The Complete Annotation Of SocGen's Latest Hit Piece On Gold
Gold has held firmly above $1300 for over two weeks, confounding those who said it would never see that key level again, but as the constantly-bearish SocGen explains in this 'astounding' report, gold's downturn is set to return... except their reasoning has a fatal flaw - it's entirely factually incorrect.
As SocGen writes...
Gold holds firmly above $1,300/oz
After showing a lack of price direction in the first two months of this quarter, gold entered a new uptrend in June, gaining 6% in the first three weeks and hitting a two-month high of $1,322/oz (on an intra-day basis) on the 19. A much firmer tone in gold was supported by the June CFTC data, which showed a steady increase in the long-side speculative position, to reach its highest level since May 2013 in the last week of the month. It touched a high of just over $1,332/oz earlier this week but slipped thereafter, but continued to hold firmly above the $1,300/oz level.
[ZH - a big surprise to many that Gold was the best-performing asset in Q1]
Economic worries prompt safe-haven buying
Demand for safe-haven gold was sparked by fresh concerns about global economic recovery after the World Bank slashed its global growth forecast for this year, blaming severe weather conditions in the United States, financial market turmoil and the crisis in Ukraine. Similarly, the OECD cut its forecasts for global growth this year and next, citing slowing economic activity in emerging countries and concerns about the US Federal Reserve's tapering. The escalation of violence in Iraq was among other factors supporting gold prices.
[ZH - yes]
But Gold's downtrend to resume on improving US economy...
Looking ahead, we believe that gold's current shine is unlikely to last and the downtrend, which started in 2013, is likely to resume as we move into the second half of the year. First, US economic data indicates that economic activity has picked up in recent months, pointing to stronger growth in the second quarter. This has been supported by further improvement in labour market conditions and upbeat manufacturing data. We are therefore likely to see continued tapering of the Fed's asset purchase programme, and, later on, a gradual normalisation of the policy, weighing on gold's safe haven appeal.
[ZH - improving US economy? Q1 GDP was worst in 5 years, Q2 GDP estimates are tumbling, and 2014 GDP expectations are now the lowest since forecasts began]
...Weak physical markets...
Second, support from the physical market remains weak, as there has been a lack of investment demand from key Asian markets. Gold's recent rally, in addition to sustained yuan weakness, weighed on gold demand in China, which last year overtook India to become the world's largest gold consumer. Gold imports from Hong Kong, the main channel for gold into the country, fell in May to the lowest level since January 2013, although some of this decline can be explained by increased volumes going through Shanghai. In addition, increased concerns about the use of gold to back loans, after Chinese authorities reportedly discovered billions of dollars of illegal gold financing transactions, have weighed on gold prices.
[ZH - actually the Chinese commodtity-financing-deals implies gold strength as forward/future hedges are unwound driving prices up and wagging the spot market's tail higher]
Gold demand in India, the second largest consumer of the yellow metal, has been restrained by the government's stringent measures introduced last year and aimed at reducing the country's massive current account deficit by imposing restrictions on gold imports. While it is widely expected that the new government will cut the duty on gold imports at its upcoming annual budget in July, this is unlikely to drive imports significantly higher as the 80:20 rule is expected to remain in place for some time. In the meantime, while the gold industry is waiting for a possible easing of restrictions, demand for gold remains subdued.
[ZH - India just announced it would reduce tariffs and 'swap' its gold with the Bank of England - expectations that reduced tariffs would not bring back demand for India gold are baseless and the swap itself will be swallowed by a market desperate to transfer paper to physical. On a side note Gold ETF physical holdings are rising once again]
* ...And easing geopolitical tensions
Third, geopolitical tensions have been providing a strong boost for gold prices so far this year. Gold's safe haven appeal has been driven, among other factors, by continued violence in Iraq and the tense situation in Ukraine. However, once geopolitical tensions start easing, gold is likely to come under pressure.
[ZH - Easing geopolitical tensions?!!! Like Ukraine's cessation of the cease-fire, like Kuwait's burning, like Iraq's turmoil?]
In the near term, it is possible to see gold prices edging even higher, as it will continue to benefit from geopolitical risks. The recent news that Singapore is planning to launch the first exchange-traded physically-backed gold kilobar contract in September has also provided additional boost to gold sentiment. However, without firm support from the physical market and in light of additional signs of economic recovery in the US, we are likely to see gold's current rally falter sooner than later.
[ZH - so, in summary, SocGen thinks the trends that are supporting gold strength are all false or ending and, no matter what, their prediction of lower gold prices must hold - or else the entire dream of the return of the status quo is over]
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