Almost a year ago the Telegraph’s Thomas Pascoe put out an interesting piece on gold. We’ve decided to reprise it this Friday because we think it offers an interesting and useful perspective on current developments in the gold market: One of the most popular trading plays of the late 1990s was the carry trade, particularly the gold carry trade. In this a bank would borrow gold from another financial institution for a set period, and pay a token sum relative to the overall value of that gold for the privilege.
Anyone who bought gold in 2008 is probably more than tempted to cash in their profits right about now. Reflecting the scale of the change in sentiment — and confirming that there was indeed something of a choke level for gold at around the $1,908 mark — is the following chart from Macro Risk Advisors which neatly sums up the degree to which investors have been liquidating gold ETF positions.
There’s an enlightening interview with Oleg Deripaska, chief executive of Rusal, in the Telegraph this Monday (h/t Neil Hume). Turns out the metal tycoon believes aluminium may do better than expected this year, largely because much of the excess capacity that has plagued the industry has finally been cut back.
ROUND-UP FT markets round-up:“US stocks fell, while the US dollar shot higher after minutes of the last Federal Reserve meeting showed policy makers are growing wary of asset purchases and may end their $85bn monthly bond buying programme in 2013. Investors bought the US currency, pushing the dollar index up 0.7 per cent, as the euro touched a three-week low against the greenback, below the $1.31 level. In contrast, gold prices sold off, with the precious metal falling 1.4 per cent after the release of the minutes, to hit a session low at $1,662.34 an ounce. The US 30-year bond sank a full point, while its yield rose to 3.10 per cent. The 10-year note yield jumped 7 basis points to 1.90 per cent. The FTSE All World index spent much of the trading day in negative territory, also dragged lower by declines in most European equity markets. The global benchmark index closed 0.3 per cent lower as the S&P 500 ended the session down 0.2 per cent on the day.” (Financial Times)
We made the case a few weeks ago that the gold price may have reached its choke level and that it was arguably capped from that point on. One good indicator of this, we noted, was the divergence between the gold price — which had been flat-lining for some time — and real interest rates. It’s also hard to ignore gold’s reaction to the latest Fed announcement, which has been intriguingly bearish to say the least
Gold experienced a sizable wobble on Wednesday, so no surprise people are still trying to make sense of it. The best comment we’ve seen come from Commerzbank and UBS on Thursday who suggest a fat finger or rogue computer algorithm could be to blame for the disturbance…
Athens buys time || Harry Winston to buy diamond operations of BHP Billiton || Vodafone write down of £6bn in Europe, £2.4bn cash dividend from Verizon || Loan losses provisions of €3bn for Italy’s two biggest banks || Cisco System’s shares in relief rally || Bail-inable bank debt in the UK || Banks fight Basel III
Austerity package passed in Greece || Dexia bailed out (again) || Soured Apple || Deutsche’s loss on MetroPCS merger || Argentina v Chevron || Sandy disrupts US petrol supply || Gold up || Bluffer’s guide to regime change in China || The election results and Wall Street || EC/IMF stats fight, and the art of understatement || China NOT deleveraging
ROUND-UP FT markets round-up: “Global stocks advanced, with the S&P 500 rising for a second day, as Americans headed to the polls to pick the country’s next president… The FTSE All-World equity index rose 0.7 per cent as the FTSE Eurofirst 300 closed 0.6 per cent higher, after the Asia-Pacific region added 0.2 per cent. On Wall Street, both S&P 500 and blue-chip Dow Jones Industrial Average rose as much as 1 per cent, while the dollar index fell 0.2 per cent. The S&P 500 closed 0.8 per cent higher. Among commodities, copper gained 0.5 per cent to $3.49 a pound, and oil prices traded back above the $110 per barrel. Gold prices jumped, with the precious metal up $29 to $1,715 an ounce.” (Financial Times)
The price of gold has been all over the place in the past twelve months. No matter, say James Steel and Howard Wen at HSBC; they remain bullish on the yellow metal and expect prices to hit $1,900 before the end of the year. They also raise their average price forecasts for 2013 and 2014 to $1,850 and $1,775 respectively, but lower the 2012 average to $1,700 from $1,760. As the graph below suggests, expectations of monetary policy in the US have been the key drivers, offsetting somewhat sluggish global demand.
While there was a time that the gold price represented a useful expression of investor concerns over currency debasement, that may no longer be the case. So says Simon Derrick from the Bank of New York Mellon, who argued last week that it’s probably time to re-evaluate the signals coming from the bullion market. As he wrote last Wednesday:
Update (8:20am BST): it seems the usually-reliable sources were mostly reliable in this case, though there remains some uncertainty over whether they can tell one Chinese gold company from another. Barrick Gold statement:
The calls for QE3 continue to rage. But as FT Alphaville has discussed at length, QE3 in its conventional guise — freshly minted base money in exchange for US government bonds — might not really be an option due to the squeeze it causes in the US Treasury market.
In our previous post, we made the point that if the old goldbug accusation that central banks and bullion banks were suppressing the gold price by selling or lending gold into the market is true, then in the current cash-for-gold universe — which features negative gold lease rates — the opposite must apply. That is, the very same entities may now, if anything, be supporting prices in the market.
A while ago we observed that negative gold leasing rates were potentially signalling something awry with the Libor rate. That judging by gold forwards, the Libor component of the gold lease rate calculation (Libor-GOFO = Lending rate) was coming in much lower than what might otherwise be expected.
In 2010, when the BIS first revealed that it held gold swap agreements worth SDR8.16bn (representing 346 tonnes of gold) the revelation knocked the gold market. That’s because rather than making money (or yield) from lending out its gold — as the BIS usually did — it had become cost effective for the BIS to lend out currency against gold collateral instead.
FT Alphaville drew attention on Thursday to an alleged whistleblower letter that arrived in the CFTC’s mailbox this week. The author of said note claimed to be a JP Morgan employee with inside information about the bank’s (supposedly less than honest) activities in the precious metals market. He wrote that he was whistleblowing because he no longer had faith or belief that what the bank was doing for society was “bringing value to people”.
Last week, Dennis Gartman, author of the eponymous Gartman Letter, caused a bit of a stir in the goldbug community when he suggested that gold’s sell-off on February 29 may have been connected to central bank intervention.
China is set to overtake India this year as the world’s largest consumer of gold, the World Gold Council predicted, underscoring the surge in Chinese demand that has revolutionised the bullion market, the FT writes. India has for decades been the world’s largest gold market, but in the final quarter of 2011 demand tumbled by almost half from a year earlier as a collapse in the value of the rupee made gold more expensive for Indian buyers. “It is likely that China will emerge as the largest gold market in the world for the first time in 2012,” said Marcus Grubb, managing director for investment at the WGC, a lobby group for the gold mining industry. Thursday’s prediction comes after a surge in Chinese gold demand last year, with imports from Hong Kong – a proxy for overall import demand – more than tripling from 2010. In the second half of the year, as Indian demand waned, China edged ahead as the world’s top consumer, according to data from GFMS, the consultancy, that were published by the WGC on Thursday.
Global stocks fell and the euro remained under pressure as a string of economic reports in the US failed to offset the gloom sparked late on Monday by Moody’s, which downgraded six European countries and put the UK, France and Austria on negative outlook, the FT reports. The FTSE All-World equity index fell 0.4 per cent and commodities were mostly weak, with copper shedding 0.7 per cent to $3.81 a pound. On Wall Street, the S&P 500 closed 0.1 per cent lower and the FTSE Eurofirst 300 was off 0.3 per cent. The dollar index was up 0.6 per cent and yields on 10-year Treasuries fell 3 basis points to 1.94 per cent. Gold prices were volatile and the precious metal closed 0.4 per cent at $1,714 an ounce. The credit rating agency’s move reminded traders that a bail-out agreement for Greece, which bolstered sentiment at the start of the week, does not remove sovereign debt risks in the region and might leave many growth assets vulnerable to profit-taking, given their recent good run. French and UK bonds saw sellers, nudging yields higher by several basis points. After initial gains, the single currency traded lower for most of the session and closed down 0.5 per cent at $1.3119. Demand for the euro fell as a meeting of eurozone finance ministers set for Wednesday has been postponed.
We know the gold bug/Austrian case. When the United States broke away from the gold standard in the 1970s it allowed for unchecked credit creation, beyond what could realistically be supported by economic growth.
On Tuesday we asked what rules should govern entry to the FTSE UK indices. We launched our consultation in response to a similar survey from the FTSE Group, which sought market feedback on the free float rules for its various indices. This followed investor outcry over oligarch-owned Russian companies (Evraz, Polyus Gold and Polymetal) seeking to list on the main market while keeping control out of public hands.