We already know that ECB is prepared to use so called OMT mechanism to buy on secondary markets government bonds in trouble. The only thing we know is that ECB is prepared but close details were never revealed to public. But the rhetoric was so strong that markets calmed down for now. Lower interests’ rates have been introduced two weeks ago. This week some hidden sources from ECB have revealed that ECB is considering introducing negative rates for commercial lenders who park excess cash at the ECB to minus 0.1 percent from zero. It would be the first time the central bank has adjusted interest rates by less than a quarter of a percentage point. The true is that policy doesn’t yet have a consensus, the sources said. But I still think that it is more rhetoric than real policy decision. ECB has still some other option to intervene on markets as another round of LTRO, similar QE policy as we are witnessing in the US or direct forex interventions to which Czech central bank have decided two weeks ago. So we will see. But European leaders must be a little bit desperate because this news are coming with another measure which simply put should decrease extensive public debts by new debts. Yes you are reading correctly. The European Union is allegedly considering whether it could encourage countries to make long-term economic changes by offering them loans at below-market rates. Loans would be more suitable for smaller countries which have more difficult access to market sources. The only positive news is that loans for reforms would not be available to countries running excessive macroeconomic imbalances or under bailout.
Bundesbank gave noticed in the report from last week that southern European countries and their banking sector are still within the same vicious circle. According to Bundesbank Italian banks have increased their holdings of Italian public debt from €240bn to €415bn since November 2011 (+ 73pc). Spanish banks have raised their holdings of Spanish debt €166bn to €299. (+81pc) and Irish banks are up 60pc with Portuguese banks up 51pc. And we can only consider as one of the consequence apart of OMT mechanism why yields on sovereign debts still on sustainable levels are. But this state is not definitely sing of health banking system. Still works but not too long.
The best example of “effectiveness of the EU” is definitely moving parliamentary sessions from Brussels to Strasbourg. It is such a good idea that also Members of the European Parliament are tired of the monthly move from Brussels to Strasbourg for a week of plenary sessions. France on the other hand vetoes any change. After MEPs tried to merge two plenary sessions into one week last year to cut down on traveling time, France took the case to the Court of Justice of the European Union. What do you think happened? They won. So now MP´s are trying to change their strategy. They proposed that MP´s should in future be allowed to choose the seat of their institution themselves – with no mention of Strasbourg or Brussels. We will see if they succeed.
As we are always emphasizing it is not only about public debt. The extension of the debt of the whole western society is enormous. And public debt is only one part of it. It is very likely that much of private debt is not effective as well as public one. The situation is very considerable in the UK. Total personal debt in the UK has reached record highs – 1.4 trillion pounds. It means that households owe 94 percent of the UK’s economic output last year and an average household debt is about 54,000 pounds. It is almost twice the level of a decade ago. What is also more dangerous indebted households in the poorest 10 percent of population have average debts more than four times their annual income. So it is not very surprising that more than 130K people declare personal bankruptcy each year.
Globally, 86% of companies do not plan to hire in 2014. It is the output from the global survey within 11,000 companies around the world. Only 33 % of them are optimistic about the economic future for next year. Among most optimistic are US companies because 41 % of them presuppose better economic conditions in 2014 and only 19 % of them stated that they are not plan to hire anybody in 2014.
As we mention many times in the past China is preparing to enter world currencies world. One of the evidence is its vast activities in currency swaps with many countries or alleged increasing of their official gold holdings. The another step within this policy was last week clarification what the People’s Bank of China is going to do. There are two interesting points. First PBOC said the country does not benefit any more from increases in its foreign-currency holdings. It means that bank will very probably rein in dollar purchases as well. The second is that China’s central bank will “basically” end normal intervention in the currency market and will increase the role of market exchange rates and broaden the yuan’s daily trading limit. So do we see the step by step rise of new reserve currency? From my point of view, yes.
FED´s minutes revealed the dispute among members of monetary committee that they are prepared to tapper their easy-money policy within a few coming months. I still do not believe to that because it is not only about the unemployment rate which is if not manipulated at least managed according to some allegations that the last unemployment report before election in 2012 was manipulated. It is also about the structure of unemployment which is very bad. But who knows. On the other hand Bernanke has said last week that if FED tappers the policy of low interest rates remains for a longer period of time. It is clear evidence that nothing has been changed and trillion of US dollars from FED does not really help to economy. Otherwise we will see at least speculation about higher interest rates which also Keynesians consider as a healthy state of economy.
The war against gold continued in India. Many Indian customers find out this week that it is no longer possible to purchase gold by credit card. The Reserve Bank of India is leaving no stone unturned to discourage gold buyers in India. Indian consumers tend to convert gold purchases into equated monthly installments of three months or six months but Central Bank asked banks to stop accepting credit card for this kind of gold purchases. This affects most of the customers who enjoyed purchase and repay for it in longer term. Gold imports significantly decreased by 70 % and also compared to record high imports in May on the level of 162 tones. On the other hand some banks are trying to accommodate to new conditions. They try to buy gold on consignment basis and to keep it in places like Dubai due to the lower storing charges and bring to India by paying full money when required. Banks having such an infrastructure abroad would find this viable. Imports might rise again after the new arrangements are in place, said a sector official. Many also presuppose that demand in India traditionally pick up with the start of a series of Hindu festivals in August. Demand peaks during the festival of lights, also known as Diwali, in November.
The data about Chinese gold imports have been released last week. China imported 108 tons of gold and we witnessed the second largest import after the record level seen in March at 136 tons. China looks like heading to absorb over 50% of global gold output this year – and still rising. The reason why we did not witness a new record could be in the fact that gold is hold in strong hands for now and investors are not willing to sell at present prices. So far net imports through Hong Kong for the first five months of the year have totaled over 413 tons – double those of a year earlier when China imported just over 830 tons in the full year.
South Korea ranked 34th in gold holdings last month data showed Monday. South Korea’s gold holdings reached 104.4 tons. The country was ranked 56th in July 2011.
Gold sales from Australia’s Perth Mint declined for a second month in June. Sales of gold bars and coins totaled 49,460 ounces in June, compared with 92,781 ounces in May and 116,755 ounces in April. The similar situation is with the U.S. Mint which sold 57,000 ounces of American Eagle gold coins in June from 70,000 ounces in May and 209,500 ounces in April.
First two days of the week were quite normal and both metals stayed plus or minus on the same levels. Both prices significantly jumped on Wednesday. Silver was for a while over $ 20 but then closed a little bit below this level. The next day gold almost touched $ 1300 but as day before silver stayed below it. Silver was more successful and closed the day over $ 20. Friday´s session was quite calm but silver did not hold $ 20 level.
Gold finally closed on $ 1284.8 per ounce what was $ 61 more compared to previous week. Silver closed on $ 19.92 per ounce what was $ 1.02 more compared to previous week. The gold/silver ratio is 1 to 64.51 (i.e. you could buy 64.51 grams of silver for 1 gram of gold, it was 64.75 week before). So silver was a bit successful compared to gold this week. HUI index (index of the most important gold mining companies) was on $ 225.03 and was up $ 9.14 compared to previous week. XAU index (index of gold and silver mining companies) was up as well and ended on $ 89.57 what was $ 3.13 more compared to the previous week. Indexes were up first time after five weeks. Last week data from COMEX showed us that bullion banks significantly decreased their net short concentrated positions on gold but increased them surprisingly on silver. This week report showed us that bullion banks slightly decreased positions on gold and silver as well.
Ben Bernanke was behind the rise of metals prices on Wednesday. First we had the release of the FOMC minutes which were not very much indicative what the FED is preparing for us. The only thing which is more significant from them is that committee is divided over current policy. Than Ben spoke and stated that the FED will continue with accommodative policy. In other words that the FED will very probably continue with purchases of bonds and both prices rose.
This week has occurred one interesting thing. I mentioned it two weeks ago when I wrote about gold and if it is in strong hands. The GOFO rate which indicates stress on the London gold market turned into the negative territory; first time after the Lehman Brother collapse. It means that someone with dollars needs the short term use of gold and is willing to pay the owner of the gold a rate of interest plus use dollars for collateral. It tells us that that the delivery situation (for 400 oz bars) is extraordinarily tight. And you have to realize that we are speaking here about the environment of institutional investors not small investors.
GOFO is negative more than 5 days in row on 1, 2 and 3 month rate. This has occurred only four times in the last 14 years. And each time a negative GOFO has been connected to significant bottom in the gold market. Put it into the perspective of the COT report where bullion banks moved into the long side of the market especially on gold and connect it with short term backwardation on both metals and we should state that we are witnessing bottom very probably. On the other hand there are some opinions that we could still go lower based on the simple assumption that corrections like this could hit basically 50 % of the previous peak (which means gold between $ 900 and $ 1000). As usually only time tell us. But what I am not still very sure is the bottom on the silver market especially if anything happens in global economy which could indicate any type of recession.
Overview of the prices of gold and silver for the remaining periods:
Due to the fact that Indian government imposed higher taxes on gold imports and new restriction on banks to sell gold (e.g. limits of sale per customer) gold smuggling has gone up several notches in India. Officials pointed out that smugglers and buyers of smuggled gold tend to save on import duty as well as other taxes like value added tax and income tax. There are two basic channels. One way is from Dubai and second one is from Thailand. There are also other consequences of this policy. Indians turns more to silver as well. While India imported 1,900 tons of silver in 2012, in the first five months of 2013 alone, imports have touched 2,400 tons. According to industry estimates, silver imports during the January-March quarter stood at 760 tons. Imports shot up to 720 tons in April alone, and in May they further swelled by 920 tons. To put it into the perspective it was 10 % of world production so far this year. This is also very interesting movement in the context that if any government starts to fight against gold public will move to the second option on the market – silver which was recognized within the history as monetary metals as much as gold.
Demand for gold decreased in Vietnam. There are there main reasons behind. First is that the Central Bank declared that it would keep selling gold to meet market demands in the coming time. Second reason is that local prices may keep falling despite rising global price because the gap between the two prices is over VND6 million for a tael (37.5 g) now. Third reason is that demand for gold itself has reduced as people are concerned about further gold price decline on the world market.
To encourage gold trading in the country, Singapore’s SGPMX, (Singapore Precious Metals Exchange) launched the world’s first physical precious metals exchange. Singapore tries to become a new world precious metal leader to replace Switzerland and London. The platform will operate 24/7 and will allow investors and traders to buy and sell physical gold for as little as $1,000 and it will also provide facilities to store gold with Certis Cisco Singapore.
Today´s price of gold cause lot problems to many miners. According to Gold Fields Ltd. (GFI)’s Chief Executive Officer Nick Holland the bullion must rise at least to $1,500 an ounce for the gold mining industry to be sustainable. On the other hand mines cost differ each other. For example Gold Fields’s South Deep mine in South Africa can survive at the current gold price. The reason behind is the size of the mine and the fact that it’s largely mechanized and not dependent on labor costs.
The market calmed down this week after two weeks downtrend really. It seems to that both metals took a new breath and heading higher. Silver almost touched $ 20. But finally we were moving most of the time within $ 1240 and $ 1260 zone on gold. Silver tried to stay over $ 19.5 most of the week but one day closed over and another below this level. Trading volumes were thin. We had free trading day in the U.S. on July 4th. Friday´s session was influenced by the payroll data from the U.S. and both metals sharply declined.
Gold finally closed on $ 1223.8 per ounce what was $ 11.5 lower compared to previous week. Silver closed on $ 18.9 per ounce what was $ 0.76 lower compared to previous week. The gold/silver ratio is 1 to 64.75 (i.e. you could buy 64.75 grams of silver for 1 gram of gold, it was 62.83 week before). So silver was less successful compared to gold this week. HUI index (index of the most important gold mining companies) was on $ 215.89 and was down $ 12.2 compared to previous week. XAU index (index of gold and silver mining companies) was down as well on $ 86.44 what was down $ 3.71 compared to the previous week. I expect that bullion banks decreased their net short concentrated positions on COMEX on gold as well as on silver but cannot confirm this because COT report was delayed due to the U.S. federal holiday.
We had non-farm payroll data on Friday. Both metals reacted to them negatively. It is probably because market participants are expecting that FED will react to data by taper of its policy of buying bonds. Behind price moves within this week we can find as well some fears connected with the unrest in Egypt. We had two central banks meeting (BoE and ECB) to discuss rates but their impact on the price of precious metals was not very visible.
Do we witnessing bottom is the usual question for this report for last few weeks? It is still difficult to tell. Gold certainly declined enough to bounce but there is still possibility to decline more especially if it breaks $ 1200 level. The next support will be on $ 1155 with possible decline to $ 1100. To expect uptrend moves we have to cross $ 1320. According to legendary analyst Luis Yamada $ 20 provided a strong support on silver but a full-fledged breach has opened the door for a return to the 2003 uptrend near $ 15-14. So we can still witness gold silver ratio on 1 to 70 or more (maybe 1 to 80 – 90 – 100) if anything happens within the global economic system which will indicate recession; e.g. in Japan or China. According to City analyst Tom Fitzpatrick “we may need the market to be more concerned about the financial/economic backdrop before Gold can get any real traction again.” In other words to push gold and silver higher we need some trigger connected with some economic uncertainties. Otherwise we will stay on these levels. At least for now.
Overview of the prices of gold and silver for the remaining periods: