Archive for European Central Bank
(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 29, 2013)
Global financial markets will be taking their cues from U.S. Federal Reserve and European central bank policy meetings to be held by the Fed on Tuesday and Wednesday and by the European Central Bank (the ECB) on Thursday.
The consensus among economists who pay attention to these things suggests there won’t be any significant change in Fed policy . . . but, in contrast, there is a strong belief that the ECB will cut European interest rates from their already record low levels.
The ECB has seen a disappointing string of European economic data over the past several weeks. Even Germany, which had earlier seemed immune from the deteriorating conditions elsewhere in the 17-nation eurozone, is beginning to feel the pinch.
A cut in European interest rates could be a mixed blessing for gold. Here’s why: Lower European rates could adversely affect the euro in world currency markets . . . making the dollar appear stronger. And, dollar strength has often — but not always — been a short-term negative for gold. It could be that the markets have already priced in a weaker euro/stronger dollar, in which case there may be little gold-price reaction.
Longer term, stimulative ECB monetary policies will be a big plus for gold, not only its euro-denominated price but, reflecting higher aggregate global gold demand, as big plus for the U.S. dollar-denominated price as well.
U.S. Economic Trends
Today’s news on the U.S. economy, with consumer spending up a modest 0.2 percent in March, along with other recent indicators, suggest the feeble recovery may not have sufficient firepower to sustain positive growth, let alone engineer any meaningful reduction in unemployment.
Recent GDP data excluding erratic business inventories, which is the broadest measure of economic performance, puts U.S. economic growth in the first quarter at only 1.5 percent, down from 1.9 percent in the fourth quarter of 2012 and 2.4 percent in the third quarter — taken together not a reassuring trend.
Misguided U.S. fiscal policies — the recent hike in Federal payroll taxes and the sequestration-related spending cuts and layoffs — are already impeding consumer and business spending . . . and this fiscal drag will increasingly retard economic activity in the months ahead.
Meanwhile, global economic trends are also impede U.S. growth: The deepening European recessions and slowing activity — in many of the emerging economies — along with a rising dollar exchange rate against the currencies of important foreign markets for U.S. exports is also retarding growth here in America.
All of this will be on the minds of policy-makers at the Fed when they meet on Tuesday and Wednesday this week. No doubt their discussions will focus on the economy’s vulnerability, along with the unacceptably high rate of unemployment and the below-target rate of consumer price inflation rate. The core inflation rate (excluding food and energy) for personal consumption expenditures was only 1.1 percent in the first quarter, well below the Fed’s target rate of 2 percent
Although we, along with most other Fed watchers, do not expect any explicit change in monetary policy, the market’s will be parsing Fed Chairman Bernanke’s every word at the post-meeting press conference for any suggestion the Fed may shift their accommodative policies later this year.
With labor markets in distress, inflation below target, and the economy showing signs of stumbling, their will be less talk of an early reduction in monetary accommodation and possibly some nuanced mention of possible additional stimulus later this year.
This would be bullish news for gold . . . and could give the market enough juice to break through overhead resistance.
A significant upside gold-price reaction to this week’s news from the Fed and the ECB just might be enough to fuel an upside price advance and restore upside momentum.
Momentum and technically driven trading in futures and over-the-counter derivative markets were responsible for the swiftness and magnitude of selling as gold prices came tumbling down. Although gold certainly remains vulnerable to renewed technically inspired selling — especially if prices stall below recent highs — the potential for high-powered moves on the upside should not be overlooked.
If gold prices can break through key resistance points and post further significant gains in the days ahead, the machines will turn increasingly bullish — and they have the buying power to drive prices much higher in a blink of the eye.
(Posted: March 15, 2013)
Gold bears have been a gleeful group of late, pointing to the recent decline in gold exchange-traded fund holdings as evidence of investor disinterest in the yellow metal.Â Gold bears also see the market’s rather lackluster performance over the past year and a half - and the failure of prices to move higher - as further evidence the decade-long bull market has run its course.
Yes, gold has retreated some 20 percent from its September 2011 all-time high (near $1,924 an ounce) to its subsequent low (just over $1,520).
Yes, Gold ETFs have seen some substantial and high-profile withdrawals in recent weeks.
These developments in no way diminish my belief that the bull market in gold has plenty of life ahead with the yellow metal’s price doubling (or more) from recent levels in the next few years.
Historically, cyclical upswings in stocks, bonds and commodities have often been measured in decades and bull markets typically end with a rapid advance to record heights followed by a swift and resounding crash.Â This looks more like equity markets today while gold’s appreciation over the past decade has been a measured advance and its recent performance bears no resemblance to a bursting bubble or a mania run its course.
The bears are also pointing to the recent strength of the U.S. dollar in world currency markets and the record highs on Wall Street as confirmation that gold is past its prime.
In my view, the appearance of dollar strength does not reflect a healthy currency.Â The U.S. dollar is merely the least unattractive contestant in a beauty pageant of ugliness.Â As such, flight capital, especially from Europe, seeking a safe haven has been gravitating to dollar-denominated U.S. Treasury debt.
Nor is the record-breaking streak on Wall Street a sign of a healthy economy.Â Who could possibly believe that! It is a consequence of the Fed’s super-accommodative monetary policy and the need for many investors to register positive returns in a near-zero interest-rate environment.
What about the decline in global gold ETF holdings?Â For all the attention in the financial press, the nearly 10-percent decline in gold ETF holdings from their all-time high in December really tells us very little about market fundamentals and price prospects.
First, it is quite possible that some of these sales were from institutional investors choosing to buy and hold the real thing, directly and under their own control, rather than hold a piece of paper representing ownership but not directly accessible by ETF investors.
Second, many hedge funds and institutional investors are driven by the need to perform well in short term - and simply could not resist jumping on Wall Street’s bandwagon where profits in the next month or quarter looked more attractive to them.Â Once gold again shows some real life (and it will), those who jumped ship will get back onboard, expecting gold to deliver relatively attractive short-term gains.
Third, gold sold by ETFs has to go somewhere - and where it’s been going is of great importance.Â On the other side of the market have been central banks, buying for the very long term and unlikely to re-sell anytime soon, perhaps not for decades or longer.Â It’s as if the gold has been permanently removed from the marketplace and indefinitely unavailable to meet future demand - not just from ETF investors but also from investors and jewelry buyers of every stripe. This means that prices will have to rise much more than might be expected as more buyers compete for a smaller supply of available metal.
In fact, central banks are likely to continue building their gold holdings in the months and years ahead -so that available supply, what I call “free float,” will continue to shrink as gold moves from weak to strong hands.
Ironically, America’s former cold-war rivals - Russia and China - have been the biggest and most persistent central-bank buyers, followed by a diverse group of newly industrialized and emerging economy nations including Mexico, Korea, Brazil, Mexico, the Philippines, Kazakhstan, Ukraine and others.
Both Russia and China see central-bank gold accumulation as an important step toward playing more important roles in the evolving global economic and political order - while ending America’s dominance in the world monetary system.
Moreover, for those central banks under-weighted in gold and over-weighted in dollars and euros, their motivation has been to diversify their official reserve assets and reduce their exposure to the U.S. and European currencies.Â With America unable to address its Federal budget deficit and limit its mounting sovereign debt and with economic policy on both sides of the Atlantic in disarray, central banks around the world have a strong incentive to buy and hold gold as a currency hedge and insurance policy.
When the dollar looks less attractive as a safe haven and easy gains on equities look less certain to investors, gold will once again be the leading beneficiary of the Fed’s easy-money policies.Â In the meantime, support for higher gold prices will come from continued central-bank buying as well as strong private-sector demand from China, India, and retail buyers around the world.
(Posted: January 15, 2013)
Iâ€™ve been following gold professionally for some 40 years, ever since joining Citibank as an international economist back in 1973.Â One of my early assignments was to write a report for senior management on the future role of gold in the world monetary system.Â Gold had already risen from $35 an ounce in August 1971, when President Nixon ended the U.S. dollarâ€™s official convertibility into gold, to $120 an ounce in mid-1973 when I joined Citibank as one of the most junior economists.
Though I thought the price of gold could rise, if only because its price had been suppressed and private demand quashed since the 1930s, I saw no return to anything that might resemble a gold-based world monetary system.
At the time, few mainstream investors, and even fewer economists, imagined gold would rise so spectacularly, as it did, to $875 an ounce, if only briefly, by January 1980.Â Since then, gold has continued its roller-coaster ride, reaching $1,924 in September 2011 and subsequently falling back to the $1,650 to $1,750 range in the past year.
My views today are quite similar to what I wrote in 1973: I see gold prices continuing to rise . . . but little chance the yellow metal will resume its former role as the lynchpin of the world monetary system.
Today, gold is still considered by an â€śalternativeâ€ť investment, out of the mainstream, by many individual and institutional investors â€“ and by many in the mainstream media as well.Â Over the past decade, gold has moved higher, much to the surprise of many in the investment community who still continue to hold the yellow metal in low esteem.
As a result, most investors are today still underweighted in gold â€“ and many own none at all.Â This is true, not only among private investors, but also importantly among central banks.Â While the U.S. and many European central banks retain large official holdings â€“ and seem loath to sell any â€“ many of the newly industrial and emerging-economy nations remain grossly underweighted in gold.Â Even those who have been substantial buyers of gold in the past few years â€“ including China, Russia, Saudi Arabia, Mexico, and India to name a few â€“ hold only a very small portion of their total official reserves.
This underweighting of gold in both private portfolios and official reserves bodes well for gold-price prospects in the years ahead â€“ and is one of the key factors suggesting that the price of gold could easily double by the end of this decade.
Donâ€™t be distracted or disappointed by goldâ€™s recent setbacks.Â The price decline from its all-time high in September 2011 owes much to short selling by a relatively small number of institutional speculators and short-term traders out to make a quick profit operating in gold derivative (or paper) markets where little physical gold actually changes hands.
The resulting price weakness has masked the continued tightening of goldâ€™s own physical market fundamentals â€“ and the movement of metal into relatively stronger hands, owners who are unlikely to sell anytime soon, perhaps for decades if not longer.
This is certainly the case with most of the central-bank buying the past three years.Â Central banks â€“ eager to increase their holdings of gold and decrease their holdings of paper currencies (U.S. dollars, euros, British pounds, etc.) â€“ are unlikely to part with newly acquired gold anytime soon, probably not for decades or longer.Â Instead, the official sector is likely to demand a significantly more physical gold as it becomes available in the world market.
Similarly, in some countries â€“ most significantly the Peopleâ€™s Republic of China and other East Asian nations with relatively healthy economies â€“ private-sector jewelry and investment/savings demand will remain an powerful bullish gold-price driver as personal incomes and household wealth rise, the middle and wealthy classes continue to expand, stock markets and real-estate investments look overvalued, and as inflation concerns remain ever present.
Itâ€™s no accident that Iâ€™ve not mentioned the fiscal cliff, or the overhang of public and private debt or central-bank monetary policies in the United States and Europe.Â Nor have I mentioned the likely growth in retail and institutional investment interest in gold in the United States and European economies.Â Although I believe these factors â€“ especially the continued easing of monetary policies â€“ will become increasingly bullish for gold in the months ahead, they are not prerequisites for the resumption and continuation of goldâ€™s long-term bull market during 2013 and beyond.