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In his weekly market review, Frank Holmes of the USFunds.com summarizes this week’s strengths, weaknesses, opportunities and threats in the gold market for gold investors. Gold closed the week at $1,088.94 down $53.22 per ounce (-4.6%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 9.68%. Junior miners outperformed seniors for the week as the S&P/TSX Venture Index lost 1.43 percent. The U.S. Trade-Weighted Dollar Index soared 2.29 percent for the week.
Gold Market Strengths
There was about 57 tons of gold bullion withdrawn from the Shanghai Gold Exchange into China in the latest week. This pushes the cumulative withdrawals of Shanghai gold over the 10,000 ton mark. Compared to prior years, 2015 is going to be a new record if the withdrawals maintain the pace. This continued strength in demand from China is positive for bullion’s momentum and stability.
Gold and platinum were the strongest of the four precious metals this week with just a couple of basis points separating the two in what was a tough market for the precious metals sector as a whole. The stronger-than-expected change in nonfarm payrolls released on Friday likely sets the Federal Reserve on a path to an interest rate hike in December, unless significant economic news turns the tables.
Today’s employment report illustrates U.S. economic strength. The report was underpinned by a few important factors that include a pickup in wage growth, tightening labor slack and an acceleration in retail hiring ahead of the holiday shopping season. While the price of gold suffered from the increased odds of a December rate hike, longer term it could benefit as sustained economic strength should start to push inflation higher.
Gold Market Weaknesses
Gold prices continued to fall this week, erasing all of October’s gains, on the back of a stronger-than-expected jobs report that pushed up the odds of a December rate hike to over 70*.
Palladium fell 8.36 percent this week, significantly more than the 4.95% that silver suffered. Some commentators expressed concerns, that in the wake of the Volkswagen emissions scandal, automakers may look for ways to avoid reliance on palladium for cleaning the emissions of gasoline powered engines.
Royal Gold fell the most in 12 years after the company reported a quarterly loss and revenue that trailed analyst estimates. They were also impacted by having a streaming agreement on the Phoenix Gold Project, which another operator announced is moving to suspend underground activities until they could sort out the proper mining method to use.
Gold Market Opportunities
A report by Paul Donovan from UBS calls for an imminent increase in inflation. The report states that headline inflation is about to take a significant step up in most of the world’s major economies. The report argues that core inflation pressures have been exhibiting modest increases which have been perhaps undermined by the relative price shift in the oil market. Thus, the fading of the oil base effect between October and January may bring the inflation argument into greater prominence.
Goldman Sachs warns that the S&P Volatility Index (VIX) seems low, significantly underpricing the tail risk of economic uncertainty. According to the company, the options market seems to either be anticipating an inflection higher in the economic data, no rate hike, or an extreme lack of catalysts between now and year end. With the broader market rebounding back to the highs and gold being off, this may set us up for a reversal in these gains.
Another report from Paul Donovan argues that never in the history of economic thought have so many people been as wrong as they are about the dollar today. He argues that the floating exchange rate theory is a theory that is simply wrong in major economies today. Reliance on archaic economic theories means that there is a general tendency to assume that a strong dollar automatically and broadly weakens U.S. exporters’ market share. However, the assumptions are wrong and the implications for inflation, economic growth and exporters’ profit margins are significant.
Gold Market Threats
According to UBS, India’s plan to tap idle gold may exceed expectations. A survey run by the company shows a “significantly large” proportion of respondents are likely, or highly likely, to participate in the government’s monetization plan and aren’t resistant to temple gold being deposited with banks. Nonetheless, the plan should take time to gain traction, especially in rural areas. Also key will be the willingness of women in rural areas to participate.
Appetite for gold in China, which accounts for one-fifth of global investment demand, could fall in the long term as the country moves to internationalize the yuan. This would enable savers to gain direct access to foreign stocks and bonds, placing them in direct competition against bullion.
Nomura predicts gold may dip as the Federal Reserve hikes rates in March 2016, and then recovers by the second half of the year. The bank forecasts bullion at $1,150 per ounce in the fourth quarter, falling to $1,115 in the first half of 2016, and then rising to $1,235 in the second half.
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