Gold - once disowned ; now being adopted

After tentatively stabilizing in September, the gold price staged a $50/oz, rebound in early October, setting up the potential for a further short covering rally. 

Gold traded higher on Friday and is heading for the third straight weekly increase on the back of a rise of demand due to equity market volatility and a softer dollar. The market opened the day at 1229.70/1230.70. After the open, gold prices traded between a high level of 1230.46/1231.46

The gold in euro terms was trading at a three-month high near €1,070 per troy ounce. The conflict between Italy and the EU [European Union] over the Italian draft budget for 2019 is escalating.

The EU too seems to be taking a strong line against member states (Poland and Hungary are examples) which diverge politically from the consensus policies and rules. There is perhaps a fear here that the EU might break up if too many member states fall out with the EU hierarchy, which is probably why such a hard line is being taken on Brexit. A consensus deal is in both sides’ interests, but intransigence may well win the day, with adverse economic consequences for the U.K. and the EU as a whole.

Concerns that the euro-zone crisis could flare up again should support demand for gold as a safe haven.

Lately, US have been very aggressive in its trade policies and imposition of sanctions against countries like Russia and China. Indirectly the other counties that wish to trade with these sanctions hit economies will also suffer in the long run. They too will become victims of U.S. trade sanctions and imposed tariffs.

This is the main reason that countries like Russia and China have accelerated their gold reserves. Leading countries are trying to reduce dollar dependency, thus replacing it with gold.

The Russian central bank has announced yet another increase in its gold reserves in September – this time it has added a massive 1.2 million troy ounces (37.3 tonnes) to the gold in its Forex holdings. This brings the overall total to 65.5 million ounces (2,037.3 tonnes) and means it has added just short of 200 tonnes of gold to its reserves in the first 9 months of the current year which represents an increased acceleration in its reserve increases over the prior few years

The big European holders – Italy and France – in the global gold reserve table which respectively report holdings of 2,451.8 tonnes and 2,436 tonnes.

China on the other hand has been constantly increasing its reserves but not reporting to the IMF. It’s expected to be in the sixth place, but it could be higher given that the numbers are not reported to. The current trade war between the US and China has propelled China to reduce its dependence on dollar holdings in its reserves and perhaps use that money to buy more gold, but yes, without reporting it to the IMF.

Chinese officials and academics have intimated in the past that they would like to at least reduce the dollar’s dominant position in world trade and as a global reserve currency. It is already taking measures towards this by negotiating oil and other contracts in Yuan (convertible into gold if wanted) rather than in dollars, which is another reason why it may be building its gold reserves as well.
As we have mentioned before gold may be facing short term headwinds, but longer term prospects look to be ever increasingly positive.

The sentiment shift is still subtle, but it’s both real and widespread. After a few years of being ignored and/or dismissed as basically useless and almost being disowned by investors, gold is stable again, attracting positive press and increasing accumulation by big investors.

Appetite for gold Rises

Gold prices have rebounded 3% this month to $1,225-$1,230/oz as the confluence of asset market unwinds and escalating geopolitical risks have come roaring to the fore.

A combination of factors ranging from depressed equity markets, trade disputes, global growth fears and geopolitical tensions have brought gold back into the limelight.

The yellow metal found comfort near three-month highs on Tuesday as risk-averse investors sought safety in the metal amid market uncertainty.

Thursday was a momentous day for the precious metals sector with gold and other índices, and giant gold ETF all breaking out on impressive volume, and this development was all the more extraordinary because it happened when the broad stock market was crashing.

The IMF Global Financial Stability report, released on 10 October, highlighted an increase in the level of risk among multiple global metrics. Following its publication, stocks in the US, Europe and Asia lost 4%, 3% and 4% respectively over three days which created a rally in gold.

This is viewed as a strong sign that instead of being dragged lower still by a crashing stock market, the precious metals sector will soar.

The positive link between global economic expansion and gold has, historically, provided an important contribution to its long-term performance. But its role as a diversifier and tail-risk hedge has been fundamental too, and its price has been boosted as markets have faced systemic risks.

While there have been headwinds for gold over the past six months, complacency has crept into the market, questioning liquidity; market valuations are at extreme levels; debt has grown substantially globally, and increased tightening could hurt markets. All these factors, either individually or in combination, could be catalysts for a risk-off environment that could propel gold higher.

Is it time to go back to gold

Markets have been more volatile than normal so far this year due to many factors, including geopolitical tensions with North Korea and the Middle East, Italian government upheaval, rampant speculation related to interest rates and the spectre of potential trade wars involving the United States, Canada, China, and European powers as a result of tariffs.

Recently the gold price has depended on the dollar’s cross-border flows. They in turn have been driven by market perceptions of increasing credit risks in emerging market currencies, and the Fed’s policy of normalising interest rates while other major central banks are still applying monetary stimulus. The result has been a stronger dollar on its trade-weighted basis and a weaker gold price.

Spot gold dropped 0.4 percent to $1,225.89 an ounce during Thursdays trading hours, after it rose 0.6 percent on Wednesday. Earlier in the session, the metal hit $1,235.16, its highest in more than a week but eased by the end of the week due to a strengthening dollar.

Gold prices are back under pressure, with the U.S. dollar gaining ground against its major counterparts, and the precious metal may continue to consolidate over the remainder of the week as market attention turns to the Federal Open Market Committee (FOMC) interest rate decision on August 1.

Even though the FOMC is widely expected to keep the benchmark interest rate on hold, Chairman Jerome Powell & Co. are likely to implement higher borrowing-costs over the coming months as officials warn ‘gradually returning interest rates to a more normal level as the economy strengthens is the best way the Fed can help sustain an environment in which American households and businesses can thrive.’

In turn, a batch of hawkish comments may sap the appeal of gold as the FOMC appears to be on track to further embark on its hiking-cycle, and growing expectations for four rate-hikes in 2018 may reinforce a bearish outlook for gold prices on the back of expectations for higher U.S. Treasury yields.

One more interesting thing witnessed during the past week was gold reserves. It seems that strong economies have increased their gold reserves which are a good sign for gold.

CHINA – Officially, China has kept its gold holdings unchanged at 59.24 million ounces since October 2016, or 1,843 metric tons, valuing them at $74.1 billion at end-June. Globally, central banks continue to increase gold reserves, albeit at a slower pace, adding 371.4 tons in 2017, according to the World Gold Council.

However in the past too, China has spent long periods before without revealing increases in gold holdings. When the central bank announced a 57 percent jump in reserves to 53.3 million ounces in July 2015, it was the first update in six years.

So it seems that mysteriously China has been adding to its gold reserves.

RUSSIA- Russia‘s U.S. dollar reserves have shrunk from $96.1 billion in March to just $14.9 billion in May, according to the Russian Central Bank. Its governor, Elvira Nabiullina, says the decision will help protect the Russian economy and diversify the bank’s reserves.

Notably, the Bank of Russia has been buying gold every month since March 2015, overtaking China as the fifth-biggest sovereign holder of gold.

Russia added 500,000 ounces of gold (15.55174 tons) to reserves in June and bought some 106 tons of gold since the start of the year, with total reserves now approaching the 2,000-metric-ton mark. Last year, Russia added a record 224 tons of gold to the reserves.

The Russian central bank hinted that it could invest the money from the USD sale not only into gold, but also into International Monetary Fund (IMF) bonds and Chinese bonds.

But why have these economies diversifying to gold? Well, in periods of global financial or political crises, gold is much more useful than securities or cash, although gold is also prone to price fluctuations.

Moving further, it must be noted here that the gold price is affected, of course, by more factors than simply the US dollar and US interest rates. Equity markets can and do affect the gold price, oil prices too, and there is a long list of non-quantifiable factors that can have a dramatic impact on the gold price. Heightened global political and economic tensions on account of a highly erratic US President may encourage more investment demand for gold, for example. And can anyone fully rule out an Italian exit from the Euro zone and the financial crisis that would follow?

Reserve Bank of India adds 2.5 tonnes of gold to forex reserves in Q4

This was the first instance of gold being added to the forex reserves since 2009

The Reserve Bank of India (RBI) has added 2.5 tonnes of gold to foreign exchange reserves for the quarter ended March 2018 in two tranches.

This is the first such addition after 2009, when the central bank bought 200 tonnes of the yellow metal from the International Monetary Fund (IMF) at $1,032 per tonne. According to IMF data (updated till March 2018), India’s gold holding in forex reserves rose to 560.3 tonnes by the end of March 2018. The RBI did not respond to email queries till the time of going to press.“The addition looks like a pilot purchase. The net impact is that reserves are up marginally. This is not significant and does not imply strategic addition, unless we see a creeping acquisition trend,” a source said. “This was a decision taken by the government before the Budget presentation. But due to the sensitivity of the issue, it was not announced,” another source added. Globally, central banks, including in Russia and Turkey, add gold to forex reserves to hedge against the dollar. The Turkish central bank announced a policy in May 2017, replacing the dollar as a prominent asset in its foreign exchange reserves. Turkey’s commercial banks also hold huge gold deposits.

These are placed with the central bank under the reserve option mechanism. The country is the 11th largest gold-holding country in forex reserves at 595.5 tonnes. Russia has been buying over 200 tonnes of gold per year since the last three years to add to its forex reserves and reduce dollar dependence. Its reserves are bigger than China’s, making them the sixth largest in the world. Russia and China buy most of their gold locally since they are prominent gold miners.

According to sources, India could add gold mobilised by the Gold Monetising Scheme to its forex reserves. The RBI was likely to have purchased gold in March from two London-based banks, they added. Gold buying by central banks has been on the rise in the last few years, with 350 to 400 tonnes of gold being bought annually. China buys gold locally, but announces with a lag. However, according to GFMS Thomson Reuters, China will buy gold this year to add to its reserves after two years.

Source : http://www.business-standard.com/article/finance/reserve-bank-of-india-adds-another-3-1-tons-of-gold-to-forex-reserves-118051000349_1.html

IT'S A GREECE GAME FOR GOLD:RSBL

                                                         By Mr. Prithviraj Kothari, MD, RSBL

A very boring week for Gold and rest of the precious metals complex. An extremely tight price range trading showing no clear indication for the next move in price. The $1200 level remains significant for Gold while for Silver it is $16.20, where it continues to place selling pressure.

During the last week it rallied well to move from a two month low near $1160 back up to above $1190 again before easing back to the $1180 level. The key $1170 level has consistently provided solid support and has held it up now for a couple of months.

Somehow the important data released from the US:

• US unemployment claims were in line with forecasts at 271,000.
• US GDP released on Wednesday showed that the retraction in Q1 was just -0.2% better than the expectation of -0.7%, increasing the necessary confidence in US economy growth.
• University of Michigan Consumer sentiment was 96.1, besting forecasts of 94.6, while inflation was rose 2.7 percent.
• Personal spending month-over-month in May was up 0.9 percent, above forecasts of 0.7 percent.

While recent positive US economic data strengthened the dollar and led to speculation over interest rate hike this year, the Greece negotiations have gone haywire.

Talks between Athens and its creditors have failed completely. Still there have been some signs of hope being shown by either parties. But if I understand, tomorrow being Greece's payment date to IMF, I feel they would default. Euro-zone rejected Greek's request for a one month extension to its bailout creating a non-payment type of scenario.

Greek prime minister Alexis Tsiparis called a referendum on July 5 for the Greek bill to approve the bailout demands. Like expected, Greece announced capital controls and will keep its banks closed on Monday until further notice. I feel it is the darkest hour in Greek's economy. 

Even when I see the potential Grexit, there are more chances that gold will be on a bearish side for the week to come particularly if Thursday’s nonfarm payrolls report shows the labor market is gaining strength. Positive data will provide the Fed the reason they need to raise interest rates in September.

So now it all depends on the Greece Game and the important US data.

The primary purpose of this blog by Prithviraj Kothari - MD, RSBL, is to educate the masses of the current happenings in the Bullion world.”

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