In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. Gold closed the week at $1,280.08, down $24.75 per ounce (-1.90%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 3.08%. The U.S. Trade-Weighted Dollar Index rose 1.08% for the week.
Gold Market Strengths
Persisting geopolitical risks and low bond yields have continued to push investors toward gold exchange traded funds (ETFs), which have seen the largest inflows in nearly two years.
The Chicago Mercantile Exchange lowered its initial margin requirements this week for gold, silver, platinum and palladium after prices fell after the release of the Fed minutes.
Gold Market Weaknesses
The release of the Fed minutes this week resulted in a gold sell off on Thursday. The hawkish tone taken by the Fed fueled worries that a rate increase may come sooner than expected.
Deflationary pressures continue to plague the global economy. Both food and energy prices have been significantly depressed over the past few weeks. Even in the U.S. where strong signs of economic recovery exist, the producer price index (PPI) increased just 0.1 percent month-over-month in July and just 0.2 percent year-over-year. Persistent deflation seeks to reduce gold’s attractiveness as an inflation hedge.
Gold Market Opportunities
Despite weak Indian gold imports in the first half of the year, demand in the second half is expected to be stronger due to the majority of the Indian holiday season falling during this time period. A significant amount of prizes used during these holiday festivals contain gold such as gold pots, coins and other decorations.
China has permitted three more banks to import gold. Standard Chartered, Shanghai Pudong Development Bank and China Merchants Bank were all given regulatory approval to import gold, according to Reuters. The news strengthens the opportunity for higher Chinese gold imports in the future.
Shanghai is planning to implement a gold free-trade zone. On September 26, the Shanghai Stock Exchange is expected to start bullion trading in the city’s free-trade zone, confirming the idea that Shanghai is determined to become a regional gold-trading hub. Xu Luode, the exchange’s chairman, said that the gold contract will be priced and settled in yuan and trading should begin in the third quarter.
Gold Market Threats
After the release of the Fed minutes, sell stops were triggered against leveraged investors. However, this dumping of gold onto the market occurred in the late hours of the night, revealing that this sell tactic is still very much in use. This purposeful trading pattern to gap prices down in the middle of the night is one we have seen repeatedly since the Fed has started to reel in quantitative easing.
As the dollar continues to strengthen, the cost to insure against emerging market currencies is on the rise. According to data from Bloomberg, the costs of options contracts betting on a decline in the currencies of Brazil, Indonesia, South Africa, Turkey and India, have risen to their highest level in roughly five months. A stronger dollar has already started creating headwinds for gold, which typically moves inversely with the dollar. The subsequent decline in emerging market currencies would only serve to strengthen the dollar further on a relative basis.
World demand for gold shrank 7.2 percent in the first half of the year, compared to the period a year earlier. In India, demand for gold fell 39 percent in the quarter ended June 2014, according to the World Gold Council. If there is no trend reversal in the demand for gold, the second half of 2014 could see significant headwinds.