Gold Prices Erase All 2014 Gains on US Fed Outlook, Asian Demand "Good" as Shanghai Launches FTZ Trading
GOLD PRICES fell to new 2014 lows Thursday lunchtime in London, extending their drop since yesterday's US Federal Reserve policy decision to more than $20 per ounce.
Trading down to $1216 per ounce, gold prices earlier recorded their lowest London Fix since 2nd January – the first trading day of the year – at $1223.
Asian dealers reported "good physical demand on the move lower", with premiums above London quotes on the Shanghai Gold Exchange rising to $6 per ounce.
Visited today by Chinese premier Li Keqiang, the SGE today launched its new free-trade zone gold contracts, aimed at foreign institutions wanting to deal for Yuan held off-shore.
Gold inflows to India – overtaken by China as the world's No.1 gold buying nation on a raft of anti-import measures in 2013 – are expected to rise as Hindu wedding and festival season demand peaks with Diwali, says Prithviraj Kothari, vice-president of the India Bullion & Jewellers' Association, reaching "about 70-75 tonnes per month in the coming months as against a monthly average of 50-60 tonnes."
"The US Fed," Bloomberg quotes analyst Abhishek Chinchalkar at AnandRathi Commodities in Mumbai, "seems to be slowly preparing the markets to gear up towards an eventual monetary-tightening cycle."
"Any rallies [in gold prices] are unlikely to be sustained as we head closer."
Silver extended the drop in gold prices today, hitting $18.31 per ounce as New York markets opened – less than 10c above June 2013's near 3-year low.
"The markets decided that [the Fed news] was good for the Dollar and therefore bad for precious," says David Govett at brokers Marex Spectron in London.
As expected, Wednesday's Fed statement tapered next month's quantitative easing asset purchases to $15 billion, and repeated that the US central bank will then wait a "considerable time" after ending that program before raising rates from zero.
New forecasts of likely rates in 2016 and 2017, however, showed Fed policymakers targeting higher rates than in their June projections.
Meantime in Frankfurt, and launching its latest long-term lending program with $106 billion in cheap loans to 255 banks across the Eurozone, the European Central Bank today changed its policy-making schedule such that Germany – a staunch opponent of QE money creation – will not vote in two meetings in 2015.
Gold prices for Eurozone investors retreated to Monday's 3-month low at €945 per ounce.
UK gold investors saw the price in Sterling also hit 3-month lows beneath £745 as the Pound rose on expectations of a "No" vote in today's Scottish independence referendum.
"Expectations of higher policy interest rates," says a note from London market-making bank HSBC, "is gold-bearish."
The U.S. Dollar Index closed last Friday at 84.25. For the ninth consecutive week, the Dollar Index has finished higher than the quote from the end of the previous week. This is the longest string of consecutive weekly increases since the first quarter of 1997.
The U.S. dollar reached its highest level in six years against the Japanese yen.
This is the highest the index has been over the past couple of years except for two days in May 2013.
In reaction, the price of gold fell to a multi-month low and silver dropped to its lowest levels since May 2010.
There are several reasons why the dollar is temporarily strong. The economies across Europe are proving to be weaker than the politicians were pretending, which had encouraged some investors to abandon the euro and replace it with the dollar. The military actions and economic sanctions involving the Ukraine and Russia are also putting more pressure on Europe than the United States. American politicians are still talking about the economic news in the United States being positive rather than negative as several reports (a horrible jobs report for August, mortgage applications are declining precipitously, the percentage of home sales being settled for cash is dropping sharply, a growing number of people qualifying for food stamps, the Federal Reserve’s continuing inflation of the money supply at far higher levels than it is admitting, and so forth) are indicating. This is quieting potential clamor from the public as we enter the final few weeks before elections.
However, behind the scenes, various regulatory changes are coming that are all likely to hurt American financial markets. As they impact the value of other kinds of assets, there will be fallout for the values of gold and silver.
On Aug. 28, the CME Group, which owns the COMEX, NYMEX, GLOBEX and other commodity and financial exchanges in New York and the Chicago Board of Trade and the Chicago Mercantile Exchange in Chicago, announced a change to its Rule 575, which became effective Sept. 15.
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Dollar up, gold down; why? was first posted on September 18, 2014 at 6:51 am.
GOLD PRICES held steady around $1235 per ounce in Asian and London trade ahead of the US Fed's policy statement on Wednesday.
US consumer prices fell in August from July, new data showed meantime, with minus 0.2% marking the first negative monthly inflation reading since spring 2012.
World stock markets ticked higher overall as commodities were flat and major government bond prices rose, nudging yields down.
With one day to go before Scotland's vote on independence from the UK, the British Pound regained last week's sharp loss after pollsters put the "Yes" camp ahead.
Gold prices for UK savers today retreated to unchanged for the week at £757 per ounce.
"Rising rates and a significantly stronger Dollar present headwinds" for gold prices, says a new note from metals analyst Suki Cooper at London market-making bullion bank Barclays.
Those factors "are set to overwhelm any seasonal strength in physical demand this year," Cooper believes, cutting her gold price forecast for 2015 to an average $1180 per ounce – the 3-year low reached twice in 2013.
"The months of August and September," explains Swiss refiner MKS in a trading note, "are typically strong for gold due to upcoming festivals and wedding season" in India – formerly the world's No.1 gold consumer nation.
"However premiums over loco London [gold prices] are currently sitting around $5 per ounce, having been as high as $170 this time last year" after the Indian government first imposed strict anti-gold import rules.
"The 80:20 scheme will continue," today's Hindu Business Line quotes Krishna Pratap Singh, a director at India's Directorate-General of Export Promotion, referring to a rule requiring one-fifth of any new imports to be re-exported before the rest is released to the domestic market.
"We have [already] allowed more banks to import gold...help[ing] cut the premium that jewellers had to pay."
Ahead of the US Fed decision Wednesday, "We would want to avoid taking any positions over the next 48 hours," says a note from US brokerage INTL FCStone.
"But if pressed," it adds – saying today's statement is more likely to leave the Fed's forecast for possible interest-rate hikes from zero until well into 2015 – "we would rather be long gold at this point than short."
Further ahead, and "as the US economy continues to recover and monetary policies in other countries diverge," Bloomberg quotes analyst Yang Xi at Yongan Futures Co. in Hangzhou, China, "the Dollar will remain strong and put precious metals under pressure."
The Eurozone's latest long-term bank-lending scheme will begin Thursday, with the European Central Banking injecting cash in a bid to boost private-sector borrowing.
Beijing today injected $81 billion into China's 5 largest banks according to Chinese reports unconfirmed by the People's Bank.
If China remains a one-way street for gold, it cannot become the world hub...
SHANGHAI this week launches a new international gold exchange inside the city's free-trade zone, writes Adrian Ash at BullionVault.
Most everyone thinks this is important because "global gold traders [see] the zone as a gateway to China's huge gold demand." But that's the wrong way round. Because if it's to have any real importance, the Shanghai FTZ gold bourse must mark a step towards China's gold output and private holdings flowing out into the world, not the other way round.
Start with the situation today. China and the UK could hardly be more different when it comes to gold. China is the world's No.1 gold-mining producer, the No.1 importer, and the No.1 consumer.
The UK in contrast...and despite spending its way to household debt worth 140% of income...has no gold jewellery demand to speak of. Private investment demand is also tiny compared to Asia's big buyers
On the supply-side the UK hasn't had any gold-mine output worth noting since 1938. Nor does it currently have any market-accredited refineries for producing large wholesale bars.
So you might think China plays a bigger role in the international gold market than does the UK. Yet nearly 300 years since it first seized the job, London remains the center of global gold flows, trading and thus pricing. For now at least.
Since 2004, and with no domestic mine output and next to no end demand, the UK has imported over 6,800 tonnes of gold, according to official trade statistics – more than China but behind India, the former No.1 buyer. It has also exported nearly 5,000 tonnes, more than any country except No.1 bar refiner, Switzerland.
That's in a global market seeing some 4,500 tonnes of end-user demand per year. Because London is the heart of the world's gold bullion market, and the central vaulting point for its wholesale trade. (Same applies to silver, by the way – the UK was the world's No.1 importer and exporter in 2013.)
The relationship with prices is clear. When metal piles up in London's vaults (where its market also offers the deepest, most liquid place for large investors to hold their gold in secure vaults, ready to sell or expand at the lowest costs) prices have tended to rise. But when the rate of accumulation in London is slowing, prices have tended to fall. Gold prices have sunk when London's vaults have shed metal.
On BullionVault's analysis, those months since end-2004 where Dollar gold prices rose saw net demand for London-vaulted gold average 38 tonnes. Falling prices, in contrast, saw London's vaults lose 16 tonnes per month on average (imports minus exports). Exclude the gold-price crash of 2013 and we get the same pattern. Average net inflows when Dollar price fell were only 15 tonnes per month between 2005 and 2012. Rising prices, in contrast, saw London vaults add 48 tonnes net on average per month.
So what's happening with London-vaulted gold really does matter to world prices. Far more, to date, than what's happening to China's flows.
Why? The Middle Kingdom's modern gold boom has come in mining, importing and refining. But in exports it just doesn't figure. Because bullion exports are banned, thanks to Beijing deeming gold to be a "strategic metal".
Never mind that China now boasts 8 gold refineries accredited to produce London-grade wholesale bars. Out of a world total of 74, that's more than any other country except Japan. But Chinese-made wholesale bars never reach London (or shouldn't...) because they are dedicated by diktat to meeting its world-beating domestic demand alone.
Global investment flows are further locked out by Beijing's block on foreign cash coming into China – another key difference between the UK and China in all financial trading, not just gold. Shanghai vaults have therefore been closed to international gold investment to date. So the impact of global flows on pricing has completely passed China by.
This may change this week however, when the Shanghai Gold Exchange launches its new international gold exchange inside the city's huge free-trade zone on Thursday. Six major Chinese banks will provide clearing and settlement services. The first 40 approved members of the exchange include London market makers HSBC, UBS and Goldman Sachs. But whether global investors will choose to hold gold in Shanghai vaults remains to be seen. China remains a Communist dictatorship, after all. Whereas London, even in the dark days of 1970s exchange controls – which barred UK investors from buying gold, as well as moving cash overseas – still freely allowed foreign money to come and go as it pleased, not least through the City's world-leading gold and silver markets.
Remember, China's gold market has only answered Chinese supply and demand so far. Its mine-supply leads the world...but cannot reach it. China's demand has meantime needed imports from abroad to supplement what Chinese mines produce. That demand leapt when world prices fell in 2013, doubling China's net imports through Hong Kong from 2012 to well over 1,000 tonnes, and clearly showing that – for now – its gold market remains a price taker, not a price maker. The running is made instead by free-flowing investment cash choosing to buy or sell down gold holdings worldwide, and that decision shows up in London, center of the world's bullion trade.
Yes, Shanghai's new free-trade zone gold market marks one step towards changing that. Yes, the FTZ is very likely to replace Hong Kong as the stop-off point for gold imports entering the world's No.1 consumer market. But only a truly liberalized gold trade, with foreign cash and gold flowing in...and out...right alongside China's domesic flows will challenge London's 300-year old dominance.
World Gold Trust Services, LLC, a wholly-owned subsidiary of the World Gold Council, has named William Rhind as its Chief Executive Officer.