Market Sentiment & Lateral Thoughts

from Neil Behrmann and other authors

‘Helicopter Ben’ stirs comatose gold and silver

In September Federal Reserve Board chairman Ben Bernanke’s Jackson Hole speech caused gold and silver to break out of their long-standing respective trading ranges of US$1,550-1,640 and US$27-29 an ounce.

 At the time dealers noticed that there was a slight “backwardation” in the market – that is, spot or cash prices were trading at a slight premium to early 2013 futures quotes. This usually indicates that demand exceeded immediate availability of bullion. In normal commodity markets, there is a “contango” as futures prices should be higher than cash quotes because of interest, insurance and storage expenses.

The big question is what happens now that gold is trading close to an important resistance level of $1800 an ounce?

Gold hovering near crucial resistance level

The jewellery industry is by far the biggest consumer of gold and as the price rose in recent weeks, Jewellery makers and industrial buyers in Asia, Italy and the US were wary of being caught short of supplies. They were competing with central banks, pension and hedge funds, and individual investors and speculators who have been buying because of fears that quantitative easing (QE) of Professor Bernanke, European Central Bank (ECB) chief Mario Draghi and the Bank of England (BOE) governor Merwyn King were already causing inflation to accelerate. 

Now that prices are higher, the market is delicately balanced. Jewellery and industrial demand is waning.  Moreover, Indian and other gold holders who are struggling financially, are selling their gold and silver to scrap dealers to obtain cash. This gold is sent to refiners which are melting and selling the metal to investors. Thus the key to future prices is whether investors, central banks and speculators absorb the extra supplies and keep the upward momentum going. The outlook of the dollar is also important. If growing numbers of currency dealers, who are currently betting on an Obama victory, believe that Romney has a better chance, the dollar could rally unexpectedly. In the past, dollar strength has usually been associated with gold weakness. That is why the pivotal point of $1800 is so important.

Gold, however, could be supported between $1650 and $1700 an ounce in the event of any decline. The increase to already bloated monetary reserves aimed at keeping short- and long- term interest rates at negligible levels to boost economies, is a boon to gold enthusiasts. It is no longer expensive to hold the metal. Moreover monetary ease in the past few years have brought in their wake competitive currency devaluations which encourage investors and central banks to buy more gold.

In particular, the greenback has weakened against the yen, Swiss franc, sterling, the Singapore and Australian dollars, the dysfunctional euro and a variety of other currencies. But since there is limited trust in the euro, sterling and several other currencies, a proportion of the money has shifted to gold and has been placed in other real assets. 

Mr Bernanke noted that some $2.3 trillion has been monetised to buy US Treasury and other bonds, prior to his intended latest buying spree of some $85 billion a month. Since the programme began in late 2008, the gold price has doubled and earlier this year peaked around US$1,900 an ounce, while silver touched US$50 last year.

Several economists and politicians have accused Mr Bernanke of blatant electioneering for incumbent President Barack Obama.

“By allowing its monetary policy to be influenced by elected politicians and market speculators, the Federal Reserve is putting its independence at risk,” stated the eminent economist Allan Meltzer, professor of political economy at Carnegie Mellon University’s Tepper School and author of  A History of the Federal Reserve.

Such fears have caused Republicans to debate whether the global monetary system should return to the gold standard. A move into antiquity is highly unlikely but central bank policies, including zombie bank bailouts, have caused monetary instability – which in turn has raised volatility in global markets and contributed to business uncertainty, a low level of investment and high unemployment.

Bullion dealers contend that gold would have been higher because of these concerns had demand not slackened in India and China due to economic slowdowns in those major gold-consuming countries.

 But geopolitical worries about Iran and other Middle East nations are also keeping the golden pot boiling. Precious metals, of course, are also risky as they have tended to fall during periods of broad market declines.

 © Copyright- Neil Behrmann- Author Trader Jack-The Story of Jack Miner

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