Gold Prices Rise To 4-Month High, But Will The Bull Run Continue?

Includes: GLD
by: Moneyline

Gold Prices Rise to a 4-Month High on U.S. Dollar Weakness

Gold prices hit a 4-month high on Monday as fears over U.S. economic growth following a series of disappointing data sent the dollar to a six-week low and lifted demand for the metal. Gold prices have breached the 200 day moving average. Comex gold futures hit $1,332.40 an ounce, rising for a ninth session running and were on track for their longest rising streak since July 2011. Volumes were low as U.S. markets were shut for a holiday on Monday. Volume traded on the Shanghai Gold Exchange has eased back to early January levels while gross shorts are below the 2013 average. Gold prices have been boosted by weak U.S. and Chinese economic data, while emerging market jitters hurt some equity markets last month, spurring demand for safe-haven bullion. Speculators raised their bets in gold futures and options to a three-month high, according to data from the (CFTC) Commodity Futures Trading Commission. Regulatory filings showed hedge fund Paulson & Co maintained its stake in the world's biggest gold-backed exchange-traded fund, SPDR Gold Trust, in the fourth quarter. The U.S. dollar hit a six-week low against a basket of currencies after U.S. manufacturing output data on Friday showed an unexpected fall in January. Silver prices climbed to $21.96 an ounce, the year's highest since November 2013, gaining 12% till date this year, while Gold prices have gained 10% till date this year.

How long could gold prices continue the current upswing?

I would probably be a bit cautious because we have seen swings in the equity markets and the turmoil in emerging markets subside and that's not a strong backdrop for gold prices going forward. Regulatory filings showed hedge fund Paulson & Co maintained its stake in the world's biggest gold-backed exchange-traded fund, SPDR Gold Trust (NYSEARCA:GLD), in the fourth quarter. But investor confidence is not uniformly positive and holdings of the SPDR fund fell 5.10 tonnes to 801.25 tonnes on Friday - the first drop in three weeks. They have remained relatively stable over the past few weeks, after last year's 500-tonne outflow. Without any meaningful shift in investor sentiment and given the positive macroeconomic outlook, gold's rally may be temporary. Gold prices could be pushed towards the mid-$1,400s but I have my doubts that we are back in any kind of a bull market yet.

India will look into relaxing gold imports curbs

Gold imports fell to just 21 tonnes in November against a record 162 tonnes in May 2013. Premiums on gold prices in India recovered 21% to $75 an ounce on London prices from a four-month low as the Indian government kept import duty steady at a record 10%. Speculation of a cut in import duty this week had lead to a fall of 17% in premiums on Friday last week, to their lowest point in more than four months as buyers postponed purchases.

India's finance minister said on Monday that the government would look into relaxing gold imports curbs, but won't let its current account deficit (CAD) balloon, reported Reuters. Finance Minister P. Chidambaram, though did not announce any immediate change. "There are pros and cons (on easing gold import curbs), we will weigh them carefully, the goal is to contain the CAD at a level where it can be fully and safely financed," Chidambaram told reporters after presenting the interim budget in parliament earlier. "The operative word is, we will look into it," he said. India, desperate to trim a gaping current account deficit, took a slew of measures last year to curb demand for bullion, its second-biggest import after oil. Due to the restrictions on imports, China has surpassed India as the world's biggest buyer of gold. Industry participants had expected a cut in import duty from the record 10% on gold in the interim budget. The finance ministry said later that India will review the curbs by the end of March, which coincides with the end of India's fiscal year.

Indian exports of gold jewelry dropped in January for a tenth consecutive month, and are likely to fall further due to no sign of any government incentives to revive the sagging shipments. Gold jewelry exports from April to January fell 49.5% to $5.5 billion, GJEPC (Gems and Jewelry Export Promotion Council) said in a statement. January shipments fell 32.8% from a year earlier to $482.2 million.

The Indian Rupee was largely unmoved by the interim budget with the unit at 61.93/94 against its close of 61.9250/9350 on Friday. Chidambaram bettered his 4.8% fiscal deficit target for the current fiscal year, now forecasting it at 4.6%.

MCX Gold Prices Sizzle As India Hikes Import Tariff

The Indian government on Friday raised the import tariff value on gold and silver to $421 per 10 grams and $663 per kg, respectively, taking into account the volatility in the global prices. Import tariff value is the base price at which customs duty is determined to prevent under-invoicing. The tariff value is revised on a fortnightly basis after analyzing the global price trend. Till Thursday, the tariff value on imported gold was at $404 per 10 grams, while on silver it stood at $635 per kg. Before the current hike in the Silver import duty, the government had cut the value for silver by a whopping 14% in last three months.

MCX Gold futures for April delivery shot up nearly 3% to Rs. 30,218 / 10 grams after opening at Rs. 29,384 yesterday. MCX Silver futures for March delivery rose 2.75% to Rs. 47,931 after opening at Rs. 47,050.

Gold demand witnesses first annual drop since 2000 - World Gold Council

Gold demand fell 15% last year as sales from bullion-backed funds and less central bank buying outpaced record consumer purchases that saw China overtake India as the largest user, the World Gold Council said. Gold prices averaged $1,272 in the fourth quarter, down 26% from a year earlier and 4.4% lower than the third quarter. Global demand declined to 3,756.1 metric tons in 2013, from 4,415.8 tons a year earlier, the World Gold Council said. As investors sold as much through gold-backed exchange-traded products as they bought in the previous three years combined, the steepest price drop since 1981 spurred a 28% jump in bar and coin buying and 17% increase in jewelry consumption. Chinese usage rose 32% to a record. Gold prices slumped 28% last year as some investors lost faith in the commodity as a store of value and as the Federal Reserve said it would slow stimulus. Lower prices boosted demand from Asia, resulting in a flow of metal from west to east. Gold prices have rebounded by 10% this year.

"The consumer stepped in and took up that slack from the ETFs," Marcus Grubb, managing director of investment strategy at the World Gold council, said yesterday. "The consumer is still very much going to be on the bid in the gold market in 2014, perceiving that gold is good value at these prices."

Global gold jewelry demand rose 5.8 percent to 553.8 tons in the latest quarter, with the full-year total climbing to 2,209.5 tons. Bar and coin buying fell 5.5% in the three months through December, narrowing last year's total to a record 1,654.1 tons. Total consumer purchases advanced 21% to 3,863.5 tons last year, with demand increasing 32% to an all-time high of 1,065.8 tons in China and 13% to 974.8 tons in India, the report showed. Indian consumption was limited after the government imposed import restrictions to curb a current account deficit. Gold bar and coin buying also accelerated in Turkey and the U.S. last year, the council said.

Investors sold 869.1 tons through ETPs last year, data compiled by Bloomberg show. Holdings reached 1,736 tons on Jan. 28, the lowest since October 2009. Central banks added 61 tons to gold reserves in the fourth quarter, the least since the end of 2010, and full-year purchases declined 32% to 368.6 tons, according to the council. Nations added to holdings for 12 consecutive quarters and will continue purchasing amounts in the "hundreds" of tons, Grubb said. Mine output rose 7.7% to 802.7 tons in the fourth quarter and climbed 5.4% to 3,018.6 tons for the full year, the council said. Scrap supply was down 12% at 339.4 tons in the quarter and 14% lower at 1,371.4 tons for the whole year, according to the report. "The price drop reduced recycling significantly," Grubb said. "Looking into this year, I don't see a situation where there's a lot of recycling ready to come into the market."

Gold prices rise on weakness in dollar which was based on weak economic data

The US dollar slipped to its lowest level since the turn of the year against a basket of major currencies on Monday as soft U.S. economic data stood in contrast to better figures out of the euro zone and China. On Friday, figures showed U.S. manufacturing output unexpectedly fell in January, prompting some commentators to question whether the Federal Reserve may slow the pace at which it cuts back its massive bond-buying stimulus.

The US dollar index DXY fell as low as 80.065, its lowest since January 1, and was last down marginally at 80.134. The euro touched a three-week high of $1.37245 and was last up 0.1% at $1.3700. Against the yen the dollar fell to its lowest since February 6 but later recovered to trade up 0.1% at 101.89 yen after weaker-than-expected Japanese gross domestic product data. A further fall in stock markets could hit the dollar against the yen. The prospect of Fed tapering and further loosening of Japanese monetary policy made betting on dollar-yen a consensus trade for hedge funds and other investors going into this year, but so far it has proved loss-making. Adam Cole, head of G10 FX strategy at RBC Capital, said the dollar could fall to 97 yen per dollar over the next two-to-three months.

Gold prices signal China credit bubble bursting as investors seek safety

Uncertainty is growing over China's ability to sustain the rapid rates of economic growth it has seen over the past decade - Telegraph

China's "unfolding credit crunch" is having an unforeseen and dramatic impact on gold prices as investors urgently stock up on the precious metal as a form of financial protection against a sharp correction in the world's second largest economy. This is the main reason why gold prices have unexpectedly shot up more than 10% to breach $1,300 (£776) an ounce for the first time since November against the prevailing forecasts for weaker demand made by many industry experts at the beginning of the year, according to Adrian Ash, head of research at gold trading platform Gold traded on the Shanghai Gold Exchange has also reached a three-month high.

Rebounding is part of the reason for the rise, said Ash, adding: "Gold prices lost 30% and silver nearly 40% last year. The world economy will struggle to deliver all the good news priced in by that crash. But China's unfolding credit-crunch looks central right now." Uncertainty is growing over China's ability to sustain the rapid rates of economic growth it has seen over the past decade amid concern over high-levels of debt among its provincial governments. These concerns have helped to drive sharp falls across emerging markets since the beginning of the year. Ash argues that capital flight is happening at a rapid rate in China because of the $1.8 trillion of funds that have flooded into unregulated, non-bank "wealth management products" which offered very high yields, up to 17 times as much as cash deposits. It is feared that many of these funds are now trading at a loss, setting up a crunch moment for China's economy.

"Bullion traders never knew before what would happen to prices if China hit trouble," said Ash, "because we've never before seen Chinese demand plumbed into the world market so deeply. Its jewelry buyers, together with rising mining costs worldwide, helped finally put a floor under gold prices in 2013. But while that kind of consumer demand will never drive gold prices higher, capital flight by wealthier households and Chinese money managers certainly can."

Meanwhile, uncertainty continues to surround a 500-tonne discrepancy in China's gold import figures and its domestic supply. The unaccounted-for Chinese gold has helped to fuel market speculation that the People's Bank of China may be stockpiling, or that bigger volumes are changing hands on the grey market as a hedge against financial turmoil.

Bearish bets on gold prices even after 2014 rally

The two most-accurate gold forecasters are holding to their bearish forecasts for 2014 even after the metal posted its best start to a year since 1983.

Bloomberg -

"I just see this as a corrective move," said Robin Bhar, the head of metals research at Societe Generale SA in London and the most-accurate forecaster tracked by Bloomberg in the past two years. "We would still want to be bearish gold," said Bhar, who expects a fourth-quarter average of $1,050. Bullion got a boost this year from reports showing the U.S. wasn't growing as fast as forecast and as lower gold prices spurred Asian demand, with coin sales rising from America to Australia. Gold's best forecasters say the rebound won't last because higher gold prices will stifle purchases and the Federal Reserve will continue slowing stimulus as the economy strengthens. Gold prices will average $1,165 an ounce in the fourth quarter, down 12% from $1,318.60 on Feb. 14, according to the median of nine analyst estimates compiled by Bloomberg. Even after gold prices dropped 31% from a record $1,923.70 in September 2011, gold prices are twice the average of 2006.

"Haven demand plays well when gold is cheap, but it's no longer cheap," said Justin Smirk, a senior economist in Sydney at Westpac Banking Corp. and the second most-accurate forecaster tracked by Bloomberg in the past two years. "I'm a little surprised by the volatility in the market, but it really doesn't change my overall view," said Smirk, who expects a slide through the year to a fourth-quarter average of $1,020.

Bullish bets on gold prices

Bloomberg -

Hedge funds and other large speculators more than doubled their bets on higher prices this year, with a net-long position of 69,291 futures and options contracts as of Feb. 11, from a six-year low of 26,774 on Dec. 3, U.S. Commodity Futures Trading Commission data show. The record was 253,653 in August 2011 as prices approached the all-time high in September 2011.

Investors added 1 ton through gold ETPs in February after cutting holdings for 13 consecutive months, data compiled by Bloomberg show. The value of the funds' assets climbed to $74.2 billion, from $67.9 billion on Dec. 30. There's about a 50 percent probability that gold has bottomed, Citigroup Inc. said in a Feb. 17 report. U.S. investors are becoming more positive on gold, UBS AG analysts said in a report yesterday after meeting clients.

Billionaire hedge-fund manager John Paulson, who cut his holding in the SPDR Gold Trust by half in the second quarter, kept his 10.23 million-share stake in the largest gold-backed ETP unchanged for a second straight quarter in the three months ended Dec. 31, filings showed Feb. 14. The stake is valued at about $1.13 billion. Gold prices began to rebound last month on signs that physical demand in Asia, the biggest buying region, jumped after gold's 2013 decline. Consumption in China surged 41% last year to a record 1,176.4 tons, the China Gold Association said Feb. 10. The U.K.'s Royal Mint said Jan. 8 it ran out of 2014 Sovereign gold coins, and mints from Australia to the U.S. reported surges in coin sales. Deutsche Bank AG, in a Jan. 31 report, cited "powerful physical flows" to China and India and prospects of a weaker dollar as being supportive for gold prices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. I hold some physical gold but much more of physical silver.