on the five-year Treasury are higher than they’ve been in several quarters. Compared to many other government bonds worldwide, the U.S. five-year Treasury is actually one of the very few whose yields are positive, which tarnishes gold’s appeal somewhat as an investment.

The following oscillator for the five-year period gives you another way to look at the strong inverse relationship between the five-year Treasury bond and gold. As if locked in a synchronized dance, each asset class swings when the other one sways, and vice versa.

HOw real interest rates drive gold

This is why it’s so important to manage expectations.

As Ralph Aldis, portfolio manager of our two precious metals funds, said in our most recent Shareholder Report:

You need to use gold for what it’s best at: portfolio diversification… You have to be a bit of contrarian. Buy it when everybody hates it, sell it when everybody loves it. Our suggestion is to have 5 to 10 percent of your portfolio in gold or gold stocks and rebalance once a year. You might also get some additional benefits by rebalancing quarterly. That’s like playing chess with the market as opposed to rolling craps.