Gold prices eased overnight, falling as low as USD $1175oz, as the latest poll out of Switzerland suggested just weaker support for their upcoming referendum regarding increased gold holdings for the Swiss National Bank.

The weakness in the price overnight disappointed the bulls, who were hoping for gold to build on its latest rally above USD $1200oz, especially in light of supportive news regarding central bank buying out of Russia, and a more positive technical set up.

Back to Switzerland, and in just over a week, the Swiss are set to vote on the “Save our Gold” initiative, which, if passed, would require the Swiss National Bank (the equivalent of our RBA) too

• Take steps to increase their gold reserves to 20% of total reserves

• Repatriate all gold held overseas back inside Switzerland’s borders

• Cease all sales of gold bullion

Whilst there is still a chance the referendum could pass, the latest official poll would suggest otherwise, with support falling to 38%. Support for the initiative had been as high as 44% in October, whilst those opposed to the initiative now number some 47% of those polled.

There has been a lot of comment on the internet of late regarding this referendum, especially amongst many of the websites and bloggers who are very pro-gold and bullish on the long-term outlook.

Whilst I share the long-term positive view for both physical gold and silver, and am very happy having physical precious metals as the core holding in my own investment portfolio, I’ve got to be honest and state that last week, when I was in Geneva, hardly anyone I spoke to was even aware this referendum was occurring.

Whilst asking a few waiters, taxi drivers, bartenders, hotel clerks and old friend who live in the city hardly counts as an ‘official poll’, I was surprised at the complete lack of knowledge about the referendums existence, let alone its importance, especially in light of some of the talk on the internet.

With the latest poll now complete, it’s likely that the referendum will not pass, though of course we’d love to see the Swiss National Bank (not to mention the RBA) increase their gold reserves, as it would be a prudent course of action on behalf of the citizens they represent.

How about Russia

Whilst markets have been overwhelmingly focused on the Swiss, the Russian central bank has been busy acquiring gold at a rapid pace. The latest World Gold Council Report showed that the Russian central bank acquired some 55 tonnes in Q3 of this year, whilst Elvira Nabiullina, head of the Russian Central Bank, has stated to the lower house of Parliament that total gold purchases are around 150 tonnes this year!

Russian central bank gold holdings now account for some 10% of their reserves, still a long way below that of ‘developed market’ counterparts like the USA, France, Germany and Italy, who all hold 60% or more of their foreign exchange reserves in physical bullion.

In other news, again as per the World Gold Council, the latest (third) Central Bank Gold Agreement expired at the end of September. Whilst this agreement allowed for the sale of up to 2,000 tonnes over the five year period it covered, only 207 tonnes were actually sold.

Of this amount, 181 tonnes were sold by the IMF, demonstrating clearly that at a sovereign level, there is minimal interest in selling gold, and a much stronger preference for holding onto existing reserves, if not aggressively building them.

With that in mind, whilst the market weakened overnight in response to the latest polls out of Switzerland, we believe central banks as a whole will be strong buyers of physical bullion for many years to come, which will be conducive to higher prices ahead.

On top of strong consumer demand out of India and China, and potentially higher demand from Western investors in the coming years, it makes for a compelling argument for precious metal ownership, and the overnight pull-back should be seen in that context.

Latest news from America

Whilst markets were predominantly focused on the Swiss referendum news, data out of the United States this week has been lukewarm at best, with industrial production figures falling 0.1% for the month, vs. expectations of a 0.2% rise, whilst capacity utilization figures also slipped. Housing starts were also a bit weaker than expected, though the latest set of mortgage application figures were decent.

Add it all up and what we can see is a US economy that is sputtering along at a decent tick, but it isn’t strong in anyway, shape or form, especially in light of federal deficits in the $500bn per year range, as well as hundreds of billions in QE this year and interest rates that are still effectively at zero.

Markets are fickle beasts though, and right now, the US economy and the US dollar are being treated as the world’s cleanest dirty shirt (to quote the legendary Johnny Cash from ‘Sunday Morning Coming Down’).

This attitude towards the USD is the major reason behind the overwhelmingly negative gold sentiment that permeates markets right now, but there’s only so far it can run, before investors realise that the US economy too faces as many if not more problems than those plaguing Japan and Europe.

Iron oreful!

We couldn’t finish this weeks market report without a comment about the Australian economy, and what is happening with our key commodity export, iron ore. As it stands, prices have fallen a staggering 50% YTD, with news headlines now highlighting the hits to the personal fortunes some of our mining magnates are suffering, with the shares of many iron ore miners in free-fall.

Just today, former market darling Fortescue Metals, is down some 4% to $2.60 - a huge fall when its high over the last 12 months was above $6 per share.

Production volumes have risen substantially this year, and will continue to do so as the major mining companies (think BHP and RIO domestically) further expand operations and bring capacity online. Additional supply, coupled with slowing demand out of China (where house prices are coming off the boil), is the perfect recipe for lower prices, with some analysts now suggesting we’ll see the iron ore price head to $60 per tonne.

Even at current levels, this plunge in prices will hurt company profits, employment, and critically, tax revenues for both the Federal and WA governments. It is certaintly nothing to cheer about, and whilst there have been warning signs about the capacity for Chinese home construction to maintain its previously unprecedented pace for some time, the downside impact, which we're seeing clearly in the share prices of the pure iron ore miners, is something that will impact us all.

As a result, you can expect to see significant deterioration in the next set of government forecasts, with all hopes of any return to surplus completely blown out of the water. All this will no doubt help crimp real wages, and therefore consumer confidence, and with that in mind, I think we’ll see the RBA cut interest rates further by Q1 next year, with the cash rate hitting 2% at some point in 2015.

All the more reason for prudent Australians to want to own physical gold and silver in this environment, and use the latest weakness as a buying opportunity

Until next week

Disclaimer

This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. Any prices, quotes or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness. This report was produced in conjunction with ABC Bullion NSW.