The Daily Nugget: Has Gold Gone Back To The 1970s?

Friday’s stronger than expected jobs report saw the gold price fall on Friday afternoon and continue to do so into this morning. The fall comes as fears the Fed may soon begin tapering come after the US non-farm payrolls data was reported at 195,000, 165,000 had been expected.

Holdings in the world’s largest gold backed ETF, the SPDR gold-trust fell to a four year low on Friday, to 961.99 tonnes, following the jobs report. It is worth reminding those worried about this apparent decline in gold investment that gold-backed ETFs represent only around 6% of gold demand.

Global gold investment
Despite what appears to be bearish signal in macro-economic data, the desire to buy gold, physical gold, remains strong across the world.

This morning Bloomberg report increased gold buying in Japan thanks to a weak yen and low gold price. Bullion dealer Tanaka Kikinzoku Kogyo K.K.,the country’s biggest, believe sales this year may exceed those seen in 2004, the last year sales exceeded buying. Company representatives report customers looking to use gold as a hedge against yen based assets.

According to finance ministry data Japan’s imports of gold more than doubled to 7,686 kilograms in January to May, from 2,994 kilograms a year earlier. 500g bars are the most popular product.

Import data in China, from Hong Kong, shows gold imports continued to rise from April to May as well as on the year. HSBC believe gold investment levels, from Hong Kong to China, will ‘remain elevated.’ The bank points to the premium on the SGE which ‘more recently stood at USD 34/oz, significantly higher than the USD 10-25/oz range seen in May.’

Meanwhile in India, gold imports fell by 80.56% to 31.5 tonnes, in June. This was below the expectations of the All India Gems and Jewellery Trade Federation who had predicted 37-40 tonnes of gold imports.

This morning the world Gold Council reports that South Korea has, for the first time, been ranked in the top 35 countries for gold reserves. After buying 20 tonnes this year, the country now holds 104.4 tonnes.

What is the future gold price?

More gold price predictions for you now. Societe Generale believe that in 2014 the yellow metal will ‘extend its decline’ to $1,150 an ounce, after prices will gradually drop throughout this year. Goldman Sachs are even more bearish, stating that they believe the price will go as low as $1,050/oz. Danske Bank, the most accurate forecaster according to Bloomberg, believe the price will go as low as $1000 in the next quarter.

However, as we head into the second half of the year, we may be in for an easier ride. Data from Bloomberg shows that during the bear market of 1981-2000, gold performed better gaining an average of 1.3% in the second half, compared to losing 3.9% on average in the first.

Someone who isn’t so bearish is Citi’s Tom Fitzpatrick who took some time to remind us of the 1970s when in 1976 ‘the gold correction ended in August and the Equity market began a deep correction in September (27% over 18 months). During that period gold rallied by about 78% and over the 1976-1980 period it multiplied in value by a factor of 8 from just over $100 to over $800.’

Whilst US dollar strength and the Fed’s possible decisions dominate mainstream media news, the gold trade is, and will continue to be, affected by the political crisis in Egypt. As well as ongoing concerns over the European debt crisis.

The week ahead

This week look out for Fed minutes, which everyone will no doubt pour over desperately trying to see when QE will be tapered.

There is also central bank meetings in Japan and Brazil. In Japan, the target of 2% inflation looks like it’s not impossible given consumer prices in May remained unchanged for the first time since October. They are expected to have increased in June. In Brazil, the conundrum of slowing economic growth with rising inflation is likely to cause some debate over a rate rise, but this is expected to go ahead.