247Bull.com Editor: One of the reasons cited for the mid-April crash in the price of gold was the sale of gold by Cyprus in order to help fund its rescue. The fear among investors was that this event would set a precedent and that other larger nations such as Spain and Italy would follow suit and dump their gold on the open market. However, the rationale for these theoretical gold sales must be questioned. As Hinde Capital notes in their latest market report, the sale of Spain’s 281.6 tonnes of gold at a price of $1,400 per ounce would allow them to pay off just 1% of their government debt. Even Italy’s 2,451.8 tonnes would only pay off just over 4% of their debt. This raises the question: why would these countries sell what is arguably their most important reserve asset when it would have such a small impact on their outstanding debt? The answer is surely that they wouldn’t.
Spot market gold bullion prices fell to two-week lows Friday, drifting lower towards $1440 an ounce during this morning’s London session before dropping sharply through that level, as stocks gained and most commodities fell as the Dollar strengthened against major currencies.
Silver fell to $23.34 an ounce, while copper prices ticked higher.
“The risk [for gold] is a break through support [will] test the $1322 low,” say technical analysts at bullion bank Scotia Mocatta, who cited $1440 an ounce as a key support level.
Heading into the weekend, gold looked set for a 2.2% weekly drop by lunchtime in London, with silver down 2.6% on the week.
The world’s biggest gold exchange traded fund SPDR Gold Trust (ticker GLD) meantime saw the volume of bullion held to back its shares climb to 1054.2 tonnes yesterday, the first daily addition since mid-March. The GLD has seen its holdings fall by more than a fifth since the start of the year, taking them down to four-year lows.
Deutsche Bank became the latest investment bank to cut its gold forecast Friday, with its analysts now projecting a 2013 average gold price of $1533 per ounce, down from the previous forecast of $1637. The 2014 forecast was cut from $1810 an ounce to $1500, with the 2015 forecast down from $1930 to $1450.
On the currency markets, the US Dollar rose above the 100 Japanese Yen mark for the first time in four years Friday. The Dollar also added to gains made against the Euro Thursday, which followed the release of the lowest weekly US initial jobless claims figure since January 2008.
“Gold’s been put a little bit under pressure because of the Dollar move,” says Afshin Nabavi, senior vice president at Swiss bullion refiner MKS.
“Physical-related demand had been very strong up to yesterday. The lower gold goes, the more physical demand will come in.”
“People in Hong Kong are still complaining about tight supply,” one dealer in Singapore told newswire Reuters Friday.
Japan’s Nikkei 225 stock market meantime closed up nearly 3% Friday, hitting a five-and-a-half-year high as the Yen weakened against the Dollar.
The Bank of Japan last month announced that it will double the monetary base over the next two years, buying between ¥60-70 trillion of assets a year, after prime minister Shinzo Abe said policymakers will do “everything possible” to achieve an inflation target of 2%.
“In general, if you ease monetary policy, your currency will weaken,” International Monetary Fund deputy managing director Naoyuki Shinohara told an audience in Tokyo Friday, adding that poor fiscal discipline from the government risks giving the impression that is being financed by the central bank.
“Most central banks…still have a bias to ease,” says a note from Morgan Stanley.
“Given this disposition, it doesn’t take much in terms of downside surprises in growth or inflation to tip the balance for more central banks to pull the trigger for more easing.”
Today’s meeting of G7 finance ministers and central bank governors near London is “an opportunity to consider what more monetary activism can do to support the recovery,” said UK chancellor
George Osborne yesterday, “while ensuring medium-term inflation expectations remain anchored”.
“Central banks are our best friends,” Mohamed El-Erian, chief executive of world’s largest bond fund Pimco, said earlier this week.
“Not because they like markets, but because they can only get to their macro objectives by going through the markets…the hope is that improving fundamentals will validate what central banks have done.”
Gold mining companies meantime reduced their gold hedge positions during the last three months of 2012, according to the latest analysis from precious metals consultancy Thomson Reuters GFMS.
Ben Traynor | BullionVault