This page has been archived and commenting is disabled.
Gold and Euro: A New Tango For 2010
- Barclays
- Bond
- Central Banks
- China
- Commodity Futures Trading Commission
- Creditors
- Davos
- default
- Dubai
- Dubai World
- Eurozone
- Federal Reserve
- George Soros
- Greece
- Iceland
- India
- International Monetary Fund
- Italy
- Japan
- John Paulson
- Market Conditions
- Nouriel
- Nouriel Roubini
- NYMEX
- Portugal
- Sovereign Risk
- Sovereign Risk
- United Kingdom
By Economic Forecasts & Opinions
The U.S. dollar rose, commodity prices dropped and stocks fell last Friday after the Federal Reserve unexpectedly lifted an emergency lending rate for the first time since the financial crisis.
The dollar hit an eight-month high against a currency basket, while gold prices rose as investors bought the metal to hedge against paper currencies and debt default risks in Europe. Gold futures ended on Friday with a weekly gain of 3.1% at $1,122.10 an ounce.
Gold’s Retreat
Gold had rallied to a record of $1,218.30 an ounce on Dec. 3, 2009, as near-zero U.S. interest rates and government spending weighed on the dollar and countries including India and China boosted gold reserves.
However, bullion in the spot market has declined more than 6% since December, as the U.S. dollar benefited from the unfolding debt crisis in Dubai, Greece and the rest of southern Europe.
New Inverse Tango with Euro
Since gold is primarily a hedge against the Dollar and inflation, it typically has the strongest inverse correlation with the US Dollar. In the last month, however, the trend has broken with gold trending inversely with Euro and positively with Dollar (Fig. 1). And Euro has formally taken the center stage in dictating the price of gold on concerns about the fiscal health of Greece and other euro zone countries.
Fears over the outlook for Euro have been driving investors out of euro, and lifted both bullion and dollar as alternative assets. The euro has declined, particularly against the dollar and gold, almost 5% against the dollar, and gold in Euro terms is up 4.2%, so far in 2010.
Mariachi - PIIGS & The Fed
The new trend between the Euro, Dollar and gold is expected to continue amid fiscal challenges in the UK and Eurozone, PIIGS (Portugal, Iceland, Italy, Greece and Spain) in particular. Uncertainty over the details of any financial rescue package for Greece will likely keep the mood in the markets nervous, and the currency markets volatile in the near term.
In addition, the Fed's discount rate hike signals that other central banks will likely follow suit in exiting from stimulus measures, while the Eurozone, UK and Japan will likely lag behind. This view has partly triggered selling of the euro against dollar to seek positive yield and perceived safety.
These two factors will likely continue to be the major forces driving the euro’s direction for the rest of Q1, and may spill over into Q2 depending upon solutions to the Eurpoean Union`s debt problems and dearth of future growth opportunities.
Technicals - Short-term Mixed
Technically speaking, the short term indicators of gold are mixed and still trending bearish as gold prices remains in the lower part of its recent trading range.
Technical analysts have widely diverging views as well. For instance, Chartered Market projects gold to reach about $1,400 within 12 months as long as the $1,000 level holds; whereas Barclays Capital considers a “fair value” for gold around the $700 to $800 an ounce level.
Meanwhile, Nouriel Roubini, economics professor at the Stern School of Business, New York University, says that there is a bubble in commodities, and that the price of gold should be no higher than $1,000 an ounce given the current market conditions.
Techincal levels of significance would be a breakout above the $1150 level, which would be bullish; and breakout below the $1050 level of support, which would be bearish for the commodity. (Fig. 2)
Vulnerable to Rapid Unwind
According to the Commodity Futures Trading Commission (CFTC), NYMEX gold futures open interest increased 3.2% in January. Commercial traders increased their long positions, while holding net short positions. Non-commercial speculators held net long positions but increased their short positions. Overall, about 54% of the participants held net long positions in January. (Fig. 3)
Gold has attractions for those managers of private institutional funds. Many investors from George Soros to John Paulson have been buying gold as lower interest rates and continued money-printing could devalue the U.S. dollar in the long term.
Billionaire fund manager George Soros, for instance, told the financial elite at Davos that gold represented the "ultimate asset bubble”; however, data from SEC filing showed his fund more than doubled the stake in the SPDR Gold Trust (GLD) three months earlier. In fact, the gold trust is now his fund's biggest investment, valued at $663 million.
The large number of long speculators playing in the Gold market could leave the market vulnerable to a rapid unwinding when sentiment changes – the crowded trade scenario. One can only speculate that Mr. Soros could be seeking to exploit this market vulnerability with his seemingly uncharacteristic and contradictory actions.
Other Market Factors
Moreover, the gold price direction also hinges on several events about to unfold within the next few months:
1) Greece's borrowing needs are covered only until mid-March, and is set to launch a new bond offering of $7 billion in coming days – Eurozone/Euro could stand or fall on the success or failure of this bond sale.
2) European finance ministers gave Greece a one-month reprieve to show its deficit reduction plan was being rolled out effectively.
3) Dubai World will present a proposal to creditors in March to restructure about $22 billion of debt.
4) The IMF’s phased open-market sales of the remaining 191.3 tonnes of gold it planned to sell last year as there are no more official buyers – Bearish for gold, unless another central bank steps up.
5) The Federal Reserve will end a $1.25 trillion program of mortgage-debt purchases in March – Gold-bearish as it reduces liquidity.
As ever gold thrives on financial, economic and monetary uncertainty, there is certainly plenty of that in the world today. Sovereign risk will likely remain the main theme for 2010, and possibly 2011. This all sets the stage for the next 5 years of monetary and fiscal policy decisions around the globe which will ultimately define the future for this precious metal from an investment standpoint.
»
- advertisements -
Couple of notes:
The IMF selling gold on market vs. off market is a big distinction, as most sales in the past were just between central banks.
I thought Soros was once quoted as saying that the best time to make make money is during a bubble. This makes sense as assets appreciate at a rapid levels. I'm guessing the timing of when to get out before a possible burst would be the key, thus not making his trade contrarian based on his comments.
I haven't met too many people who like to sell gold. I've met plenty of people who had (emphasis) to sell gold.
Gold should be considered an insurance policy, as a hedge against fiat currencies. The currency outlook seems to be very confusing. On the one hand, the US, Japan, UK etc are actively seeking to stimulate via QE or weakening the currency, which is viewed as positive for their economies. The Eurozone is standing by its stable money policy, in the face of Greek dramas, weak growth figures and high unemployment. This is negative for the Eurozone economy, which confusingly is causing the currency to weaken. So, do you hold Euros, a currency that is weakening because they are not deliberately trying to weaken it, or Dollars, which is strengthening because they are?
From my discussions, high net worth individuals (and there are a hell of a lot of those in Europe) are increasingly bearish on all currencies. The SNB intervening in the currency market has shown that no central bank wants a strong currency, but rather there is a game of stealth devaluation. Gold is seen as a safe viable alternative. The objective is wealth preservation not speculation that "price will explode", which means they are willing to park their investment for the next year or so and see what the future brings.
Man, you people are kinda slow.
There's three people saying fair value on gold is less than 1000, and you are still all with the "gold bitchez."
"The IMF sold 1000 tons of gold between 74-78, and the price of gold went up."
Slightly, until it CRASHED in 1980. Has it ever occured to you people that the IMF knows that the market is the best that they're going to be able to sell gold into?
The IMF isn't selling gold into a situation where they're giving up 500% returns in the next year or two. They know what they're doing. They know that there's no effing way they're going to be able to get much more than this for the next 30 years.
But I know, I know... this time is DIFFERENT right?
I love the people here. It's hilarious.
I'd sell that physical before you're destitute from taking severe losses. Just a bit of friendly advice.
GOLD bitchez!!!
"All that glitters is not gold."
I don't know about Number 5 on this list. I don't think this will have much of an affect (positive or negative) on gold given that most institutional investors are more equity both in the U.S and abroad.
I hope the IMF and Gold holding country's sell all their gold--because--one day gold will be what it's meant to be--"power in the hands of the people"
So the less gold governments end up with--the less power they will one day have--
And this is a good thing--
Barclays owns slv ishares and think gold will trade at doelarr 700? cmon, the rothschildes know whats up.
Nothing stands in the way of gold.
Many flaws with the technical analysis in this article... Pull up a 1 year chart on gold, and you will see that 01-APR-09 to 01-DEC-09 was one massive ramp in gold, and that since then we've had a falling wedge consolidation that was recently broken to the upside.
YAWN. That other crap about "too many longs" doesn't really mean anything when you are comparing against USD and EUR, which have billions of people "going long" those instruments. Additionally, the IMF are incompetent, and their selling represents yet another "Gordon Brown" moment for the official sector. The failure of that institution is truly epic.
Ability to analyze-markets wether large or small, gold or silver, beans or rice simply occur because they are there to analyze, if they didnt exist there would be no attempt of an analysis. Using (Gold) all attempts to analyze it only indicate its impossibility for its true nature. The airplane was never accepted as a possiblity by the world until it actually flew. Several thousand analyze said it could not fly, now we have an infinite amount of explanation as to how and why it does. Facts must always come first and they may be accounted for later. There really isnt anything impossible for gold to do-it just does what it does when it is supposed to do it. Gold's attitude is coming out dominately and we will find it is going to change all of our economic system.
The line that many have drawn may seemingly have two opposites but bring these opposites together and we have a circle which will bring an end to all one-pointedness.
But then how would GS make money?
Between '74 and '78 imf sold around 1000 tonnes, gold price doubled!! Go figure..
Asia blues, good post , thank you.
If our .gov were smart (they're not), they should just issue some 30 year debt and buy the IMF's 191.3 tonnes. Chump change (or would that be Chumba change?).
Wouldn't that be a shocker! If the USA bought gold... Good for gold, good for us gold owners and ultimately good for the USA's financial strength. Up our stockpile at least 2%.
captch 2% of 0 , lucky stash of Tungsten?
Laughing at the show is all i got left. Waiting it out is like hanging at the dentist for root canal.
Deflate, inflate flatulate, never on time. Crash is overdue so we are cancelling the event.
Dont worry the dollars is good. Till it isnt.
What is of more concern to me is our survival as a species. Seems every 25,000 years we do a different dance on the galactic plane.
I pose that the 2012 thingy is why the crooks are crookeder. Cause it dont matter.
I hear other places like mars and venus are also heating up.
Would love to find out what the oil drillers say about heat at lower dephts.
You all scared bejesas outa me with talk of default, emminent, imminent domain and certain financial demise. More and more those of you who respond end with "we are fucked"
Gone to see what else i can be scared about...
OHH i shoundnt have smoked that shit
the crazy asiatic rocks, again.
--The large number of long speculators playing in the Gold market could leave the market vulnerable to a rapid unwinding when sentiment changes – the crowded trade scenario.--
Instead maybe it is the large long position in dollars, euros etc... that is unwinding right now.
Since when is Iceland in the Eurozone?
He should have said Ireland.
Perhaps George Soros was not being a hypocrite? If he converted Euros to Gold that would still be consistent with Gold dropping in $ terms.
We are thinking of rebranding with all the bad publicity and the close similarity with Iceland.
I was thinking Greenland II - where the grass is really green !
since it caught cold?
It is disingenuous at best to claim that it is somehow bearish for there (supposedly) to be "no more official buyers" for the remaining 200 tonnes of IMF gold that they have announced (and announced, and announced, and announced ...) are still for sale. EVERYTHING surrounding IMF gold is orchestrated and manipulated for maximum PR effect by the IMF in the attempt to continually cast a dark shadow over the market for, and the price of, gold. One might have thought that they would have finally learned, after their laughable Kabuki theater antics in the 1970s, and more recently with India, that all such threatened or eventual sales do NOT negatively impact the gold market or price, and have in the end proven bullish for gold instead.
I guess it just goes to show that you can't teach an old (gold-hating) bankster new tricks.
+1 as the banksters have been using the jabber jawing of this IMF gold for many years. Once India bought the first batch, gold really went up nicely. Now that they are jabber jawing the last bit, gold is once again going up. Seems to me the IMF's actions are backfiring on them and, worse still, the IMF does not have near enough gold to paper over their future obligations to 'save the world financially'.
Yes, especially as the USA has most likely surrepticiously leased out and/or sold a fair percentage of its (former) 8000 tonne stash in a vain and hopeless attempt to do the same thing. Ah, banksters, the very definition of sociopathic insanity!