Gold loses lustre as U.S. economic outlook brightens & Greece is granted respite

Gold loses lustre as U.S. economic outlook brightens & Greece is granted respite

5 June 2015

Gold bars

Pulling gold down: U.S. economic outlook
Gold continued its downward trend for the third week in a row, closing at $1,165.45. Gold for August delivery was down 0.8% to $1175.20 an ounce on Friday, down $9.70 or 0.8% from Wednesday’s closing price.

While the ongoing Greek crisis would seem to favour safe-haven bidding and increase the attractiveness of gold, the expectation of rising U.S. interest rates are making the precious metal less attractive. This could be partially offset in the mid-term by China’s acquisitions in the gold industry.

The non-farm payrolls data, one of the key barometers of the U.S. economy, is forecast to rise from 225,000 in May to 223,000 in April, according to a Reuters poll. Julius Baer analyst Carsten Menke is quoted by Reuters that “Clearly the market is going to look at the U.S. data…As long as the market is confident that the U.S. economy continues to grow after a weak first quarter, then there is belief that the Fed is going to move forward as planned.” The next meeting of the Federal Open Market Committee is on 16-17. Higher interest rates will reduce demand for gold and other non-interest-paying precious metals.

Wildcard: Greece
Investors continue to wonder whether Greece will be able to honour its daunting IMF depts. In June alone, 1.5 billion euros in paybacks are due. Over the past days, however, following high-level talks between Greece and the EU Troika and signs of flexibility from the latter, the possibility of a deal seemed more likely again. Greece has also earned a small respite as debtors agreed to delay a 300 euro trance due on Friday until the end of the month.

This positive development strengthened the euro vis-a-vis the U.S. dollar by 2.1% to $1.1161, the highest level in almost two weeks. A small break in the dollar’s 12-month general upwards tend: Over the past 12 months, the U.S. currency gained some 20% on the euro. In this period, gold, traditionally in lock-step with the greenback, has lost 4% of its U.S. value, compared with an increase of almost 18% for euro-holders.

Whether a sustainable long-term solution to the Greek tragedy can be found remains to be seen. A second round of talks between Greek Prime Minister Tsipras, EU-Commission President Juncker and EU-Group head Dijsselbloem is to take place soon.

 

Gold price in US dollar over the past month. Source: Gold.de
Gold price in US dollar over the past month. Source: Gold.de

Driving factor: China’s acqusitions
China’s shopping spree in the gold mining industry, on the other hand, is expected to boost gold mine shares, which exist in symbiosis with the gold price itself. Last week alone, China’s state-owned Zijin Mining Group bought half of a gold mine in Papua New Guinea from the Canadian Barrick Gold for $298 million.

This is welcome news for sorely afflicted gold mine share holders, who had to write off billions as the gold price plummeted from $1,900 in mid-2011 by a third to todays’ levels of around $1,200. The expansion of gold mining by gold-hungry China is however not expected to significantly increase global market supplies in this generally demand-driven market.

Outlook
In spite of the recent slump, the BlackRock hedge fund analysis sees mid-term potential for higher gold prices, citing Asian retail demands, ongoing central bank buying and an increase in inflation as consequence of global monetary easing. The Indian Ratings and Research Agency has a more bleak outlook: “In the event of a US rate hike, global gold prices could drop and range between $900 per ounce and $ 1050.” The Macquarie bank lowered its full-year average price forecast to $1,231 per ounce, down 1.5 percent on its previous prediction, while keeping its 2016 forecast unchanged at $1,359.

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Special report: The gold market in Middle Earth

Smaug's affinity for gold - a macroeconomic phenomenon in Middle Earth
Smaug’s affinity for gold – a macroeconomic phenomenon in Middle Earth

Meanwhile in Middle Earth, the gold price remains at a stable high since the dragon Smaug seized the dwarvish treasure of Mount Erebor in 2770 T.A., containing some 2/3 of the realm’s gold reserves. The Dúrin’s Coin of High-Gold closed against 226 Gondorian Canath last Friday. Gold equities have further profited from news that the Dark Lord is raising new orc legions, which also fueled the demand for mithril.

In a more recent development, gold futures have experienced a sharp downward dent after rumors in dwarvish circles that dragon Smaug could be vulnerable to attack. Investors and analysts reacted with irritation to the remote prospect of Erebor’s treasure inundating the gold market. According to the unconfirmed rumors, the dragon’s scale armour is said to have a small weak spot. In our view, this can be dismissed as a transparent ploy by Elvish mithril investors betting against the gold price. What could possibly kill a dragon? Smaug’s spokesperson has confirmed that the dragon feels “like freshly hatched” and enjoys deep sleep in spite of his 3,300 years.