What Is Driving Gold Now?

Although gold prices eased on Friday as the US dollar tumbled, price remained on track for its biggest weekly gain since October 2011, as fears of an early end to U.S. monetary stimulus subsided and bullion recovered some of its appeal as a hedge against inflation. The price of the yellow metal increased by almost 5% on the week following the release of some rather confusing FOMC minutes and a statement by US Fed chairman Bernanke that the central bank will maintain its accommodative policies for the foreseeable future.

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Mixed Message

The recently released FOMC minutes for the June meeting sent a mixed message to investors and traders. The minutes showed that many of the policymakers did not believe that it would be appropriate to taper asset purchases at the moment, while almost half of the participants would like to pare the purchases later this year.

While this conflict of interest caused much confusion about Fed monetary policy, to make matters even more confusing, while giving a speech to the National Bureau of Economic Research in Cambridge, Massachusetts on Wednesday, Fed chairman Bernanke indicated that he doesn’t really intend to stop printing money. “Highly accommodative monetary policy for the foreseeable future is what’s needed,” he said. Bernanke’s comments came just hours after the release of minutes of the June Federal Open Market Committee, which showed considerable dissension among participants.

The speech made by Bernanke stands in sharp contrast to what he stated at a press conference in mid-June when he said he saw a gradually improving economy and that the Fed could begin tapering QE by the end of this year and end bond-buying next year.

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The Aftermath

Following his comments, then, the dollar rallied global equities fell, and gold was sold off. Following the Fed chairman’s comments last week that the central bank would continue its QE3 economic stimulus the greenback fell, gold prices rallied, the DOW Jones made a new record high and the S&P 500 closed up 1% to 1,670 – above its all-time closing high of 1,669.1 on May 21.

After spiking to $1300 an ounce in Hong Kong on Thursday, gold prices climbed to nearly a three-week high in New York. Just after 10 a.m. EDT, August gold prices stood at $1,283.60 an ounce on the Comex division of the New York Mercantile Exchange, up $36.20, or 2.9%.

Currently, traders seem to be focusing only on what Bernanke has to say and are ignoring the real supply/demand fundamentals. This has resulted in some extremely erratic trading action. But, regardless of what Bernanke says, and as many Western investors bail out of gold another set of gold buyers has come forward with the aim to preserve wealth.

Physical Buying

Signs of some physical supply tightness in gold, as reflected by high premiums and record volume in the Shanghai Futures Exchange, declining inventories on Comex and a surge in gold lease rates all indicate some strong buying of the physical metal.

The cost of borrowing gold stayed near its highest level since January 2009, reflecting dwindling supplies from bullion banks after heavy liquidation and resilient demand for physical gold products.

Chinese Demand

During May, gold imports into China jumped to the second-highest level ever. Demand for physical gold in Asia is the strongest it has been in 30 years, with bargain hunters using the lower prices to secure jewellery and gold bars. The demand has left many of Hong Kong’s banks, jewellers and even its gold exchange without enough yellow metal to meet demand.

The president of the Hong Kong Gold & Silver Exchange Society, Haywood Cheung, said the exchange had effectively run out of most of its holdings as members looked to meet a shortfall in supply amid rampant retail demand for gold. “In terms of volume, I haven’t seen this gold rush for over 20 years,” he said. “Older members who have been in the business for 50 years haven’t seen such a thing.”

Chow Tai Fook, the Hong Kong-based company that is the world’s biggest jeweller by market capitalisation, reported that some stores in areas popular with mainland Chinese tourists had sold out of gold bars. It also stated that demand had not been this strong for gold products since the late 1980s.

At the same time, lines of people wanting to buy gold bars at Beijing’s largest gold store, Caibai, stretched as long as 10 metres last Friday.

Shanghai Night Trading

Meanwhile a week after the Shanghai Futures Exchange (ShFE) introduced night trading, trading volumes for gold and silver have jumped to record highs driven by a surge in investment and hedging demand. Daily transactions for gold rose by nearly a quarter to a record of 595,642 lots on Thursday, versus an average of 483,529 lots in June. Daily volume for the silver contract surged roughly six-fold from a week ago to 2.23 million lots on Thursday.

Before after-hours trading was launched, investors in China, the world’s second-largest gold importer, were often exposed to global price fluctuations in the U.S. and European markets.

The ShFE’s extended hours run from 9:00 p.m. to 2:30 a.m. local time. Each lot of gold is 1,000 grams and that of silver is 15 kilogrammes.

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In the meantime, premiums on gold and silver bullion in China have remained sharply higher than in the United States. Prices for gold of 99.99% purity on the Shanghai Gold Exchange were nearly $30 per ounce higher than London spot prices. Normal premiums in Shanghai are about $5 to $7 an ounce.

Recently, Albert Cheng, managing director for the Far East region of the World Gold Council said. “The current gold supply is getting increasingly constrained while the demand remains strong.” Cheng said gold jewellery factories in China are working at high levels of capacity and 24-hour shifts to meet the demand. Scrap supply is also expected to fall this quarter as lower prices prevent customers from selling their old jewellery.

Premiums in Hong Kong, the main supplier for China, have also moved higher due to supply issues. Dealers are mostly quoting $4 to $5.50 per ounce for gold kilo bars. One dealer told Reuters he was quoting an $8 premium. In Singapore, premiums are about $3.

US Inventories

The latest data from the CFTC shows that the total US COMEX registered gold inventories fell to a 12-year low of less than 1 million ounces, underlying the tightness of the physical bullion market. Registered gold refers to the 100-ounce COMEX gold bullion bars that meet the standard of and are used to back requests for US gold futures delivery. The total Comex and Nymex gold inventories have declined from 11 million troy ounces in February 2013 to about 7.1 million troy ounces in July, with the big drop in April and July this year.

Recently, Brinks reported a massive decline in its gold inventories. The huge decline in Brinks inventories is being seen soon after a similar decline in JPMorgan’s gold inventories. Brinks inventories have fallen from 570,000 ounces on July 3 to 257,000 ounces today, which is a drop of 313,000 ounces or 55% in just one week.

While these dwindling stocks in Comex may cause a major concern for investors who want delivery of the physical metal, any run on Comex stocks could result in a default, which would send the price of physical gold substantially higher. The easy money policies by the European Central Bank and the Bank of Japan also will help prop up gold prices and likely to prompt investors to seek a currency that is independent of the central banks, thus again luring in buyers of gold.


While gold prices have recovered from recent lows, prices will have to break above the key resistance levels of (R1) and (R2) before gaining good upward momentum.

The author runs a gold and silver bullion service at Lakeshoretrading in South Africa.

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