Daily Nugget: Gold Finishes Higher On Yellen's Comments

Yesterday the gold price finished higher for the first time in six sessions following Yellen’s confirmation hearing.

Many expected dovish Yellen to wax lyrical about the benefits of QE and how she was all for ramping up asset purchases. Instead she was far more measured, first she calmed fears that tapering would go ahead (causing the gold price to spike) before then stating that QE couldn’t go on forever (sending gold back down). Despite this, her comments did remove some of the pressure hanging over gold.

Yellen expressed her belief that overall the positives of QE had outweighed the negatives. However Citi’s FX Technicals team believes enough is enough and that the Fed needs to ‘draw a line’ under this QE ‘experiment.’ They believe that pulling asset purchases would not be painless, ‘but it would likely be less painful than what we might see later.’

‘No economic model’ to explain gold prices

Nevada Senator Dean Heller asked Yellen what she thought of gold prices and what made them tick, “Well, I don’t think anybody has a very good model of what makes gold prices go up or down,” she replied (meanwhile, we’re screaming at the screen ‘You, you are the model!’).

“But certainly it is — it is an asset that people want to hold when they’re very fearful about potential financial market catastrophe or economic troubles and tail risks. And when there is financial market turbulence, often we see gold prices rise as people flee into them.”

Compared to Bernanke’s previous response that no-one understands gold prices, this was considered a reasonable answer and impressed Heller who followed up with, “Well, that was a better answer than I got from Chairman Bernanke last July. I asked him the same question, and he said that nobody really understands gold prices, and he went on to say, and I don’t pretend to really understand them either.”

The changing nature of gold demand

Yesterday the World Gold Council released their Q3 Gold Demand Trends report. Unsurprisingly overall gold demand was down 21% year-on –year thanks to huge ETF-outflows. However, the finding that demand for bars, coins and jewellery had risen 26% from Q3 2013 confirms the changing nature of gold demand. The report also confirmed the movement of gold from West to East as data shows UK exports of gold from Switzerland in the first eight months of the year climbed tenfold. Meanwhile 90% of the increase in consumer demand was ‘accounted for by Middle Eastern and Asian consumers.’

In the same report the Wold Gold Council conceded that the smuggling of gold bars into India was certainly going on. The issue with gold smuggling is that it will never be confirmed to help us show that demand remains strong, despite the government’s anti-gold tactics. However gold price premiums do show that demand remains high and yesterday rose to 21% above spot.