Weekly Gold Market Review For September 4th

In his weekly market review, Frank Holmes of the USFunds.com summarizes this week’s strengths, weaknesses, opportunities and threats in the gold market for gold investors. Gold closed the week at $1,123.45 down $10.10 per ounce (0.89%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 6.13%. The U.S. Trade-Weighted Dollar Index lost 0.13% for the week. The S&P/TSX Venture Index was off just 0.55 percent, besting the larger capitalization stocks by a significant margin, as these stocks took most of their losses in prior periods.

Gold Market Strengths

Silver was the best-performing precious metal for the week, down a marginal 0.08 percent. This was a reversal from last week, when it was the worst performer.

According to Zijin Mining, the price of bullion will steadily rise in the short term due to output growth slowing in China amid a lack of high-quality mines.

Gold consumers in India, the world’s biggest users after China, are expected to increase purchases for festivals in the second half of the year given that the metal has become cheaper, according to the World Gold Council. Imports in August are estimated between 95 and 100 tonnes, compared to 67 tonnes the year prior.

Gold Market Weaknesses

Gold futures fell to their lowest level in two weeks as the U.S. unemployment rate dropped to 5.1 percent, a seven-year low. With employment back to pre-crisis levels, it builds up the U.S. recovery story and impetus for the Fed to raise interest rates.

Platinum was the worst-performing precious metal for the week, down 2.51 percent. Last week it had gained the most among the precious metals.

BullionVault’s Gold Investor Index fell to a seven-month low in August. The index measures the balance of client buyers against sellers. It came in at 52.8 versus 54.5 in July. Nonetheless, a reading above 50 indicates more buyers than sellers. Gold sales at the Perth Mint dropped to 33,900 ounces in August, down from 51,088 in July.

 

Gold Market Opportunities

There is a lot of talk about the negative impact of Fed interest rate hikes on the price of gold. However, historical evidence of past tightening cycles does not provide a consistent confirmation of this. As seen in the chart above, the data is mixed, with the past three tightening cycles actually resulting in a net gain in the price of bullion.

Central-Bank-Gold-Reserves-2003_2015

In a new piece, Deutsche Bank argues that 2015 will mark the peak in global FX reserve accumulation, with three drivers pointing to further reserve draw-downs in the short term: China’s economic slowdown, impending U.S. monetary tightening and the collapse in the price of oil. On the other hand, central banks have been increasing their exposure to gold as part of their asset mix, presenting a compelling opportunity moving forward. Since 2014, foreign central banks have withdrawn 246 tonnes of gold from the New York Fed, a trend that reflects that central bankers are more seriously viewing the role of gold in their portfolio to lower the volatility of a reserve mix of just currencies.

Federal-Reserve-Rate-Hikes-and-the-Gold-Price-1979_2015

Zijin Mining Group has said it will use the slump in metal prices to accelerate overseas acquisitions. The company wants to secure producing assets abroad as it juggles depleting mines and heightened environmental scrutiny at home with growing demand in the world’s biggest buyer of the metal.

 

Gold Market Threats

Renmac also highlights the TRIN index, showing past episodes of elevated readings. The historical evidence shows that there is usually a clustering of high readings and the first spike—such as the one the market encountered recently—is usually not the last. Therefore, trying to bottom-fish in the market is probably still too early.

With indicators from macro-fundamentals to market-oriented measures all flashing red in recent sessions, the gigantic spike in the Arms (TRIN) Index stands out. TRIN is a technical indicator that compares advancing and declining stock issues and trading volume as an indicator of overall market sentiment. It is used as a predictor of future price movements in the market. An index value above one is bearish, below one is bullish and one is market neutral. The recent spike to 4.95 reflects a lack of confidence by traders.

According to BCA, broad market volatility is likely to persist until the profit cycle turns back up. The latter won’t occur without looser monetary policy. That would include a weaker U.S. dollar, a pre-condition for easing foreign currency funding strains in the emerging world. Low interest rates have given a huge incentive to shift out of low-risk assets into stocks and corporate bonds in search of higher returns. However, equities require support from rising corporate earnings. That has not been the case lately, as earnings have been flat or declining. Therefore, it is no coincidence that U.S. equities started to struggle this year soon after earnings flattened.

 

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