Gold slips below $1,300, likely to stutter short term
Gold has now fallen back below the psychologically important $1,300 level, and although there are positive factors in play, could yet drift further downwards over the next month or so.
Posted: Thursday , 27 Mar 2014
LONDON (MINEWEB) -
As tensions ease on Russia/Ukraine, the gold price has suffered falling briefly below $1300 an ounce overnight and then again a little more heavily in European trade this morning. Russia now appears to have managed to annex Crimea without any sanctions of serious consequence being raised against it and President Putin has played the diplomat by cutting out some of the competitive sanction rhetoric. There seems to be little doubt that the West – and Europe in particular – has no stomach for a serious economic fight given that tit for tat sanctions might be more of a problem for those European states dependent on Russian gas for 30% of their supplies than they would be for Russia itself. And the U.S. is also conscious that Russia defaulting on its commitments to the fragile western banking system could be a huge destabilising economic factor cutting short any recovery that may be under way. It looks like Putin held all the aces from the start and his actions completely disregarded – and overcame - Western bluster.
One suspects also the West will have its hands full in supporting the de facto change in government in Ukraine with all its disparate factions – some of which are decidedly unpleasant in their politics to both Western and Russian eyes.
The potential for a further flare-up remains, particularly if there is any genuine threat to the ethnic Russian community in eastern Ukraine – or for that matter elsewhere on Russia’s borders. For the moment President Putin seems to be content to keep massed troops on the Ukraine border with the potential for moving in militarily should such a threat become reality, but one suspects he will hold back – for now at least – to see how things shake out deeming it not worth the economic risk. But the West should perhaps bear in mind that the Russian people, with a much more tightly controlled political system and society, can probably withstand a major economic downturn and a dive in value of the ruble far better than the West given recent history.
Domestic pressure on President Obama could also lead to some escalation given that his response to date has been seen as weak by many in the U.S. – although it has probably been sensible from a purely economic standpoint and has definitely helped lead to the relaxation of tensions to date. No-one in Russia or the West really wants either a shooting war or a major economic war developing over Crimea.
So gold could be in for a fairly torrid period with the bears seizing the opportunity to drive it down further in the days and weeks ahead. Whether it is likely to fall back to the levels seen at the beginning of the year remains to be seen – it is still around 6-7% higher than it was back then, although the Goldman forecast of $1,050 still seems far away, but one which will be perhaps creating more nervousness amongst the bulls who had been in the ascendancy when gold appeared to be heading towards $1,400 only a couple of weeks ago. There will also be the worry that the price downturn may also stimulate a return to heavy sales out of the gold ETFs – although the capacity for these to get anywhere near last year’s levels would seem to be strictly limited as overall holdings diminish.
There are, of course, numerous factors in play out there which could see the lower gold price trend reversing. Changes in regulations for the U.S. banks coming in April 1st could see some of the huge short precious metals positions held by the banks unwound; China’s demand figures also have to be very relevant – the huge rise in this during the first two months of the year seems to have had little price impact so far; there are a number of areas of geopolitical instability which could have a positive impact on the gold price should they flare up. The gold price can be driven by geopolitical factors as well as supply/demand data.
Back to the Chinese gold demand, there does seem to be something of a bias in media reporting on this. We keep on getting fed with reports that demand is slowing down, yet the January and February figures belie this. March, which saw record inflows last year, will probably be down this year which will receive more China demand-knocking coverage, but the close on 140% rise to date already puts Chinese gold imports through Hong Kong alone at more than 110 tonnes up on a year ago to 193 tonnes so whatever the March figure, Q1 Chinese imports are likely to be substantially higher than a year ago when they totalled 217 tonnes for the full quarter.
There has also been an interesting comment in an interview with the very well-connected Jim Rickards that China has been importing gold through military channels also as well as via Hong Kong and other major ports of entry. Rickards- who is very much in the gold bull camp so perhaps his statements should be treated accordingly - also reckons that China’s gold reserves may well amount currently to at least 3,000 tonnes, compared with its ‘official’ level of 1,054 tonnes which has remained unchanged in government figures for fully five years. He further feels the Chinese may announce a revised official reserve total of 5,000 tonnes by early next year. Indeed the 3,000 tonne figure has been suggested by other analysts and observers, not all of whom are in the perma-gold bull camp. Some also see China announcing an official reserve upgrade in the next couple of months given that it is 5 years from April since the last official reserve upgrade and that centrally planned economies seem to like working to 5 year cycles.
On the downside for gold – which relates to the U.S. in particular – the Janet Yellen statement that she could see interest rates rising within 6-months seems to have been taken at face value and there are worries there that gold performs badly as interest rates rise, which has been taken negatively by the markets. What seems to be totally ignored by the markets is that in the Eurozone – with a total population in excess of that of the U.S. , although with a slightly lower GDP – is currently seeing interest rates coming down further to fully negative levels. But it seems to be the U.S. on its own driving the gold price for the moment, hence the current weakness.
So gold could continue to stutter while the U.S. dominates the price pattern, but there are still several factors which could turn the position round dramatically – but in the short term it looks as though the gold price could continue to drift down, particularly as the psychological $1,300 level has now been well and truly breached on the downside. March is historically a poor month for the gold price and, after a good start, this year seems to be proving no exception.