After having touched a 2012 high just $7 shy of $1,800 the ounce, gold prices drifted for a third session this week on Wednesday. The yellow metal was unable to make headway much above the $1,780 mark and sister silver did not manage to penetrate above the $35 level. That said, the gold/silver duo held up relatively well, especially given the steep losses incurred in crude oil and the US dollar’s advance to near the pivotal 80.00 figure on the trade-weighted index. The latter gained against the euro and the yen after US economic metrics related to the ADP payrolls report and to the ISM services sector reading came in at better levels than had been expected. More on those numbers, later.
Not much movement was noted in the euro (still near $1.29) or the Dow (up 12 points and just shy of 13,500) either. Markets are apparently bereft of impactful fresh drivers and are drifting in the post-QE3 environment. Fear not; the next 90 days still hold plenty of potential fodder for volatility and for potentially out-sized moves in various assets. Friday’s September jobs report might be the first such opportunity for speculator albeit the one thing they can no longer look hopefully towards is QE3 as it is already baked into this market cake.
Small-scale previews of such future moves were on tap this morning as market participants awaited an interest rate decision from the ECB. Gold moved $10 higher ahead of the announcement and it once again neared the Monday high. Silver added $30 cents and traded just above the $35 level. Market participants continue to target the $1,800 and $35.50 closing levels in the gold/silver duo as they could bring in momentum-oriented buyers.
The ECB, on the other hand, deicided…not to decide to tinker with interest rates for the time being. Thus, we can now all go back to fretting about Spain and its on-again/ off-again bailout. Bond yields near the critical 6% mark do not indicate a great amount of confidence in that country’s ability to solve its difficulties at this time.
Turning back to gold, the market continues to receive plenty of conflicting news and projections from various analytical and prognosticating sources. Debates continue in the financial media as to what role gold is currently playing given certain supply/demand conditions which are not exactly in its favor. Sharps Pixley analysts note that “while both the fund managers at PIMCO and the UBS Senior International economist agree that gold holds an important position in a diversified portfolio, PIMCO views gold as a currency which does not pay any interest while the UBS economist calls the view that gold is a reserves currency, nonsense - gold supply cannot grow as fast as the rate of the world nominal GDP growth which is about 5 percent p.a.”
On the supply side of the market, we have reports that South Africa’s wildcat strikes are spreading and afflicting more and more mininig operations (and not just gold ones). Harmony Gold reported an illegal strike at one of its mines while iron miner Kumba Iron Ore reported 300 employees having stopped work. The NUM said that South Africa’s mining industry body will restart neogtiations on wages in the coal and gold sectors imminently.
On the other hand, and undeniably, notwithstanding a fresh batch of $2K and $2.2K (and beyond) predictions for that ounce of the preciousss, physical demand remains subdued, at best. It was noted the other day by analysts over at Standard Bank (SA) that “weak [Asian] bullion demand has been in place since mid-September and is the most severe in more than a year.” Standard Bank’s Marc Ground remarked that gold prices have been pumped up by “stimulus fever” and by expectations of future inflation, but not by underlying physical offtake. India’s gold imports declined by 56% in Q2 as previously tallied by the World Gold Council. The country’s central bank continues to make efforts aimed at curbing gold demand and the related risks that such demand entails (not the least of which is the worsening of the country’s current account deficit).
So, let us take a closer look at what the Standard Bank analytical team’s findings were. Their latest daily report notes that “physical gold demand out of Asia remains weak. The current demand weakness comes amid seasonality, which should actually benefit demand.” The team says that “looking at our Standard Bank Gold Physical Flow Index (GPFI), physical demand in especially Asia and India has fallen substantially since the start of September. This coincides with the gold price breaking above $1,700 for the first time since April. It is also clear that the demand we are experiencing now is less than this time last year. The current weakness in demand comes despite a substantial appreciation of the Indian rupee.”
On the topic of elevated gold prices and the aforementioned “stimulus fever” the Standard Bank researchers wrote that the current numbers “show that gold is already pricing in 15 months of QE from the Fed.” They thus conclude that “combined with the weakness in the physical market, we don’t see value in adding new long positions in gold at current levels. We still believe that it is a “buy-on-dips” market, but would look for value closer to $1,740.” Still, the writers anticipate that gold might average $1,850 per ounce in the current quarter.
Black gold did not have a very good day at all, yesterday. A loss of 4.1% took the price of a barrel of dino juice down to just under $88. The principal cause for the decline was the latest US Energy Department reading on output levels. As it turns out, the US produced more than 6.5 million barrels of goo last week; the most since the end of 1996 (!). Meanwhile, total fuel demand was at its lowest since April.