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In the last Market Overviews (and also to a considerable extent in the last several Premium Updates) we have discussed in detail differences between tapering and tightening.
In our Dec. 20 commentary, we discussed the outlook for the USD Index, Euro Index, and how these currencies were likely to impact gold.
Sentiment in the financial markets always gets re-balanced by two variables: time and price.
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According to recent BCA Research, it is difficult to see precious metals accelerating on the downside in the medium term, despite Fed’s announcement of tapering……
This was the week the Federal Open Market Committee decided to start tapering.
By November, the most recent month for which statistics are available, the US Fiat Money Quantity (FMQ) had grown to $12.351 trillion.
Many times in our previous essays we have written that if you want to be an effective and profitable investor, you should look at the situation from different perspectives and make sure that the actions that you are about to take are really justified.
London Gold Market Report
from Adrian Ash
Thurs 19 Dec 08:25 EST
Fed Tapering Whacks Gold, Spooks China, “Normalization” Challenged by US Earnings
WHOLESALE London gold sank against all currencies Thursday morning, falling 1.9% vs. the Dollar to hit 6-month lows after initially trading flat overnight despite the US Fed finally reducing its $85 billion per month in asset purchases.
Cutting next month’s quantitative easing of US mortgage and longer-term government bond rates to $75bn, the Fed pointed to “growing underlying strength in the broader economy.”
US stockmarket indices the S&P500 and the Dow surged to new all-time closing highs, while Treasury bonds fell and spot gold fell through this week’s previous low at $1230.
Besides the taper, however, the Fed revised its policy on short-term interest rates, saying it will hold the federal funds rate at zero “well past the time” that the US jobless rate falls to 6.5%, its previous line in the sand.
Overnight in Asia, Japanese shares rose but Chinese stocks fell as the People’s Bank of China broke its own rules and took to Weibo, the equivalent of Twitter, to announce a “short-term liquidity operation” after Shanghai’s interbank lending rate jump above 10%.
The PBoC usually waits a month before reporting such moves, says the Financial Times.
“It’s very clear they want to calm down market fears,” the FT quotes ANZ analyst Zhou Hao, noting the previous spike in Chinese interest rates in June, when US Fed chairman Ben Bernanke spoke about possible QE tapering.
Shanghai gold today fell 0.8% in Yuan but increased its premium over international prices from $6 to $11 per ounce.
Amongst Western investors, “More sensible minds realise,” says a note from David Govett at brokers Marex, “that on the whole [the Fed news] is not a good move for the precious complex.
“With further tapering probably to come over the course of next year, the outlook remains muted. However, I don’t subscribe to the theory that it’s all over for the bullion market [and] would be a buyer of dips if we do manage to break below $1200.”
Bids in London’s wholesale market briefly dropped below that level Thursday morning, hitting a 6-month low of $1199.75 per ounce.
Priced in Sterling and Euros, wholesale gold bullion fell to its lowest since spring 2010, down 29% and 31% respectively from the start of 2013.
Silver tracked gold in Dollars, briefly falling below $19.30 per ounce – a “key level” according to technical analysts at one bullion bank.
Fed tapering “highlights the overall positive sentiment towards the macro economy,” reckons UBS analyst Joni Teves.
“Equities are in fierce competition with gold for investor dollars, and this year’s trend of rotation away from gold into growth assets is expected to continue into 2014.”
“This is another sign of increasing normalisation for the world economy,” agrees Matthew Turner at Macquarie Bank. “Gold’s insurance function is less desirable in that environment.”
“But if the economy is accelerating as people think,” counters Albert Edwards in his latest Global Strategy Weekly for clients of French investment and London bullion bank Societe Generale, “how come Thomson Reuters has just reported the fastest pace of US earnings downgrades on record?
“If we are set for a profits-driven economic slowdown, then the low rate of core inflation will start to become a key concern. Deflationary forces are in fact stronger than even the latest [official data] suggests.”
Gold price chart, no delay | Buy gold online
Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can fully allocated bullion already vaulted in your choice of London, New York, Singapore, Toronto or Zurich for just 0.5% commission.
(c) BullionVault 2013
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.