Tuesday , 21 May 2024

What’s Up (er… down) With Gold These Days? (+2K Views)

Gold is universally recognized as a safe-haven investment, a go-to asset class when others look uncertain but this week has been a particularly rocky one for the metal, even with Greece and Puerto Rico’s debt dilemmas, not to mention the recent Shanghai stock market decline. In fact, gold has traded down for 10 straight sessions to end the week at its lowest point in more than 5 years.

The edited excerpts above, and those below, come from an article* by Frank Holmes (usfunds.com) originally entitled 3 Reasons Why Gold Isn’t Behaving Like Gold Right Now and which can be read in its entirety HERE.

The following 3 factors are affecting gold’s behavior, in particular, right now:

1. A Strong U.S. Dollar

Like crude oil, gold around the world is priced in U.S. dollars. This means that when the greenback gains in strength, the yellow metal becomes more expensive for overseas buyers. With the U.S. economy on the mend after the recession, the dollar index remains steady at a 12-year high.

2. A Possible Rise in Interest Rates

Federal Reserve Chair Janet Yellen continues to hint that interest rates might be hiked sometime this year, perhaps even as early as September. When rates move higher, non-yielding assets such as gold often take a hit.

As you can see below, the 10-year Treasury bond yield and gold have an inverse relationship. When the yield starts to rise, investors might find bonds a more attractive asset class.

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3. A Slowing of Manufacturing Activity Globally

There has been a downtrend in manufacturing activity across the globe…[and] our research has shown that when the one-month reading of the global purchasing manager’s index (PMI) has fallen below the three-month moving average, select commodity prices have receded six months later.

click to enlarge

China is the 800-pound commodity gorilla, and its own PMI has remained below the important 50 threshold for the last three months, indicating contraction. The preliminary flash PMI, released today, reveals that manufacturing has dipped to 48.2, a 15-month low. For gold and other commodities to recover, it’s crucial that China jumpstart its economy.

In the meantime, we’re encouraged by news that the slump in prices has accelerated retail demand in both China and India, which, when combined, account for half of the world’s gold consumption.

Demand/Supply Dynamics

a) Demand

We look forward to the second half of the year, when gold prices have historically seen a bump in anticipation of Diwali, which falls on November 11 this year, and the Chinese New Year. As you can see, average monthly gold performance has ramped up starting in September.

click to enlarge

b) Supply

Gold is down 15 to 25 percent below production levels that might cause some companies to halt production and the combination of the two could well help prices find firmer footing.

* http://www.usfunds.com/media/files/pdfs/investor-alert/_2015/2015-07-24/Investor_Alert_07-24-2015.pdf

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  1. I wonder why those that are forcing PM;’s value to go downward against paper money that is being printed “as Needed” don’t force a phony “PM’s crash” just because they can.

    I look forward to some Country, like Greece (that is getting their currency mauled by others) to proclaim that their PM’s can be only traded with actual (physical) PM holdings, imagine what that would do to the value of PM’s Globally!

  2. It’s surprising that in an otherwise thorough article the most important event in the gold price crash recently is not mentioned. I am, of course, referring to the dumping of 57 tonnes of paper gold in 2 minutes last Sunday. This price smash had nothing to do with physical gold, as the article implies.

    • Alan – I agree, yet another DUMP using paper to short Gold, I wonder why that is even allowed any longer, unless the biggest traders use it to force Gold ( and other PM’s) to appear to “lose value”. Left unsaid is “against Paper PM’s…