After what looked like a miserable start to the day gold climbed to a six-week high yesterday and settled about 2% higher at $1,262, above the key resistance level of $1,260. This was in part thanks to short covering and some technical buying, however news on both India and China’s gold markets and a poor performance in U.S. stock market and economic data contributed to the boost.
Gandhi weighs in on gold market
The unconfirmed news that India’s government is considering lifting some of its old restrictions helped to bring renewed confidence to the market. An Indian television network reported that Sonia Gandhi, leader of India’s ruling Congress party, has asked the government to review the strict rules on gold imports.
The most stringent of the measures, put in place to help the current account deficit, have not only led to increased smuggling thereby impacting neighbouring countries’ gold markets, but also the hundreds of thousands of gold artisans who have lost their livelihoods.
Speaking at Davos, India’s Finance Minister Palaniappan Chidambaram reportedly responded to the rumours by telling CNBC that the restrictions could not be lifted until the current account deficit is brought under control. I suspect the news that Gandhi may have written a letter (sources are yet to be confirmed) will have had had an impact on paper gold demand. Especially as this would mean that should restrictions be lifted, then gold demand won’t just return to previous levels but there will be an explosion of pent up demand to begin with.
China – does it really impact the gold price?
Weak economic data from China overnight apparently worked in the gold price’s favour. The flash PMI gave the lowest reading in six months and suggested a contraction in the manufacturing sector. Previously, such events pushed the gold price down as speculators assumed the raw commodity sector would suffer. However yesterday it seemed to prompt safe haven buying as investors looked to sell equities in exchange for gold. But even this is a daft assumption, one has to question how much impact Chinese demand currently has on the gold price given the price action in 2013 despite record demand from China. Why would it suddenly affect it now?
EU and US developments boost gold price
A strong manufacturing report from the Eurozone helped to send the U.S. dollar tumbling and the S&P 500 fell by 1%. The EU’s preliminary PMI, as released by Markit, gave the best reading in two-and-a-half years. Add to this is the not-so-subtle hint from Draghi yesterday that the ECB may resort to additional monetary stimulus to help unemployment, safe havens began to climb.
Solid losses in the U.S. stock indexes was just what the gold price needed yesterday as it suggests that the highly inflated market might just be about to spring a leak. This weak performance in equities combined with the weak U.S. economic data will lead many to expect the FOMC to hold back on further tapering this month.
The data from the U.S. was weaker than expected but it wasn’t terrible. However given we are just six days away from the first FOMC meeting of 2014, speculators are on high alert as to anything that might give some hint as to what the Fed will decide in regard to tapering. Gold will have benefited if there is a sentiment out there that further tapering is unlikely to be announced.
Traders sit back for strike effect to take hold
Yesterday strikes at South Africa’s platinum mines began as the Association of Mineworkers and Construction Union began industrial action against the country’s three largest platinum mining companies. The platinum and palladium prices have performed well since the beginning of the year, however it seems that this was in anticipation of such troubles and so market participants may sit back and see how the negotiations play out.
Don’t overplay the China story
Yesterday Zerohedge reported that the People’s Bank of China had ‘announced’ and updated its official gold reserves.
“China announced that its gold reserves remained unchanged at the end of 2013, at 33.89 million troy ounces, the same as it has been for the past 5 years. …. Needless to say, absolutely nobody believes this particular Chinese number.”
Many people have emailed me over this post from Zerohedge, stating that it overstates the relevance and importance of this news. According to one contact, this is not an ‘announcement’ but is ‘an aggregated review of the financial assets and liabilities of the entire Chinese banking sector.’
We will explain this in more detail next week, however needless to say that this is a number no one understands rather than ‘believes.’ China’s gold story is big enough on its own to make headlines, we do not need the sensationalization of various sites and commentators in order to make it newsworthy. By doing so it discredits what is an important story in the world of gold investment.