Gold has traded up in Asian and early trading in London this morning. Gold was down $18.20 to $930.60 per ounce in trading in New York on Friday while silver was down 61 cents to $17.78 per ounce (more on silver below). The London AM Gold Fix at 1030 GMT this morning was at $937.25, £472.17 €592.82 (from $944.50, £471.05 €598.28 on Friday).
Gold's volatility continued last week but despite the sell off in mid March, it closed the week up some 1.5% (silver was up 4.1% ). Friday's sell off was likely due to oil weakness, tentative dollar strength, quarter end book squaring and profit taking. Gold remains in a range between $905 and $955 but gold's higher weekly close is constructive from a technical point of view. The weakening U.S. economy is obviously dollar bearish and conversely it is gold bullish but more consolidation may be necessary before we get above the four digit price again.
Gold will likely take its cue from the dollar, oil and wider markets which will be looking to the Chicago PMI for direction. Manufacturing in the U.S. looks set to continue to deteriorate which does not bode well for an economy massively dependent on services, particularly financial services.
Gold and Sterling
Gold continues to be particularly strong in sterling. Sterling fell to new lows against the euro this morning and looks set to reach 1.25 to the euro. Further strength in sterling gold and parity with the euro in the next 2 to 3 years seems likely as the UK economy is beset with many of the same fundamental weaknesses that afflict the U.S. economy.
UK data releases were poor last week and look set to deteriorate in the coming weeks. Mervyn King, Bank of England Governor is due to speak today and his comments will be closely monitored. Economic data to be released this week includes the CIPS manufacturing and services PMIs and the Bank of England’s latest Credit Conditions report. Data released from Hometrack overnight showed house prices down for the 6th month in a row in March with the annual rate of growth now at its weakest pace for 2 years.
Asset Class Performance in Q1 ‘08
Gold has outperformed nearly all asset classes in the first quarter as it again fulfilled its safe haven role protecting investors from the deepening global financial and economic crisis. In marked contrast to other markets, gold was up more than 12% in the quarter. Given the hugely serious nature of this financial crisis (Greenspan and others calling it the worst since the Wall Street Crash of 1929 and the Great Depression) some had expected gold to continue to surge and were surprised by the pullback. This expectation was understandable however a pullback, correction and consolidation is normal and healthy and will lead to the next leg up in gold’s bull market which will likely see gold reaching $1,200 per ounce.
Investors internationally are liquidating their equity investments and concerns regarding the health of the global economy have led to Asian shares having their worst quarter in 5 years. Investors pulled close to $100 billion (€63.3bn) out of equity funds in the first three months of this year - a record shift that accelerates a longer-term trend away from U.S. and western European stock markets. Equity funds suffered outflows of $98bn in the quarter ending March 28, according to Emerging Portfolio Fund Research, which tracks retail and institutional flows. The funds had inflows of $19bn during the same period last year and inflows of $49bn in the same period for 2006. Commodity funds enjoyed inflows, of $3 billion, three times the level of last year.
Increasing Systemic Risk and Fears of Nationalisation of U.S. Banks
The Financial Times reports that Britain and the U.S. are finalising plans to create a working group that will put together proposals to better monitor and regulate the financial system. Citing unnamed senior British Treasury, the FT said the plans were agreed on Wednesday by British Chancellor Alistair Darling and U.S. Treasury Secretary Henry Paulson, with the membership and terms of reference of the working group still being finalised.
Horse, stable, door, bolted comes to mind.
Fears of a meltdown of the U.S. financial system are leading to the Federal Reserve considering drastic measures. The Telegraph reports that the Federal Reserve is considering a Nordic style nationalisation of U.S. banks. A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden, and Finland managed their traumatic crisis from 1991 to 1993, which brought the region's economy to its knees. It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the U.S. crisis and is eyeing the Nordic approach for contingency options.
Support and Resistance
Gold has strong support between $900 and $906 and below that strong support is at previous resistance at the 1980 record nominal high of $860. Resistance is at the recent new record nominal high of $1030.80 and $1000.
While support is at these levels that does not mean that gold will test support. Gold has continually surprising to the upside in recent years and given the deteriorating global macroeconomic and financial big picture, gold and particularly silver will likely continue to surprise to the upside.
Silver is trading at $17.96/18.01 at 1030 GMT.
With further confirmation of extreme tightness and shortages in the retail silver bullion markets (particularly in smaller format 1 ounce and 10 ounce bars and coins) silver looks set to reach its nominal 1980 high of $50 per ounce at least in the coming months.
Investors should be extra prudent and should shun derivative instruments and pool accounts. Personal allocated accounts and taking delivery of silver may prove the wisest course of action given the supply demand deficits and likely coming silver mania which is likely to propel silver prices to multiples of today’s price.
Oil has gone from $10 a barrel in 1999 to $110 this month and thus increased 11 fold. Silver was at $5.00 in 2001 and will likely far surpass even oil’s 11 fold increase in the coming years. Silver remains the investment opportunity of a lifetime and will protect investors from falling stock and property markets and the coming sharp slowdown in western economies.
The fundamental reasons for our very bullish outlook on silver is due to continuing and increasing global macroeconomic and geopolitical risks; silver’s historic role as money and a store of value; the declining and very small supply of silver; significant industrial demand and most importantly significant and massively increasing investment demand.
The silver market remains a tiny finite market (all of the above ground refined silver in the world is only worth at today’s prices roughly a miniscule $9 billion <500 million ounces X $18>) and if even a fraction of the world’s increasingly skittish investment capital flows into the silver market prices will rise to multiples of the current price.
Gold Investments continue to believe that silver should surpass $25 in 2008, its non inflation adjusted high of $48.70 per ounce before 2012 and its inflation adjusted high (as many other commodities including oil already done) of some $130 per ounce in the next 5 to 8 years. These are conservative estimates.
Platinum is trading at $2028/2038 (1030 GMT).
Palladium is trading at $443/448 per ounce (1030 GMT).