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Gold
Gold
and silver have fallen in most currencies today but are higher in the “commodity
currencies” of Canadian, Australian and New Zealand dollars, and flat
in Swiss francs. Gold and silver are both slightly higher for the week in US
dollar terms but weaker in terms of other currencies.
Gold
is currently trading at $1,365.95/oz, €1,023.11/oz and
£861.20/oz.
Baltic
Dry Index – 5 Years (Daily)
European
equity indices are lower after a mixed night on Asian equity bourses which
saw the Nikkei flat and the Chinese CSI300 fall 1.36%. US equity index
futures are marginally lower. Bond markets have not seen much movement but UK
and Swiss (10 year) bond yields have risen to 3.63% and 1.81% respectively.
Gold
in USD and British Sovereigns – 10 year (Weekly)
The
risk of growing inflation was acknowledged by Trichet after European
inflation accelerated to the fastest pace in more than two years in December,
led by surging food and energy costs.
Stagflation
risk in some periphery euro nations is further complicating the ECB’s
efforts to deal with the sovereign debt crisis. Not helping matters is the
fact that the ECB looks increasingly like the buyer of last resort of euro
government bonds and ‘quantitative easing European style’ will
have ramifications for the multi-state currency.
Interest
rates must rise internationally in the coming months to protect fiat
currencies and contain inflation, but the risk is that this can lead to a
sharp decline in economic growth and potentially a severe recession or global
depression.
Gold
in USD and British Sovereigns – 60 Day (Daily) – Sovereign
Premiums Rise
China’s
central bank, responding to surging inflation in China, said that it will
raise the reserve requirement ratio for the nation’s banks by 50 basis
points. Once the inflation genie is out of the lamp it is very difficult to
get it back in as was seen in the 1970s.
The
extremely fragile nature of the recent global recovery is seen in the Baltic
Dry Index (see chart above) which is back near levels seen during the
financial crisis in late 2008. This may be a harbinger of a global recession.
George
Soros’s Biggest Buy is Gold - $64 Million in the Last Quarter
Many
of those calling gold a bubble have done so simply on the basis of George
Soros’s recent comments regarding gold being the ultimate asset bubble
or becoming the ultimate asset bubble. Soros’s comments were somewhat
cryptic and had some commentators claim that Soros was saying gold is a
bubble and others claiming that Soros was simply saying gold would become the
ultimate bubble.
George
Soros said subsequently “It’s all a question of where are you in
that bubble ... The current conditions of actual deflationary pressures and
fear of inflation is pretty ideal for gold to rise.” This would suggest
that he is bullish on gold, contrary to much of the media headlines and
commentary.
As
ever with hedge fund managers and large investors it is important to watch
what they do rather than what they say. In the last quarter, Soros's biggest
buy wasn't actually a stock. His firm spent $64 million on shares of the
iShares Gold Trust (IAU).
When
George Soros begins liquidating his gold holdings, it may be an indication
that the gold bull market has run its course and it is time to reduce
allocations.
Demand
for Physical Bullion Sees Silver Eagle Sales Soar and Premiums Rise
This
week has seen further confirmation of very robust physical demand
internationally and especially in Asia. This was seen in premiums rising to
near 2 year highs in Hong Kong and Singapore and reports of shortages of gold
kilo bars. The Perth Mint also reported unrelenting demand for gold bullion
bars.
The
tightness in the bullion market is not confined to Asia. There has been
another surge in demand for silver American Eagles as seen in the figures
from the US Mint. Zero Hedge reported that Mike Krieger made a disturbing
observation on the trend: "In the first 12 days of January 3.4 million
silver eagles have been sold. I have never seen anything like this. The
amount of physical being taken off the market on this paper sell off is
extraordinary. We must be very close to the end."
By
“the end” Krieger means the point in time when the physical
demand for silver bullion (which is a very small market) is large enough to
force some Wall Street banks to close their massive concentrated short
positions, thereby creating a short squeeze that propels silver to above its
nominal high of 1980 (near $50/oz) to much higher prices.
Further
confirmation of growing tightness in bullion markets is seen in the growing
premium being paid for British Gold Sovereigns. Sovereigns are one of the
most widely traded bullion coins in the world and the price of Sovereigns is
correlated with the spot price (see chart above). Lately there has been an
interesting development which has seen the spot price of gold fall while the
premium paid for Sovereigns has risen (see chart above).
Demand
for Sovereigns remains strong especially in the US where investors like the
liquidity and smaller size (0.2354 troy oz) of the coins, and in the UK where
they are Capital Gains Tax (CGT) free with CGT having recently been
increased.
It is
too early to tell whether this is a trend that will continue but with the
continuing robust demand for Sovereigns it is likely to do so and it is worth
keeping an eye on it. The trend strongly suggests that the recent weakness is
short-term momentum players and that it is short term tech-driven rather than
long term technical and fundamental-driven
Mark O’Byrne
Goldcore
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