Archive for China
(Posted: June 18, 2013)
Gold continues to suffer under a cloud of bearish expectations.¬† Its price has been trending lower for some 20 months now - and, at recent lows, it is off some 30 percent from the September 2011 all-time high of $1924.
A growing number of investors, analysts, and journalists are already writing obituaries for the decade-long bull market and foresee only a grim future for the yellow metal.¬† These naysayers, most prominently economist Nouriel Roubini who gained some renown for predicting the financial-market debacle of 2008, point to a number factors to support their bearish predictions.
They say inflation will remain subdued, the U.S. dollar will continue to appreciate, interest rates will rise, Europe will pull through without sovereign defaults, and the central banks of some deeply indebted countries with substantial gold reserves (like Italy or Spain) may sell some of their official gold reserves.¬† Moreover, they say gold has been over-hyped and don’t see why investors would want to own an asset that earns no income.
It seems to me that the bears have a fairly provincial view and a limited understanding of gold’s increasingly bullish long-term fundamentals.¬† By “provincial” I mean they are ignoring more than half the world - the half that loves gold and will accumulate more.¬† They seem to think not much is important to the future of gold outside the United States and Europe.
Instead, the gold bears are ignoring much of what goes on beyond Wall Street and America’s shores.¬† What happened to China, India, the Middle East, Turkey and other gold-hungry countries?¬† Have these countries ceased to matter in the gold-price calculus?
Quite the opposite: In the next few years, if not longer, households, institutional investors, and central banks in these countries will continue to acquire huge quantities of gold - and most of these acquisitions are for the long term.
Buyers are not speculating for short-term gains but accumulating for long-term security.¬† In other words, much of this gold changing hands today won’t come back to the world market even at much higher prices levels.¬† This will contribute to a growing shortage of available physical gold - guaranteeing steep price increases for the yellow metal in years ahead.
Indeed, looking out beyond the next year or two, demand for gold in these gold-friendly countries will be enough to move the metal’s price higher even if economic and investment conditions in the United States and Europe remain inhospitable for gold.
What’s more, the gold bears are dismissing the certain consequences of unprecedented global monetary creation.¬† With the central banks of virtually every major economy inflating money supply with abandon, gold’s detractors are forgetting the iron-clad law of supply and demand . . . and the eventual certain devaluation of most, if not all, the world’s currencies - measured in terms of their purchasing power for actual goods and services.
The gold bears are also overly optimistic about U.S. economic prospects and the implications for U.S. monetary policy.¬† Those who adhere to a rosy economic scenario are expecting a shift in monetary policy later this year in which the Fed begins dialing back on the monthly dose of monetary stimulus.¬† This increasingly prevalent viewpoint has, in recent months, weighed heavily on the gold price and, indeed, the day-to-day variations in market expectations of future monetary policy explains much of the short-term gold-price variation so far this year.
In contrast, a faltering U.S. economy accompanied by persistently soft employment-market conditions and the declining pace of consumer-price inflation - could trigger a surprisingly robust recovery in the price of gold, - especially if monetary policy shifts into an even more accommodative mode.
The Fed is targeting a decline in the unemployment rate to 6.5 percent and a rise in the inflation rate to at least two percent.¬† As long as these targets remain illusive, the Fed is likely to continue its program of Treasury and mortgage debt purchases, known as quantitative easing, at $85 billion per month - and if the economy falters, as I think it might, financial markets may be surprised to see an even more stimulative monetary policy, surely a recipe for higher gold prices.
As noted above, financial markets have been increasingly anticipating an early reduction in the pace of quantitative easing, a “tapering” or scaling back in the pace of monthly bond purchases.¬† As a growing number of gold traders and investors begin to doubt the rosy economic scenario - possibly due to a spate of disappointing economic news - gold could rally enough to reverse the gold market’s recent downward price momentum and reestablish the long-term bullish uptrend.
Federal Reserve Chairman Bernanke has repeatedly warned us not to expect any reduction in monetary stimulus until the labor market shows meaningful signs of improvement - and this seems unlikely anytime soon.¬† Indeed, employment-market conditions are worse than the headline unemployment rate suggests - wages are stagnating, the workweek is shrinking, the number of part-timer workers seeking full-time employment is growing, and a rising number of discouraged workers are dropping out of the work force. This is a recipe calling for more stimulus, not less.
What about inflation and the dollar?¬† Investors and observers of the gold scene have been misled by the very low reported rate of consumer price inflation and by the apparent strength of the U.S. dollar in world currency markets.¬† I don’t know anyone who really believes that inflation is near zero.¬† It may be low, but not that low . . . and, eventually, all that new money the Fed is creating month after month will come home to roost.
Gold prices have been restrained by the “appearance” of a strong U.S. dollar. ¬†But, in reality, the currencies of all of the old industrial-world countries are devaluing together as each country attempts to increase international competitiveness and boost exports.¬† These currencies - including the euro, the pound, the Swiss franc, the yen, the Australian dollar and others - are all losing value in terms of their true purchasing power - only the dollar’s decline may be a bit slower than most others.¬† This “beggar-thy-neighbor” competition is reminiscent of the Great Depression . . . and must surely be supportive of gold.
Stay tuned to this space - and my more frequent twitter posts @NicholsOnGold - for on-going gold-market analysis and commentary.
(Posted: June 4, 2013)
For now, gold remains captive to the flow of U.S. and global economic indicators and prospects . . . especially those that may influence Federal Reserve monetary policy.
With the U.S. economy far from a satisfactory and self-sustaining recovery, the news is likely to become increasingly positive for gold — with diminishing expectations of imminent “tapering” (that is scaling back the Fed’s monthly bond-buying program) eventually replaced with talk of additional monetary stimulus of one sort or another.
Home in the Range
At the moment, however, gold appears range-bound between $1370 and $1420 — bouncing around within this range on the release of every relevant economic indicator and every comment on prospective monetary policy from one or another Federal Reserve official.
Paradoxically, a significant break out of this trading range — either up or down — is likely to boost buying interest. On the upside, if the price moves much above $1420, the momentum and other program traders will begin migrating back to the bullish camp. On the downside, if prices move much beneath $1370 (and even more so near $1320 (if we ever see gold prices back to this bargain price level), physical demand from all corners of the globe will underpin the market and lead to a swift increase in buying.
Paper vs Physical
It is important to distinguish between the paper markets, which are reactive to the daily news flow and where most of the short-term speculative trading is occurring . . . and the physical market, which has been — and will continue to be — a giant sponge soaking up every ounce of gold available at prevailing prices and premiums.
Much of the “paper trading” is among a small number of dealers and institutional speculators — not only in the transparent futures markets, but also (and sometimes more so!) in the largely opaque and unregulated inter-dealer over-the-counter markets, also known as the “dark pools” of liquidity where high-volume trading goes on virtually unnoticed. For more, see my May 15th post “Dark Pools, Program Trading, and the Decline of Gold.”
And, I would include in this group of short-term paper traders the hedge funds that for several months now have been lightening their gold holdings (mostly in the form of gold ETFs) in order to participate in, and benefit from, the upward march in world equity markets.
I expect when markets turn — that is when Wall Street turns down and gold prices begin convincingly moving higher — we will see a reversal with some of these funds rushing back to gold, contributing to a surprising recovery in the metal’s price.
Gold is Forever
Importantly — and in contrast to the paper markets where trading is very short-term oriented — the physical markets have an increasingly long-term orientation. The Chinese (both on the Mainland and across Greater China) are accumulating gold, not to resell for a quick profit as prices recover, but with the intention of holding forever as an inheritance to be passed on to future generations.
Many retail buyers of bullion coins and small bars in Western markets are also long-term holders with little intention of taking profits anytime soon. ¬†These buyers are motivated more by fear than by greed — Fear of financial market breakdown, fear of monetary debasement and future inflation, fear of an uncertain economy, fear of government intervention in personal affairs, and so on.
Indian demand is less certain and typically more price sensitive — with sellers, often led by housewives selling a bangle or two, emerging on rupee-denominated gold-price rallies. The country’s central bank, the Reserve Bank of India, and the Finance Ministry raised import duties earlier this year and have taken other regulatory actions to discourage gold imports, which after oil are the country’s second biggest commodity import and a major contributor to India’s gaping current account deficit. These efforts are increasing the domestic price premium over the world price, assuring a rise in illegal imports, and ending the sale of old scrap gold to world markets. In any event, Indian gold buyers will gradually adjust to the higher domestic price and demand will return to past levels dependent on local economic conditions, especially in the farming sector, which is traditionally an important buyer of gold.
Don’t underestimate the bullish influence of official-sector demand on the future price of gold. Indeed, purchases by a number of central banks, especially the People’s Bank of China and the Bank of Russia (which are by far the two biggest buyers month after month, year after year) are unlikely to be sold within our lifetimes. These official purchases are intended not only as a vehicle for reserve diversification and reducing reliance on the dollar, the euro, and other old-world currencies — but are part of these two countries’ strategic goal of raising their respective currencies’ international reserve status and gradually reshaping global monetary affairs.
The bottom line is that when gold turns higher there will be insufficient liquidity and a shortage of available supplies — except at much higher prices . . . and many will be surprised by the magnitude and swiftness of gold’s next big leg up.
(Posted: May 7, 2013)
Gold continues to confound, dropping another $25 an ounce this morning as technical and computer-driven program trading triggers selling on U.S. derivative markets, all despite favorable fundamentals and what should be seen as favorable economic and geopolitical developments.
Gold Lower Despite Bullish News
This morning’s dispatches from India and China, the two biggest gold-consuming nations, report that demand in these markets continues unabated . . . and coin dealers report still-strong retail demand for bullion coins and small bars in the Western markets.
News from the Middle East — Israel’s air strikes on Syrian targets and the rising potential for an escalating conflagration — in days of yore would have been sufficient to send gold prices skyward.
Meanwhile, this morning’s news from the Australian central bank that it was cutting its key policy rate to a record low, following last week’s rate cut by the ECB, and Fed Chairman Bernanke announcement that America’s central bank stands ready to step up its monthly bond purchases if the economic environment remains questionable — these monetary-policy moves taken together along with similar easing by other central banks — suggest the global economy may be entering a “competitive devaluation” “beggar thy neighbor” competition in which the only real winner will be gold.
The underlying gold-market theme in recent days, weeks, and months has been and continues to be selling of paper gold derivatives, including gold ETFs and futures, and over-the-counter dealer and interbank trading in Western markets and, all the while, strong physical demand for bullion products and investment-grade jewelry mostly in Eastern markets.
The Paradox Explained
Importantly, much of the activity in dealer and interbank trading goes unreported — with selling and “high-frequency trading” by the “dark pools” of liquidity at crucial chart points in order to trigger and profit from the bigger waves of selling that follow.
Much of this undercover activity is made possible by the Fed’s near-zero interest rate policy. The dealers and traders that comprise these dark pools are so profitable precisely because their cost of money is so low and the availability of liquidity is seemingly unlimited.
Indeed, this machine-driven trading activity at least partly explains the paradoxical failure of gold to move higher — as should be expected during a period of super-accommodative, highly reflationary, monetary policies pursued by the Fed and other major central banks around the world.
While some of this low-cost liquidity is funding the “bubble” on Wall Street, along with some small recovery in the U.S. housing market, and even strong physical gold demand around the world, it is also funding this dark pool trading activity that has been pressuring gold to incrementally lower price levels.
If this were a sic-fi movie it might be titled “Invasion of the Machines.” And, just like the movies, the good guys — those with patience who have trusted the long side — will win in the end.
(Posted: April 24, 2013)
Despite further gold ETF liquidation in recent days and some short spec selling on futures exchanges, gold prices are moving higher on unrelenting physical demand for small bars, coins, and jewelry from the gold-friendly Asian markets as well as retail investment demand in US and European, especially for gold (and silver) bullion coins.
It is particularly encouraging to see gold move higher despite the stronger dollar (against the euro and yen, for example) . . . and at a time when equities are moving lower (or at least are not moving higher).
In the past year and a half, the continuing advance of world equity markets has attracted investor and safe-haven funds that might otherwise have gone for the gold. Now, it looks like the appeal of equities is diminishing with the yellow metal being a significant beneficiary.
Short liquidation by bearish speculators and traders is likely now diminishing as momentum indicators become more encouraging and some traders begin to take profits.
Reports that major mints having difficulty meeting market demand for bullion coins are simply encouraging buyers despite higher retail premiums.
Today’s weaker than expected U.S. durable goods data — and shifting expectations among some investors and traders of easier than previously expected Federal Reserve monetary policy later this year and next — may be discouraging shorts and encouraging longs in paper gold markets.
While near-term prospects remain uncertain, medium- to long-term performance could surprise investors and speculators alike.
As we’ve stated over and over again, much of the gold now purchased in physical markets around the world is going into “strong hands” — that is to say by long-term investors, many of whom will hold gold indefinitely, and by central banks, some of whom are accumulating bullion as a legacy for future generation as a reserve diversifier, alternative to the dollar and euro, or (as with China and Russia) to achieve their global monetary and economic ambitions.
Importantly, the “stickiness” of demand is creating a shortage of available physical gold — what I call “free float”, the result of which may very well be greater-than-expected future price increases once the market turns convincingly higher. ¬†More simply, available supply will be insufficient to satisfy demand except at much higher price levels.