Gold ..... from Star of the Show to Whipping Boy. What's next ....?

Tuesday 11th October 2106

  

Gold ..... from Star of the Show to Whipping Boy. What's next ....?

ref:- "Gold's gains put investors on price alert", The Financial Times, Markets and Investing

If you took a look at the recent action in the gold price, over the last two or three weeks say, you'd be forgiven for thinking that things look pretty bleak. Last week alone saw a fall of 5%, the market's worst weekly performance for over three years. The chatter is all about the possibility/likelihood of a Fed rate hike and the stronger US dollar that should go with it. For an asset that bears no yield and is quoted in dollars, like gold, that is a decidedly unhelpful combination.

But with gold trading around the $1258 per oz level, we should remember that still represents a 20% rise in price since the start of the year and that many of the factors behind the rise from near $1050 to the highs above $1350 are still in play, even if the sentiment may have changed. The technical picture isn't looking too rosy either for those of a chartist bent, but the FT chooses five fundamental issues that may dictate what the rest of the year has in store for the yellow metal.

The Fed

You can't escape from the Fed. Just as the rally was in part driven by the Fed's repeated failure to carry on with its desired tightening process that started last December, so the growing expectation that it WILL finally act in December is weighing on prices now. We've been here before, though  --  many times. In fact, it may just  be the perception in some quarters that credibility-wise the Fed cannot afford NOT to raise rates that is boosting the probability of a December hike out to 70%, according to futures markets. Some more aggressive intent on the Fed's part would certainly be bad news for holders of gold, but even with a move in December there's absolutely no guarantee that it would be followed by more next year, given unconvincing economic outlooks in China, Japan and Europe. And it's possible that in those circumstances the Fed would tolerate some higher inflation without bumping up rates, despite howls of protest from the hawks. Now those really would be much more gold-friendly conditions.

ETFs (Exchange Traded Funds)

Much of the demand for gold on the way up manifested itself in the buying of gold-backed ETFs. You'd have though that a proportionate amount of the move down could be put down to the selling of the same instruments ..... not so, holdings have remained steady and even rose slightly last week. Now, there two ways of looking at this ..... either those ETF investors have yet to catch up with the less healthy environment for gold, or as Goldman Sachs put it : "The drivers of strong physical ETF and bar demand for gold during 2016 are likely to remain intact, including continued strong physical demand for gold as a strategic hedge, limiting further downside". Goldman, as you may have gathered, are bullish on this market and see lower prices as a buying opportunity.

China and India

Driven by purchases of jewellery and gold bars, these two nations are the biggest buyers of gold ..... which is why their unspectacular levels of demand of late have been a disappointment to gold bulls. A sign of things to come? Well, maybe ..... but those same bulls will be hoping that the cheaper prices prompt renewed buying interest, an important factor in which should be the upcoming Indian wedding season (yes, it really is that big a deal). In China, it may chiefly be about two things: a weaker Yuan that might promote buying of gold as a store of value, and the growing possibility of a bursting of the property bubble ..... such an event would likely see gold's status as the ultimate of safe-havens make it very attractive to Chinese investors.

US Election

You could see the gold market monitoring US election polls: Hillary Clinton performs well, gold goes lower (as after the two debates so far) ..... Donald Trump does well, and gold rallies. There is obviously nervousness about how this maverick of an entrepreneur with isolationist tendencies might go about managing the world's largest economy. There might well be a good deal more of it at the thought of a highly confrontational US President crossing swords with Russia and China. This might have been more of an issue a few days ago, but with senior Republicans rushing to disassociate themselves from a candidate they now view as a loose cannon (what took them so long?) , an electoral surprise is looking considerably less likely. Mr Trump's chances have taken quite a beating of late, but even now it would be foolish to write off his chances completely.

Brexit

Not so long ago, Brexit was a very big thing indeed for precious metals  --  gold made a two-year high in the immediate aftermath of the June 23rd vote. It has since given up all those referendum-inspired gains, and growing speculation of a so-called "Hard Brexit" has had little effect on gold prices. Even last Friday's 6% slump in sterling barely registered. Monetary policy has regained centre stage, and it's hard to imagine just how badly things would have to for Britain from here for Brexit to be a major factor once more. 

Five things that the FT suggests we should keep an eye on then, but there'll be others and we may not even be aware of some of them yet .....