Draghi's Trillion Euro 'Bazooka' and SNB Shock Is ‘Icing On Cake’ For Gold
Is gold a safe haven [13]? Mark O’Byrne, executive and research director at GoldCore, told CNBC yesterday that yes it is. He said that the Swiss National Bank’s recent decision was “icing on the cake” for gold and shows how gold thrives in a volatile environment.
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Interview:
CNBC’s Seema Mody: Given the lacklustre performance of gold over the past two years, investors have been questioning whether gold is in fact a good investment. But last week’s unexpected move by the Swiss National Bank confirmed that perhaps gold is still seen as a safe-haven by investors during a time of rising volatility. Would you agree?
Mark O’Byrne: I would indeed – yes, absolutely. And I think the SNB decision is actually ‘icing on the cake’ because there were strong fundamental factors in place coming through from 2014 and gold prices had actually started to move up – particularly in Euro terms, but also in dollar and sterling terms – even prior to the SNB decision.
Then the SNB decision last week obviously caused a lot of turmoil on the markets and you just mentioned there about FXCM and Alpari and it shows again how volatile these markets are and that is an environment that very much suits gold and speaks to the need of having gold in a diversified portfolio.
Seema Mody: if you are expecting volatility going into the New Year should one be buying gold and if so how much of their portfolio should be allocated towards the shiny metal?
Mark O’Byrne: Well there is a huge amount of academic research just in recent years both coming out of academia but also out of independent research by massive allocation specialists – the likes of Ibbotson and companies like that – and a lot of the research shows that a small allocation of gold is very, very prudent.
Seema Mody: What is small?
Mark O’Byrne: 5%, 7%, 10%.
Seema Mody: So 5% to 7% of your portfolio should be allocated towards gold?
Mark O’Byrne: Physical gold.
Seema Mody: Physical gold.
Mark O’Byrne: Yes to physical gold because the whole point of holding gold is that you hold it in the safest way possible.
It’s not really a trade. There is no point owning it as a futures contract with FXCM or with some other counterparty where there is a degree of counterparty risk.
So physical gold is a safe-haven unlike paper gold or electronic gold. The research, as I said, is actually 5% to 7% but there is an old Wall Street adage which is “you should put 10% of your money in gold and you hope to God it doesn’t work” because if it does work it generally means the rest of your portfolio is not performing very well.
The interview can be seen here [15]
ECB’s Momentous QE As Currency Wars Intensify
Tomorrow, the ECB is generally expected to march where other central banks have marched before – and largely failed – by initiating it’s own quantitative easing or QE programme. All will be revealed at 1245 GMT/ BST tomorrow.
Round II of currency wars looks set to begin as the ECB attempts to weaken the euro in order to increase competitiveness in Europe, reduce imports and increase exports thereby creating jobs, stimulating demand and aiding economic growth. At least so it is hoped.
With Europe flirting dangerously close to recession, deflationary pressures building in some sectors and with interest rates at 0% and close to as low as they can go, the ECB is going all out in the desperate hope that further QE is the required medicine for the structurally challenged and debt riddled European economies.
Given the ECB is the central bank of a common currency with many national Central Banks as members, each with their own – and sometimes competing – national agenda, this new version of money printing will be quite different from that of the US or Japan.
At the moment, it is the scale of the program which is causing the most speculation. Insiders expect QE of around €500 billion ($580 billion) to be announced tomorrow.
Anything less would be likely to disappoint markets and could see further volatility. They are already anticipating a move by the ECB to adopt QE, causing, for example, the euro to weaken and stocks to rise despite poor fundamentals.
The central bank wants to raise the balance sheet of the Eurosystem (the ECB along with the euro zone’s 19 national central banks) from €2.2 trillion to €3 trillion.
Will it be enough to avert deflation and a Eurozone recession or Depression?
Will last week’s action by the SNB, which caused the Euro to fall to eleven year lows, discourage the ECB from devaluing the currency too aggressively?
Who will ultimately benefit from the action?
Will it be the people of Europe or only the mega-rich? For whom, we have continuously pointed out QE has greatly benefitted and as Alan Greenspan recently pointed out – has been a “terrific success.”
The intensification of currency debasement and currency wars shows the increasing importance of owning real assets such as gold in order to protect and grow wealth.
Goldcore Insight on Currency Wars: Bye Bye Petrodollar, Buy Buy Gold [16]
MARKET UPDATE
Today’s AM fix was USD 1,298.00, EUR 1,121.67 and GBP 859.32 per ounce.
Yesterday’s AM fix was USD 1,292.25, EUR 1,113.63 and GBP 852.35 per ounce
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Gold in Euros– 1 Month (Thomson Reuters)
Gold climbed $17.20 or 1.35% to $1,292.70 per ounce yesterday and silver rose $0.24 or 1.36% to $17.93 per ounce.
Spot gold bullion climbed as much as 0.6 percent to $1,303.63 an ounce and traded at $1,300.28 in late morning trade in London. On the Comex in New York futures for February delivery gained 0.5 percent to $1,300.50.
Gold surpassed $1,300 an ounce for the first time since August on IMF warnings of sluggish global growth which is likely to bring about more QE from central banks increasing gold’s safe haven appeal and indeed demand.
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Gold in USD – 1 Month (Thomson Reuters)
With the ECB close to announcing more QE and euro printing tomorrow, gold’s outlook looks positive for the rest of 2015. However, we would be nervous in the short term. There could be a ‘buy the rumour, sell the news’ reaction and gold could correct after its recent gains in anticipation of EU QE. Any pullback would represent a buying opportunity for those seeking to diversify and hedge euro and other currency risk.
It is important to remember that during the U.S. Fed’s QE, gold rose 70 percent in dollar terms from December 2008 through June 2011, when the Federal Reserve pumped more than $2 trillion into the financial system in its bond buying programs. Similar gains should be seen in gold in euro terms in the coming months.
Gold demand has picked up markedly in recent days. This is seen in the surge in the gold ETF holdings and dealers and mints also report a pickup in demand.
The world’s largest gold ETF, SPDR Gold Shares GLD [19], reported another inflow yesterday, of 11.4 tonnes. That has taken its holdings to their highest since late October, at 742.2 tonnes, up from a six-year low of 704.8 tonnes in early January. There is also a continuing move from ETFs, digital gold and unallocated accounts to safer allocated gold [19] ownership.
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Silver in USD – 1 Month (Thomson Reuters)
Futures and options open interest on the Comex in New York is at the highest in 2 months, and money managers are the most bullish since August.
Silver climbed as much as 1.9 percent to the highest since September and was last at $18.213 an ounce. It’s up a whopping 16 percent so far the mone month and has seen its best start to a January since 1983. It is silvers best start to a year in over thirty years.
Platinum was little changed and palladium rose 0.3 percent.
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