Daily Nugget: Gold Price Bears Roaring

Gold prices fell for the eighth straight session today as bearish bets on the yellow metal rise. It still remains vulnerable to institutional selling. Gold futures fells 5% on COMEX last week. Holdings in gold bullion backed ETPs remain at their lowest level since July 2011, a further 3-5 million ounces of selling is expected to occur – liquidation has so far reached 13 million ounces.

Shrill bear call from Credit Suisse
Credit Suisse said last week that they believe gold will be trading at $1,100 by the end of the year and below $1000 within five. They are clearly feeling more optimistic about the global economy than we are. In great PR grabbing comments, Ric Deverell, head of commodities research at Credit Suisse told reporters “Gold is going to get crushed…The need to buy gold for wealth preservation fell down and the probability of inflation on a one-to-three-year horizon is significantly diminished.”

Gold always seems to be heading or in a bear market, according to major news wires, at the moment sentiment of this kind seems heightened. Whilst gold is clearly on a downward slump it does appear as though the bearish sentiment is carving out a bottom for the yellow metal. Deutsche Bank expects it to find support at $1300, thanks to physical demand. Judging by other reports it seems the general consensus is for support to be found at gold prices between $1300 and $1350/oz.

Deutsche Bank, according to Kitco, had some interesting comments on the US’s and China’s gold affordability: “We find that U.S. household income in gold terms has declined by 63% from its peak in 2001, largely a function of a 10-year bull run in gold prices and sustained decline in traded-weighted USD,” the bank says. “In contrast, China’s household affordability of gold has improved as rapid growth of household income and RMB appreciation have mitigated the impact of rising gold prices.

Furthermore, given the unprecedented levels of China’s M2 and loan growth as well as an acceleration of RMB appreciation this year, gold still remains attractive relative to other alternative investment channels such as property and equities in China.”

The price of gold – how is it set?
Premiums on gold, particularly in India and Vietnam continue to increase. See our report on the disconnect between the three elements of the gold market: Physical supply, ETPs and futures. Gold prices: Where are they set?

On Friday, silver fell to its lowest in three years to $20.69/oz before recovering to $21.34.

Both gold and silver’s weakness is being put down to the dollar’s improving strength. The currency continues to gain strength as expectations continue that the Fed will taper off bond purchases sooner than predicted.

This week, on Wednesday, Bernanke will testify before Congress. He will be watched closely for hints regarding the FOMC’s future decisions which will affect the dollar strength and, therefore, gold.

Flash PMI data from the Eurozone, US and China will be released this week, providing some indication as to the health of these economies. All three had seen disappointing Markit PMIs I April, with the Eurozone faring the worst.

Following Japan’s positive Q1 domestic figures last week no change is expected in the monetary policy program following the central banks’s meeting later this week.

Central banks play copy-cat
The minutes from both the Bank of England and the Federal Reserve’s latest meetings are also set to be released this week. Both their currencies finished well last week, markets will be watching the minutes to gauge some kind of indication as to how the committees are feeling about respective QE programs.

Speaking of central banks it is important to remember the stance taken by other banks so far is month, not only has the ECB and Reserve Bank of Australia surprised us with dovish stances and rate cuts but so too have the central banks of Israel, Korea, Turkey, India and Poland. This isn’t exactly a picture of good health for the global economy.

Tomorrow inflation data for both the UK and Germany will be released. UK inflation predictions have been a mixed bag recently with Sir Mervyn King stating he believes great things are ahead for the economy, whilst other analysts see inflation climbing higher.