Gold: Recent Data Points Are Becoming Headwinds

There has been a significant amount of outflows recently in gold-backed exchanged traded funds such as the SPDR Gold Trust (GLD). State Street (STT), which is the distribution agent for GLD, has seen outflows of 11% in the month of April alone. Also, there are various high profile investors that have cut their gold position. First, there was news out that billionaire investor George Soros cut his gold holdings in the first quarter of 2013. Then came news that gold-heavy investor John Paulson, who manages the $18 billion Paulson & Co, sold a portion of his gold positions. Paulson exited its $32 million stake in Barrick Gold Corp (ABX). This was on top of his gold holdings that he sold in the previous quarter, which included significant shares in NovaGold Resources, Iamgold Corp, Gold Fields Ltd, Randgold Resources, and Agnico Eagle Mines.

Gold as an inflation hedge

As equities continue their impressive climb up, gold prices have stayed muted. The climb in equities has come alongside a climb in the U.S. dollar. Gold may be losing its appeal as a hedge against inflation. The debate is whether inflation and the expectation of future inflation will increase significantly for that investment thesis to play out. Recent numbers for consumer prices in April doesn’t help that thesis, but rather goes against it. Even renowned bond guru Jeff Gundlach of DoubleLine has suggested investors should use silver instead of gold to hedge against inflation. Gold as an inflation hedge also loses a lot of its urgency as equities have regained their momentum and that shows in the flow of assets.

Negative perception from prominent figures

Dr. Nouriel Roubini, also known as Dr. Doom, has stated that gold is going lower based on a number of factors. Among his biggest argument is the fact that gold is not a means of payment and that you can’t pay for your groceries with gold. Even legendary investor Warren Buffett has publicly said that he is not a buyer of gold. With such influential investors and public figures such as Roubini and Buffett stating their concerns with gold, it creates a significant negative perception on gold and may be a factor in influencing other investors to get out of GLD.

Headwinds for gold moving higher

There are also recent data points that have become significant headwinds for gold and GLD.

  • The consumer sentiment index in May jumped from 76.4 to 83.7, exceeding expectations
  • The Conference Board’s leading economic index rose .6 to 95 in April which was stronger than expected
  • The ICE dollar index jumped from 83.606 to 84.245 on a one day move, close to a three-year high
  • Comments by San Francisco Federal Reserve President John Williams stating that the Fed could slow its bond buying program as soon as summer 2013. This would take out $85 billion a month in bond buying.

Source: Yahoo! Finance


Gold Premium Surges In China – Wise ‘Aunties’ And Wealthy Buying

Today’s AM fix was USD 1,405.25, EUR 1,074.68 and GBP 918.64 per ounce.

Yesterday’s AM fix was USD 1,396.75, EUR 1,072.61 and GBP 915.00per ounce.

Gold climbed $27.10 or 1.96% yesterday to $1,412.00/oz and silver also gained 2.57%.

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Gold inched down today after yesterday’s 2% gain. Gold was higher in Australian dollars after the Aussie dollar fell on concerns about the Australian economy.

Monday’s economic data showed U.S. manufacturing activity had slowed to the lowest level in almost 4 years. The still fragile nature of the U.S. economy will support gold.

Poor economic data is confusing the bulls who continue to under estimate risk. The monthly nonfarm payrolls figures out on Friday will give further guidance regarding whether the U.S. is tipping into recession.

Deutsche Bank has recommended buying gold in Japanese yen and Australian dollars.

The bank cites the significant increase in Japan’s balance sheet as likely to cause the yen to weaken further and says the Australian dollar is overvalued.

While gold in yen is down just 3.6% in 2013, in the last 12 months the yen has fallen by 10.1% against gold showing gold’s importance as a hedge against currency devaluations.

As long as the world’s economy remains in tatters then safe havens will be few and far between.

While gold’s safe haven credentials have taken a bit of a battering of late, they will again prove themselves over the long term.

The banking crisis in Cyprus has shown that even bank deposits are not safe and globally there are plans for so called ‘bail ins’ or deposit confiscation for banks that become insolvent.

The premium gold buyers in China are willing to pay to take immediate delivery of gold, as bullion jumped four-fold in April after prices fell sharply.

Store of wealth buyers thronged jewellery stores and bullion brokers in China in order to buy gold jewellery, coins and bars.

Photos of Chinese “aunties,” a term of respect for older women, clearing shelves in goldsmith shops made headlines in government media such as the People’s Daily and millions of Weibo microblog accounts after the 14% plunge in prices in the two days through April 15.

The biggest such drop since 1983 was seen as an unprecedented opportunity by some, which prompted fabricators to replenish inventory by taking delivery on the Shanghai bourse.

The Bloomberg CHART OF THE DAY (above) shows that in the 12 months through April 12, before the rout, gold for immediate delivery in China traded at an average premium of $7.22 an ounce to the prevailing London counterpart, according to Shanghai Gold Exchange data.

The premium has averaged $32 an ounce since mid-April, as physical demand surged, and was at $17.15 at 2:17 p.m. in Shanghai.

“Premium is a function of demand and supply, and right now you could interpret the high premium in Shanghai as a sweetener to entice the overseas gold supply to flow into China,” Qu Mingyu, a trader at Bank of China Ltd. in Shanghai said on May 24.

Even before the mid-April price drop, China’s gold imports jumped to a record in the first quarter, according to official data, and probably rose further through May, Qu said.

China’s output of 403 metric tons in 2012 made it the world’s largest producer for a sixth straight year, according to the China Gold Association. Domestic demand was 776 tons last year, which outpaced supply and spurred imports, according to the World Gold Council.

The store of wealth demand is not just from Chinese ‘aunties.’ There remains an under estimation of the demand coming from wealthy Chinese and high net worth and ultra high net worth individuals (HNWs and UHNWs).

This has not been commented upon or analysed but we have direct experience of wealthy Chinese people looking to store gold in Hong Kong and Switzerland, as have other storage providers.

Given the significant cultural affinity for gold in China, there is likely to be sizeable demand from wealthy Chinese people looking to diversify and protect their new found wealth.

To characterise Chinese demand for physical gold as solely from “aunties” is to simplify Chinese demand. Indeed, besides Chinese people buying gold, Chinese companies and of course the official sector and the People’s Bank of China are also likely accumulating gold.

The significant broad based demand for gold in Asia, and particularly from India and China, continues to be ignored and under estimated by gold bears such as Nouriel Roubini.


NOURIEL ROUBINI: 6 Reasons Why Gold Will Plunge To $1,000

Gold has been getting poleaxed in recent months, though it remains just below $1400/oz.

In a piece up at Project Syndicate, economist Nouriel Roubini says gold will fall to around $1,000 before the end of 2015.

He gives six reasons why.

We summarize:

  • Gold spikes during extreme crises. The crises are over.
  • Gold does well during periods when there’s a risk of high inflation. That clearly is no longer a big worry, given how much central banks have unsuccessfully tried to stoke even modest inflation.
  • Now with the economy recovering, nobody wants to be in rocks that don’t pay any dividends.
  • Real interest rates are rising. That kills gold.
  • Governments with debt issues are selling gold.
  • Gold was juiced by right-wing fanatics in the US. That boom is over.