Gold News

'Big Risk' to Gold Price in Non-Zero US Fed Rate as Summers Sees Recession Threat, Goldmans & T-Bonds Don't

GOLD PRICES held the $1060 per ounce level in London's wholesale market Tuesday, trading some 1.4% above this month's new 6-year low as Western stock markets rallied hard ahead of tomorrow's long-expected US rate rise from the Federal Reserve.
 
Crude oil stabilized above yesterday's plunge near 11-year lows but base metals fell again as the Baltic Dry Index of shipping costs fell almost 5% to a new 30-year series low according to Bloomberg News, pointing to the collapse in China's steel output.
 
Silver today edged back above $13.80, some 15 cents above Monday's new 6-year low, but still more than 25% below January's 2015 highs over $18 per ounce.
 
"We are seeing quiet conditions in most markets," says a note from US brokerage INTL FCStone, "[and] don't expect much to happen over the course of the next 36 hours or so, as markets wait."
 
"Gold is still faced with selling pressure," says a trading note from Hong Kong dealer Wing Fung Precious Metals, saying that "as risk increases" so do difficulties for the gold market.
 
"The big risk [for precious metals prices] is that the Fed finds non-zero rates aren't so bad after all," Reuters quotes Australian bank Macquarie's analyst in London Matthew Turner.
 
"Then people will begin to price in a more aggressive tightening cycle."
 
"If we're to believe you should raise rates for financial stability reasons," says former US Treasury secretary and one-time Fed chairman candidate Larry Summers in an interview, "you have to believe there's a serious problem of over-confidence, of bubble formation.
 
"You can't say that today of high-yield bonds, emerging markets or commodities."
 
"I hope the Fed will not now invest its credibility," Summers adds in an article for the Washington Post, "in signaling further increases until and unless there is much clearer evidence of accelerating inflation."
 
US Treasury bonds spread: 10-year yields minus 2-year yields
 
The gap between 10-year and 2-year US Treasury yields slipped Tuesday near the lowest levels of the last 8 years, retreating rather than rising steeply as happened in each of the five US recessions since 1980.
 
The slump in corporate debt prices is meantime sending a "false recession signal" according to portfolio strategists at US investment bank Goldman Sachs, dismissing last week's plunge in many high-yield bonds.
 
Some $27 billion of investors' money is still sitting in mutual funds now losing 10% peak-to-trough in 2015, says data compiled by Yahoo Finance.
 
"We are cautiously optimistic on gold prices into 2016," says a note from Swiss bank and London bullion market maker Credit Suisse, "underpinned by our view that ETF selling pressure will continue to lose influence...physical demand will be a source of strength, central banks will continue buying and supply will begin to decline."
 
Repeating its post-2017 long-term forecast of $1200 per ounce, but cutting 2016's average target from $1175 to $1150, Credit Suisse believes that the gold mining industry's combination of "relatively short average reserve life" (below 10 years for the 7 largest miners in North America) plus the current switch to mining "high grade" deposits to cut production costs will "result in a challenged supply outlook."
 
But gold price rises "will be limited," says a trading-desk note from a fellow London bullion market maker, "as mining companies [also] continue to manage active and opportunistic hedge programs aimed at keeping some certainty over sales revenues in front of their capital expenditures and other debt servicing."

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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