Daily Nugget: Gold Price Holds Ahead Of FOMC

Making headlines this morning is the news that the Bank of England helped Hitler’s Germany sell Nazi gold, which had been looted from Czechoslovakia only days earlier. The sale of £5.6m worth of gold bullion was instructed by the Bank of International Settlements, a customer of the central bank. CityAM reports that nearly 2,000 gold bullion bars were sold in March 1939, with the funds then transferred to the Reichsbank just six days after the Nazis invaded Czechoslovakia.

We plan to bring more on the Nazi gold story later today.

Gold price holds ahead of FOMC
Gold has gained this morning thanks to some month-end gold buying following the yellow metal’s stellar July performance. Silver has also climbed one percent. July has seen the biggest monthly gain for the gold price since January 2012, thanks to the Fed’s reassurances over QE.

Markets still await further clarity from the FOMC, the two day meeting will finish today followed by a statement release. Given the belief from some FOMC members that previous Fed statements were seen to be over-hawkish, we expect we will see no change in monetary policy which will be announced through a dovish-leaning statement.

Prior to the announcement US GDP data and a private jobs report will be released, GDP is expected to be weak and therefore we do not expect it to have a significant impact on gold and silver today.

Keep Chinese gold ETFs on your ‘radar’
On Monday morning the small drop in the price of gold was attributed to the disappointing performance of two new Chinese gold ETFs. Yesterday UBS warned us not to write them off too quickly but instead keep them on our radars.

The bank writes, “ultimately, it will take time for these products to gain traction across the broader retail customer base. ETFs in China currently get strong competition from banks’ gold-accumulation plans and offerings of other small retail products, which enjoy a wider distribution network. [gold ETFs] could easily pick up momentum as distribution channels improve and the Chinese gold market becomes more and more sophisticated over time.”

India, a country with a similar passion for gold, has had gold ETFs for some time. As we explained last week, these ETFs have not suffered anywhere near as badly as those in the West due to a comparatively different investor sentiment towards gold. However, they are backed by such an insignificant amount of gold compared to that held in homes that it barely registers in the domestic gold market. Whilst UBS may hope that Chinese gold investors (Mrs Wong) become more ‘sophisticated’ we think that they understand gold ownership enough to continue to wish to hold real, physical, allocated gold as we see in India.

As we have written about previously, the Shanghai Gold Exchange may well be the wedge that drives the separation of the paper gold and physical gold price. This is due to the almost insatiable demand for gold seen on the exchange. It would take a significant change in investor mentality in order to drive a proportion of demand into ETFs that is big enough to affect the domestic gold market.

QE isn’t an issue, gold’s off to $1,800

In significant contrast to those central banks selling gold and the other banks predicting the end of gold, an analyst from the National Bank of Canada has said that he expects gold prices to go to $1,800. Regardless of whether or not the Fed decide to taper bond purchases. Paolo Lostritto believes that there is already enough liquidity in the system and this will continue to add inflationary pressures to which gold will positively react.

Explaining to Kitco why inflation is lying low at the moment, Lostritto explained “I think the Fed has bought itself about two years before inflation shows up because it is the least dirty shirt out there”. Rather than worrying about the amount of money in the system, Lostritto believes we should be looking at the velocity of money, which is beginning to rise.

Einhorn remains bullish on gold

Big news for those interested in gold investment, David Einhorn, head of hedge fund Greenlight Capital has reaffirmed that he remains bullish on gold.

Much attention has been paid to Einhorn and Greenlight Capital after he said that the fund sold a small amount of gold bullion, but this was not to say he had lost faith in the precious metal. The fund now has now rebalanced its assets to a more aggressive gold position of equal exposure to both gold miners and gold bullion. Einhorn said that the fund has ‘mid-single-digit percentage exposure’ to gold bullion.