Political Metals (PMs)

GoldMoney News Desk

Stock markets rose yesterday and the gold price plunged as investors regained some optimism about the state of the global economy. The German DAX settled 0.84% higher yesterday, with Britain’s FTSE 100 also tacking on a 0.55% gain. In America, the Dow Jones Industrial Average posted a 1.29% increase to settle at 11320.71, while the Russell 2000 index of small-cap stocks recorded a 1.39% gain. Japan’s Nikkei has settled 2% higher today, while Hong Kong’s Hang Seng Index closed up 1.1%.

Price action in the commodity sector was mixed. Copper, Brent crude and Nymex gasoline futures all settled higher – indicative of “risk on” trades being implemented – though precious metals such as silver, platinum and palladium all sold-off. Silver fell by more than $3 an ounce, while the front-month platinum and palladium contracts were down $53 and $21 respectively.

All of this was small fry, however, in comparison with the losses in gold. The August Comex gold contract lost a whopping 5.6% ($104.20) to settle at $1,754.10 per troy ounce. In dollar-terms, this decline is second only to the $143.50 plunge that occurred after the gold price reached an inflation-adjusted peak in January 1980. However, in percentage terms there have been even sharper declines than yesterday’s 5.6% loss in recent years.

Given the incredible gains in the gold price witnessed in recent weeks, such a down move is unsurprising, and is indeed a healthy part of a sustainable bull market. Such moves force speculators and other weak hands out of the market – with more and more committed gold holders using the price dip as an opportunity to buy more physical metal.

Stronger-than-expected US durable goods data for the month of June was partly responsible for the bullish mood on Wall Street and the rout in the gold market. Economists had only expected a 2% increase, when in actual fact the data showed a 4% rise. As Robert Wenzel points out at his blog, the surge in the US money supply in recent months is starting to result in improved economic statistics, as well as rising prices at both the producer and consumer levels.

Margin hikes at the New York Comex and the Shanghai Gold Exchange have also contributed to the downward move in gold prices. The Comex has raised the amount of money needed to trade gold contracts by 27% to $9,450 per 100-ounce contract, following on from the Shanghai Gold Exchange’s decision to raise margin requirements by 26% on Monday. Higher margins mean futures traders must stump up more cash in order to buy and hold gold futures – which tends to encourage selling. Clearing houses will tend to raise margins in response to big price rises, as a means of reducing volatility.

In addition to the above pressures, this week is options expiration week at the Comex. The largest banks operating on this exchange write a lot of the call options on gold futures; thus, they have an incentive to aggressively short gold in the days leading up to and on the day of the expiration of certain calls, so that they expire worthless – meaning that the banks make the maximum profit from selling these options.

None of this should detract from the long-term fundamentals that are underpinning steady rises in precious metal prices. As the old saying goes, bull markets take the stairs up and the elevator down. Or, as the American investor James Dines notes: “the very function of declines in a major bull market is to keep investors out – until the top. The very function of rallies in a major bear market is to keep investors in – until the bottom.”

ZeroHedge

Two weeks after the CME hiked gold margins by 22%, and two days after the Shanghai Gold Exchange sent them higher by 26%, here comes the CME, as we expected, with another 26% gold margin hike (previously: “Should we expect 3 more SGE margin hikes in the next 2 weeks? Or will the CME rightfully accept the baton and do everything in its power to dent the parabolic rise in the alternative reserve currency? We are cautiously looking at what the CME will do today and will advise readers.”). 

And now we know that this particular margin hike was leaked well in advance, and explains the entire $100 plunge in gold today. And as a reminder, the August 1 CME margin hike worked… for about 30 minutes.

China Business News

Central banks’ purchases in the second quarter more than quadrupled compared to the levels in the corresponding period of 2010, according to the council’s report. Central banks are likely to remain net purchasers of gold. “Purchases of 69.4 tonnes during the second quarter of 2011 demonstrated that central banks are continuing to turn to gold to diversify their reserves,” WGC said in the report.

It added that gold supply was 1,058.7 tonnes in the second quarter, a four per cent decline from 1,108.3 tonnes in the same period last year, as a result of an increase in net purchases by central banks.

Ten years ago when the gold price touched $1,000 an ounce, it seemed improbable, and now the industry forecast is pegged at approximately $2,000 by 2015.

Asked if the high price of gold would be reached even earlier than that, Unni told Gulf News: “Considering the current fundamentals, further gains in gold are quite possible, but it will be difficult to envisage a high in the near term.”

He added that gold remains “vulnerable” if investors have to sell positions to cover any sharp fall in equity markets.

As per WGC’s estimates, gold demand in the second half of 2011 is expected to remain “strong”.

“The strength of demand in India and China, coupled with an overall drop in recycling activity this quarter, demonstrates that consumers have adjusted to the current price environment and expect the upward price trend to continue,” Marcus Grubb, managing director, investment, at the WGC, said in the report.

Dubai The rising price of gold is unlikely to impact the trading patterns in the UAE, according to commodity analyst Pradeep Unni. “The UAE, especially Dubai, is largely a trade centre and also a favourite tourist destination. Thus, jewellery trade in the region is unlikely to get effected by the price spikes or drops,” he said, adding that gold trading in Dubai constitutes to about “16 per cent” of the global gold trade.

Retailer Damas, too, does not expect much of an impact on sales in value terms.

“Our belief is that consumers have become slightly accustomed to high gold prices. There is even a strong consumer sentiment that the price might increase further,” said Raj Sahai, director, retail, at Damas.

The UAE emerged as the most resilient market in the Middle East according to WGC report, with second quarter tonnage demand just one per cent below year-earlier levels at 16.1 tonnes.