Gold back on the Fed grindstone

(November 30, 2016 - by Lawrence Williams)

Gold followers will hardly be unaware that every time a Fed Open Market Committee Meeting draws near the gold price moves, often quite sharply, on the will she, won’t she prospect of Janet Yellen announcing that at long last the Fed will start to raise interest rates again, after a full year’s hiatus since the last Fed rate rise.  Well the next FOMC meeting is due to take place on December 13^th and 14^th and perhaps there is actually a realistic likelihood that indeed on this occasion it will be a case of ‘she will’.

So the gold price is moving accordingly, but perhaps not quite in such a volatile manner as on previous occasions when the likelihood of a Fed rate raising decision was rather more uncertain.  During European and North American trading the futures markets have managed to control it in the $1,180s for the most part with the occasional run-up to the low $1,190s, and a move below the $1,180 level today, but any moves to the higher levels seem to be swiftly capped and brought back down again.  There does seem to be something of a plethora of adverse gold price comment being released at present and when this has happened in the apst it has sometimes been associated with a significant price takedown.  It remains to be seen whether this is yet another instance of such.

The anomaly here appears to be the Shanghai Gold Exchange Benchmark Pricing which seems to be coming in at levels above $1,200 two or three times this week so far, although these higher levels don’t seem to appear in the Kitco gold price charts.  We do know that Chinese gold prices are running higher at the moment and carrying the highest price premiums over London and New York prices seen for some time.  Some put this down to reports that the Chinese Government is already restricting, or is planning to restrict, the number of gold import licenses.  This has been running in parallel to rumors that India, the other major global importer of gold, is planning to ban gold imports altogether, although one suspects that if this were to happen the amount of gold smuggled into the country would soar.  The caution here though is that when Chinese and Indian demand was just about at its strongest back in 2012, the gold price tanked due to heavy withdrawals out of the big gold ETFs and we have again been seeing some major outflows from GLD in particular.

The other reason for the Chinese high premiums – reportedly approaching $30 an ounce on some days – is that traditionally this is the time of year for Chinese fabricators and gold retail outlets to stock up ahead of the Lunar New Year festivities which can create temporary gold shortages, particularly in a year when gold imports have been running at a lower level.  In 2017 the Chinese New Year falls on January 28^th, followed by a full week of holidays (The Spring Festival Golden Week) and gold has always played a hugely significant part in gift giving over the period.

Iit should be noted, though, in respect of something of an anti-gold media campaign that reports are surfacing that a number of major bank analysts are now seeing a period of substantial gold price weakness ahead coupled with the Fed rate rise decision. and more.  Whether these analysts should be given any credence or not given most analysts were predicting that a Donald Trump victory in the U.S. Presidential election would see gold surge and the stock market crash, is a moot point.

Perhaps before drawing any conclusions one should wait for the results of this weekend’s Italian constitutional referendum.  A defeat for the Renzi Government position, which the opinion polls are suggesting, given the set anti-euro positions of the opposition could put the EU in turmoil again which could give the gold price a welcome boost.  But then, after the Brexit vote and the U.S. Presidential election result, who believes the opinion polls anymore?

In the context of a Fed rate increase those with only a short memory may also recall that after the last rate increase a year ago, gold fell back just a little, and briefly, in a knee-jerk reaction and then set off on a six-month bull run!

The past year has seen a number of major destabilizing events occurring (the Brexit vote, Trump victory and Indian banknote cancellation fiasco all within the past few months) and with the Italian referendum perhaps adding another.  In the long term, such uncertainties have to be gold positive, but there could well be some negatives in the interim and perhaps the first will be the actuality of a Fed rate increase.  Prepare for a bumpy ride.