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Don’t Look Now but Gold May be in a “Stealth” Bull Market
Since July 31, gold is up over $100 per ounce, from a low of $1,080 on July 31 to a high of $1,190 on October 15. Most of gold’s gains have come in the first half of October, when gold rose from $1,114 (on September 30) to $1,185 (October 16). On October 14 alone, gold moved from $1,165 to $1,190. Several factors are pushing gold up. Here is a rundown on seven reasons – in the general order of their importance – for gold’s rise:
Seven Reasons Gold is Rising Now
#1: Fed policy. The most important driver of the gold price right now is the perception that the Federal Reserve will not raise rates at their next meeting of the Federal Open Market Committee (FOMC) in late October, and they might even postpone any interest rate increase until early or mid-2016. Various Fed officers (nicknamed “doves” for their accommodating nature in keeping rates near zero for seven years now) have made it clear that they want to see a strong recovery with gently rising inflation and meaningful wage increases before they consider raising rates. The recent spate of downbeat economic statistics has added to the perception that that the Fed may not raise interest rates for the remainder of this year. (Gold benefits when interest rates remain near zero, since gold doesn’t pay interest income, which puts it on an even playing field with low-yield cash.)
#2: The U.S. dollar is gentling falling. A second factor is that the U.S. dollar has been flat to down in the last six months, which has helped gold recover in U.S. dollar terms. The dollar rose 25% fairly rapidly from mid-2014 to March 2015. The U.S. Dollar Index rose from 80 to 100 in those nine months, but now it is down 5% to around 94-95. Since most commodities are priced internationally in terms of U.S. dollars, gold and many other commodities (like oil) have been gently rising in recent months, as the dollar falls.
#3: Seasonal factors. A third factor behind gold’s recent is the holiday jewelry trade – first in India, and then in Europe, America and (finally) China. Jewelry fabricators in India stockpile gold in August and September for their holiday gift-giving jewelry and for their wedding season in the fall months. Jewelers in the West then fabricate gold for the Christmas and Valentine’s Day trade in America, which generally overlaps the Chinese New Year. To deliver these products in a timely basis, jewelers must order their raw gold in late summer, which makes September to December gold’s strongest season of the year.
#4a: Central bank gold buying: A fourth factor is the continual stream of central bank buying of gold. Russia’s central bank added 31 metric tons of gold in August – its highest monthly purchase since March – and early indications are that the central bank of the Russian Federation could have bought up to 100 more tons since the end of August.
Reuters reported that China increased its gold holdings by over 3% in the third quarter. The People’s Bank of China (PBOC) said they bought 480,000 Troy ounces (about 15 metric tons) in September after buying 19 tons in July and over 16 tons in August, lifting their total holdings to 1,708.5 metric tons as of September 30, according to the PBOC.
China has the largest foreign exchange holdings in the world, so this massive gold hoard – fifth among nations, behind only the U.S., Germany, Italy and France – represents only 1.7% of their total foreign exchange holdings of about $3.6 trillion, so they have plenty of opportunity and motivation to add more gold to their coffers most months going forward.
#4b: Central Bank dollar selling. The flip side of central bank gold buying is their selling of U.S. dollar holdings. The Wall Street Journal reported on October 8 that “Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.” The Journal adds that “sales by China, Russia, Brazil and Taiwan are the latest sign of an emerging-markets slowdown that is threatening to spill over into the U.S. economy. Previously, all four were large purchasers of U.S. debt.” Sales of U.S. dollar Treasury notes and bonds was down by a net $123 billion in the year ending July 31.
The Journal concluded that “persistent fiscal deficits made the U.S. Treasury market vulnerable to a reduction in foreign purchases,” whereas gold is a central bank asset that carries no debt obligations. Gold by its very nature is a fully-paid-for and owned asset.
#5a: ETF traders are buying gold. Gold-backed exchange traded funds (ETFs) have increased their gold position in four of the last five weeks. In early October, GLD, the biggest gold ETF increased its gold position 12 metric tons in two days, pushing the total holdings back over 700 tons. Barron’s reported on October 7th (in “Gold Bulls Flood into ETF ‘Call’ Options”) that options trading has been bullish in the SPDR Gold Shares ETF.
This trend carries over into the futures market as well. One early October trade they cited was an $11.5 million call contract that profits if gold rises 10% or more by mid-2016.
#5b: Positive analyst views. ETF sales are rising since mainstream analysts are starting to make positive statements about gold – now that it is up $100! For instance, Deutsche Bank says that the prospects for gold are looking “rosier” since they expect precious metals to “benefit from weaker economic data, indicating a longer pause before FOMC members can credibly signal a first policy rate hike.” French banking giant Societe Generale said in a research report that commodities are bottoming out and should recover in the medium term. The bank’s analysts see gold as the best choice among commodities in a “hard landing” scenario for China. Also, DBS Group Holdings has been overweight gold since mid-August and said they will likely be overweight next year.
Billionaire Paul Singer, founder of the hedge fund firm Elliott Management, said that paper money is being systematically debased, favoring gold. He said at a recent seminar that “I like gold. I believe it’s under-owned. Every institutional portfolio should be 5-10 percent invested in gold to protect against zero interest rates that are degrading the value of paper currency,” adding that “Gold is the only real money,” a “real asset to protect against inflation, government policy and/or diversification from stocks and bonds.”
#6: Mint coin sales. Another new demand factor is Mint sales. Third-quarter demand for Gold American Eagles at the U.S. Mint rose 181% over the second quarter. The Mint sold 397,000 ounces in the third quarter – or 45% more than the 273,000 ounces they sold in the first six months of 2015. The Royal Canadian Mint and Perth (Australia) Mint reported similar sales increases. Silver coin sales rose at a slower pace in America last quarter, but that was only because the U.S. Mint rationed silver coin sales to dealers.
#7: Potential Supply disruptions. Yet another bullish factor is the potential for supply disruptions. Bloomberg reported in early October that “African gold production could be shut down or sharply curtailed soon as a strike threat loomed larger when the second-largest union in the country rejected a pay offer even after the largest union approved it.”
The Association of Mineworkers and Construction Union (AMCU), which represents 31% of gold mine workers, rejected management’s offer, even though Bloomberg reported that the largest producers in South Africa with the deepest and oldest mines in the world are “losing money on about 35% of production at current gold prices.”
The AMCU union controls three of South Africa’s largest producers – AngloGold, Sibanye Gold Ltd. and Harmony Gold Mining Co. If AMCU goes on strike, they say that “there will be no production coming out, even if these other unions do not do so.” Any reduction in South African gold production would put additional pressure on the supply side for new gold and hence the price, since rising demand is already pushing gold up.
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