KK Bullion – Gold Bullion and Investing in Gold

Gold prices hit a 4-month low on Wednesday as markets were pressured by a lower Euro and overreacted to the political upheavals in the Euro zone. Alexis Tsipras, head of Greek’s second largest Syriza Party, has so far failed to form a government since Sunday’s Elections. His opposition has alienated mainstream political parties and led to renewed fears that Greece will default and exit the Euro causing contagion to Spain, Portugal and Italy.

Up until recently the thought of Greece leaving the Euro zone has been unthinkable and the ECB has done all it can to prevent it,. However, now it seems that the most likely outcome is Greece’s return to the Drachma. Although this would leave other Euro Zone countries under pressure and bond yields would rise, the ECB would have to open the flood gates and print money in order to cap these yields. Inflation is generally good for gold and therefore the removal of Greece from the Euro Zone does have an optimistic side.

There are also concerns with the new French President Hollande who has pledged to ‘finish with austerity’. However, it is thought that Merkel has addressed this “We in Germany, and I personally, believe the fiscal pact is not up for negotiation” she said.

As well as the Greek political crisis, oil prices could also have helped drag gold down. A Bloomberg survey indicated that crude oil supplies climbed by 1.9m bbl to 377.8m bbl in the first week of May, a rise not seen in more than 21 years. An increase of this size in supply is likely to lead to lower oil prices, gold prices normally move in line with oil prices and as such this could continue to weigh on gold. It is also rumoured that Iran may have sold oil to China in exchange for gold, leading to a spot gold sale to close out the trade.

“It’s not as though the escalation of the political risk in Europe is doing anything positive for gold prices at all, and this is totally different to how we were between 2008 and 2010, when all the correlations were totally reversed and the weakening of the euro actually led to a strengthening in the gold price,” Natixis head of commodity research Nic Brown said.

People may well be confused as to why gold has fallen so sharply in line with the Euro and other riskier assets, after two pieces of bullish news:

Firstly, the removal of the excise duty is positive news for India’s jewellery industry and has revived Indian gold demand, with the help of prices below $1,600.

Secondly, according to Bloomberg, China’s gold imports from Hong Kong surged more than six fold in the first quarter of this year.

All the fundamentals remain bullish for gold, however, it continues to move in line with risk assets, whilst investors flock to the dollar and German Bunds. If confidence is lost in fiat currencies and the Euro Zone faces contagion from Greece then people will flock to invest in gold and other hard assets but right now it remains on the defensive.

In the US, the non-farm payroll data showed an increase of only 115,000 in April which was well below market expectations of 160,000+, however unemployment slipped to 8.1% its lowest level in 3 years. These figures may well be the catalyst the US Fed needs to initiate another round of QE (albeit under a new term so it is not recognised as such).

• Author: Eytan Krips

Refreshed concerns about the euro zone have been weighing on gold prices, in particular, Spain, where bond yields have risen recently. Gold prices have now fallen for the fourth day in a row and are resting at around $1,640. While gold rose in 2011 in times of elevated risk aversion, it has since reverted to trading in line with other commodities and against the dollar, which is now the haven of choice.

For the week ending 10^th April, CFTC reported that fund managers reduced their net positions across commodities futures and options by 9.3%, the largest decline seen since 20^th December. Many speculators have cut their exposure to the gold price and flows of gold in ETP’s have pretty much stagnated. Investors remain cautious and may continue to do so until gold decides whether or not it is going to embody its traditional safe haven status or not.

The near-term path of least resistance for gold appears to be lower and a base for gold prices may be forming around $1,600. In order for gold prices to recover an increase in emerging market demand is essential. Euro zone policy makers also need to restore market confidence by laying out a clear path to fiscal union which would help to bolster the Euro.

Jewellers across India ended a 21-day protest on 6 April following assurances by Finance Minister Pranab Mukherjee that the government would consider scrapping a proposal to impose an excise duty on unbranded gold jewellery. So far, however, merchants report that business has not rebounded as expected following the end of the protest. The weak INR has measurably dampened Indian demand. In the last 12 months the cost of 10 grams of gold has increased from cINR22,200 last year to cINR28,600, almost a 30% increase while in US dollar terms gold prices have only increased 8% for the same period.

Sales are expected to pick up over the forthcoming Akshaya Tritiya festival, which is one of the biggest gold buying festivals in the country and commences on the 24^th April. The word ‘Akshaya’ means imperishable or eternal and as such valuables brought on this day are considered to bring success and good fortune. Gold is considered the ultimate symbol of wealth in India and gold demand is expected to reflect this sentiment during the festival.

In order to encourage gold purchases the Indian post office is offering a 6% rebate on gold coins of various denominations during the festival, this should be an attractive investment option for small investors who can buy smaller coins of 0.5-8 grams in weight.

Gold prices are likely to continue to struggle as investors await the outcome of the International Monetary Fund meeting and the US FOMC meeting.

Gold prices may look bearish in the short-term but in the long-term the gold price is expected to reach highs of $1,800 or more.  Gold gave up most of its gains for this year when speculations of further monetary easing were wrung out of the market but as currencies continue to be weakened gold; should come back into play as the ultimate safe haven. There are still many factors present in the economy that will see gold prices driven higher; negative real interest rates, inflation/deflation, a strong US Dollar, futures market etc.  Many people may still remain cautious at present but ultimately the current lows in gold price are the perfect opportunity to invest in gold before prices reach those predicted by banks.

• Author: Eytan Krips

It is no surprise that the gold price has fallen so far in the last two weeks, considering all the reduction measures it is currently facing, but many commentators still remain confident that we will see new highs this year.

After Ben Bernanke’s statement last month caused gold prices to plummet, a contradictory statement caused gold prices to regain some ground; The Fed indicated it would not rule out QE3 or other options to stimulate the economy and said that recovery is still “extremely sluggish”. However it appears people are just choosing to believe what they wish and currently it’s the bulls driving the market now.

More investor panic has now begun over concerns that Greece may eventually need another debt restructuring. They cited that investors lower in the priority list would demand a higher yield and that another Greek debt restructuring is possible to accommodate this.

In the short term gold prices may be influenced by the effectiveness of the Euro zones bailout plan for Greece and the news that ministers are considering freezing up to $240bn of funds in case Spain or Italy should need a bailout. However, in the medium term a shift to US weaknesses may influence gold prices.

Investors will now be watching and waiting for gold prices to breach the 100-day moving average of $1,700 which could then initiate a surge in gold prices.

There will of course be just as many investors claiming that gold’s ‘bubble’ is about to burst, one day they will probably be right however all the key drivers are still in place-monetary stress, deficit spending, debt, currency debasement, growing money supply, negative interest rates and so on.

It is unlikely there will be any bursting of a ‘bubble’ until economies start to stabilise but major economies are still printing money, thus devaluing their currencies and, whilst they do so, people will invest in gold  as the ultimate protection against this devaluation.

Mining consultants remain confident that gold prices will head back up and that $2,000 is still realistic. Although most analysts have lowered their forecasts for gold prices, predicting where gold will be by the end of the year is nearly impossible.

“In the last few years we’ve had, on average, a $150 increased per year in gold price; last year we finished in the $1,600 range so $1,750 is realistic based on what we have seen in the bull market.“

After the credit crunch of late 2008, gold took another 400 days to hit a new record high. It’s been 147 days since the last record high, so a similar recovery period would push a theoretical all-time price high for gold out to April 2013.

Goldman Sachs’ analysts have also stressed that they expect gold prices to climb throughout 2012 and have reiterated their $1,940 per ounce 12 month forecast for the metal.

“We acknowledge, however, that continued strong US economic data poses growing risk to our forecast for rising gold prices,” said commodities analysts Damien Courvalin, David Greely, and Jeffrey Currie.

Oil prices may also support gold prices in the long-term. Next week there is a meeting of the BRIC nation over the use by the U.S. of the SWIFT system to block Iran from selling its oil, the BRIC nations use the  SWIFT System to buy that oil and thus the use of it as a ‘war machine’ has angered these nations. Gold prices tend to be influenced by oil prices and with relationships between countries becoming increasingly tense and the threat of tanker drivers striking; we could see oil prices bolster gold.

• Author: Eytan Krips

Gold prices fell more than 2% in a straight decline on Wednesday after the market absorbed the Fed statement and the better than expected US economic data. The data was strong enough to further reduce expectations of a third round of quantitative easing (QE) by the Federal Reserve, which has now effectively been wrung out of the market. The FOMC statement was clearly positive about the economy which lead to a round of technical selling that hit gold prices hard and saw them fall to $1,634.09; the lowest since Jan. 16. The precious metal has now erased gains made since late January when the Fed said it would keep interest rates low for the next several years.

Gold appears to have lost its safe haven status as many investors now fear gold prices may continue to fall after dropping below the 200-day moving average. Gold prices could now test lows below $1,600. Many investors are now convinced it is the end of the road for gold and that we are now in a bear market but many of the key fundamentals for its significant gains have not disappeared.

The Fed may have given no indication of QE but that is only based on recent data, Japan has been printing money for years with no sign of giving up and it has only just begun in the Western world. Negative interest rates will remain whilst inflation is running higher than returns from the bank and protection from inflation is one of the biggest reasons to hold gold. Gold may provide no real return or dividend but when cash and bond returns are negative and gold is up 6 fold since 2001, it makes sense to own invest in gold.

With recent declines in the gold price we may now be reaching a point where we will see renewed physical buying from emerging markets, especially China and India; which would help stabilize prices.

Gold appears to be in a stage of consolidation and digestion. Gold has a habit of getting ahead of itself and climbing steeply, then pulling back sharply and digesting before reaching new highs, this happened in February 2008 and, of course, most recently in September 2011 when gold reached new highs. After February 2008, gold was in a digestion phase for around 18 months, this could mean that we may not see new highs for gold until autumn this year at the earliest. In the short term this means gold is likely to remain volatile and continue reacting to economic updates from the Euro Zone and the US.

Over the long-term gold may not be so easily manipulated, it’s always the last standing investment: “people don’t buy gold to make money but because they have money”. Gold is purchased as a security against economic crisis and bad government decisions. At the moment the main factors driving demand for gold are the Eurozone crisis and Central Banks actions. When gold prices have finished consolidating these key factors, along with any changes in monetary policy and supply, factors are likely to send gold prices soaring.

• Author: Eytan Krips

Gold Prices have fallen below $1,700 again today, after gains last week.  Prices remain in sync with the Euro, which fell following last Friday’s Greek debt exchange.  Markets will be paying close attention to the statements released today by the Federal Open Market Committee (FOMC), following Mr. Bernanke’s recent testimony to Congress in which he was deemed as putting some distance between the Fed and the possibility of a third round of quantitative easing.

After better than expected Labour data was released from the US, there seems to be no need to announce a change in monetary policy at this time.  One of the biggest risks to the gold price right now is if the US data continues to meet targets, the Fed may start considering normalising monetary policy before 2014, as expected.  Expectations for the Fed to launch QE3 may eventually weigh on gold prices significantly, however after Ben Bernanke’s recent dampening of these hopes; today’s statement may have little impact on gold prices.

Gold prices will now seek support at the 200-day moving average of around $1,680.

There is still so much scrutiny over Greece and while gold prices continue to move in line with the Euro, which remains volatile; it is likely that investors will sit on the sidelines.

• Author: Eytan Krips

Yesterday, gold managed to break its $200-moving day average and is now trading back above $1,700, just, 3 days of continual loses. Gold prices fell below $1,700 on Monday after official data released from China at the annual meeting of the National People’s Congress. China’s economic growth target has been revised down to 7.5% and this is the first time since 2005 that China is expecting to see growth fall below 8%. This announcement had a heavy impact on the markets and gold prices slipped, as the prospect of a modest slowing in GDP growth could also have negative ramifications for China’s appetite for gold jewellery.

In order for Greece to avoid default, investors must agree to incur a loss of up to 75% on their bonds; these private investors include banks, hedge funds and financial institutions. Investors may be forced by the Greek Government to accept these losses regardless in order to avoid a default. However, holding onto these bonds may also prove unwise; the situation is far from resolved and future losses are like to be bigger.  Considering the price of gold two years ago was around $1,100 would you rather be holding sovereign debt right now or gold?

Yesterday, a group of 30 banks and funds representing nearly 40% of Greece’s EUR206bn of outstanding debt announced they would take part in a Greek debt deal, and this news raised the likelihood that Greece’s bond swap would go through and supported equities and the EUR, according to Reuters. This news and oil prices helped support gold prices.

Gold was further supported by a Wall Street Journal report that Federal Reserve officials are considering a new type of bond-buying program designed to subdue inflation worries. Even the mention of such a programme is bullish for gold.

Chinese demand also appears to be recovering, however any further negative news regarding Greece and the European Sovereign Debt is likely to be bearish for gold and declines would follow. Any declines in the gold price present a good opportunity to invest in gold

It also seems that rising oil prices are becoming a main source of investor anxiety. Oil and gold prices tend to move together, which means any increase in oil prices lends support to gold.

“Although the macro environment is still very gold-supportive, in the nearer term it’s going to be the physical market and whether that enables prices to consolidate enough so that investment demand can retake the reins,” Barclays Capital analyst Suki Cooper said.

Data released from the FED showed that US Companies increased their hiring in February, supporting hopes that the US Labour market has moved into a higher gear.  Investors will be anxious to hear the U.S non-farmers payroll data, due to be released tomorrow; poor data could lead to further expectations of quantitative easing in the US, which would be bullish for gold.

There is still significant demand from emerging markets, the EU debt crisis has not been resolved and the staggering level of debt in the US is unsustainable meaning that the long term fundamentals stay bullish for gold and as such may now be the perfect opportunity to buy gold

• Author: Eytan Krips

On Wednesday gold fell nearly $100, (5%) its biggest one day loss in 5 months, which wiped out gold’s gains from the rest of the month and saw the mental end the month with a 2.5% decline.

The decline in gold prices was fuelled by speculation that central banks may now be finished with quantitative easing as Federal Reserve Chairman Ben Bernanke did not mention another round of QE in his semi-annual testimony. Gold prices were hit particularly hard because investors have been hoping the Fed will launch another round of QE, which would boost inflation, against which gold is a hedge.

There was also a reported 31 tonne sell order on the CME that is said to have contributed to falling gold prices. Other markets have suggested that Ben Bernanke’s comments or lack thereof simply provided an excuse for this particular ‘non us’ fund to take profits. It is possible the seller was looking for the gold price to drop upon this sale so that they could then buy back into the market at a lower price. However there is much speculation.

This dramatic decrease in gold prices has certainly, if nothing else provided an opportunity for investors to enter the market. The long term outlook for gold still remains bullish.

Ross Norman of Sharps Pixley in London commented “Bull runs are characterized by retracements such as these and in fact confer greater strength and validity on higher prices in the year to come. What will be most interesting is to see just how quickly gold recovers from this set back as it will be a good test of the resolve of gold bulls. A test of character if you like.”

Gold has manage to rebound slightly today after yesterdays rapid declines, however with liquidity being a main driver of financial markets, gold is likely to remain volatile in the short-term.

• Author: Eytan Krips

Gold prices hit a 3-month high yesterday of $1,783.40, after piercing through a key resistance level at $1,765 which promoted a round of technical buying. Gold prices were initially down on Wednesday weakened by doubts over whether Greece will be able to repay its debts and concerns over whether, Portugal will also need financial assistance soon.

Gold prices have diverged from moving in line with risk assets, as equities weakened after sluggish growth data was released from the Euro Zone and China. Greece and Portugal were the only economies the Commission expected to contract in their previous forecast in November. Belgium, Spain, Italy, Cyprus, the Netherlands and Slovenia have now been added to that list.
There still appears to be a lot of uncertainty and scepticism regarding whether or not Greece will be able to meet its debt obligations.

Greece bailout deal agreement means that:

• Private sector bondholders have agreed to swap the bonds they hold now, for new ones. This will involve a ‘haircut’ of 53.5% on the face value of the bonds (but could in reality be up to 70%), up from the 50% agreed in October. They will also get a lower interest rate on the new bonds than they’d previously hoped.
• Greece has agreed another €325m in spending cuts.
• There will be a permanent team of monitors in Athens, watching the nation’s finances.
• A constitutional change will give priority to debt repayments over the funding of government services and as such Greece will have to hold three months’ worth of debt payments in an escrow account.

Any surge in Greek or Euro Zone sovereign debt issues has the potential to reverse the gold rally and could sap all recent gains, however the gold rally should stay intact in the medium to long-term; supported by easing monetary policies. Data showing weak activity in the Euro Zone and further contraction in China’s manufacturing sector has fuelled rumours of monetary easing. Investors will turn to buying gold as a hedge against inflation when banks continue to flood the markets with paper money.

Quantitative Easing and other accommodative monetary policies in the West are also playing a role in pushing oil prices higher by fostering higher oil demand. Oil prices rose on the back of increased tensions with Iran after UN inspectors had a ‘failed’ mission to Iran. Higher oil prices are bullish for gold because they are inflationary and can therefore stimulate investment in gold as a hedge against such inflation.

• Author: Eytan Krips

John Paulson from Paulson & Co. (the biggest investor in SPDR Gold Trust, the largest ETF product backed by bullion) told investors this week that it’s time to buy the metal as protection against inflation caused by government spending.

The theory is that western countries will continue to keep interest rates low, while printing money which will cause inflation to rocket up, debasing currencies and boosting gold’s safe-haven status. Added to this is also the ongoing crisis in Europe.

“ By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position in gold,” New York based Paulson said in a letter to investors.

The predictions of high inflation assume that central banks will not alter monetary policy. Although the Federal Reserve has pledged to keep interest rates low, if economic growth improves and inflation pressure builds things could change and their promise could easily be forgotten.

The World gold council reported that central bank demand reached 4,067.1 tons last year, and it expects 2012 to be a stronger year.

A major part of central bank demand comes from China which is expected to increase, as the WGC expects China will surpass India as the top buyer in 2012, but this requires large purchases from the central bank and official figures aren’t available; so it’s impossible to know how much is being purchased. The Shanghai Gold Exchange is also said to be cutting trading fees, in a bid to keep its costs competitive.

China’s gold demand was stagnant in the fourth quarter of last year and if economic growth slows and inflation falls, consumer demand may not grow as much as anticipated.

Indian demand dropped by 44% to 173 tonnes in the fourth quarter of 2011 and with fewer auspicious days for buying gold in the Hindi calendar, coupled with a weak rupee, Indian demand is not likely to recover in the short-term.

Therefore, if Chinese and Indian gold demand becomes constrained and monetary policy in the Western world begins to improve, what bullish factors remain for gold?

It appears investors are becoming cautious of gold’s near-term prospects, as the rally towards the end of January is being said to have been a result of overexcitement after the Fed’s announcement that rates will stay low.

Currently the gold price continues to move in tandem with the Euro/dollar. Gold is now trading around $1,750 after Euro zone finance ministers sealed a 130 billion euro ($172 billion) bailout for Greece to avert a chaotic default in March; after persuading private bondholders to take greater losses and Athens to commit to deep cuts

Europe’s deepening debt crisis may spur some investors to retreat to cash, which may induce a round of gold selling if prices rally on the back of Greek developments. The underlying sentiments is still one of fear and until the Euro Zone debt crisis appears to be resolved all assets, including gold, are in the risk category. Greece is still not out of danger yet; all Europe minsters still have to sign off on the proposed deal, private sector bondholders need to agree to swap their current bonds for the new ones and the best-case scenario is still for debt-to-GDP to only come in at 120.5% by 2020. German Finance Minister Wolfgang Schaeuble has reportedly called for Greece to be allowed to default. This will not have pleased Angela Merkel who is firmly against such an action.

Meanwhile the US has no plans to give additional money to the International Monetary Fund.

Gold still remains the best store of value during bad times. Savings are meant to provide great returns, but we all know that isn’t going to happen. Compound interest has all but disappeared and people may end up have less money in the future if inflation erodes their savings.  Gold does not provide an income; but during times of financial volatility, it’s quite normal for gold’s purchasing power to increase many times over; which why it is a good time to invest in gold.

• Author: Eytan Krips

On Wednesday gold rallied despite a weak euro and drops in risk assets, on expectation of a solution to the Greek crisis. This seemed to imply that gold was decoupling from risk assets. However, gold prices are down 0.4 percent today after the Euro fell to a 3 week low when rumours circulated that euro zone ministers may delay paying parts of Greece’s second bailout package until after the Greek election.

Gold prices have been moving between $1,700 and $1,730 as investors watch the Greek government try to convince euro zone officials to grant the bailout fund, so far it has been unable to break this range which is becoming frustrating for investors. Meanwhile, the German finance minister said in a radio interview that Greece might delay the election and install a technocratic government

Other factors influencing gold included the release of FOMC minutes which showed most members would agree to conducting further monetary stimulus, easing monetary policy is generally bullish for gold. The Bank of China also reaffirmed loose monetary policy.

You can also follow KK Bullion on Twitter, Facebook and Google+ to keep easily updated with movements in the gold price and economic news.

• Author: Eytan Krips