Market Update: Gold back above USD $1300oz on ‘Incursion Risk’

Gold prices got their mojo back overnight, moving sharply higher as the situation between the Ukraine and Russia deteriorated, with Russian defence minister, Sergei Shoigu, stating that Russian troops “must be in constant combat readiness”. In response, the US joined NATO and Poland, warning of an ‘incursion risk’ in the area.

The disturbing developments unsurprisingly lent a ‘safe haven’ bid to the yellow metal, which shot up some USD $20oz to USD $1310oz at one point, before edging back a couple of dollars as I wrote this article.

The sharp rally was captured neatly in the following chart, which shows the gold continuous contract, and the price action when the “NATO incursion headlines” hit the wires.

Gold miners were also stronger across the board, although the bid did not translate across into silver, which fell below the key USD $20oz level. A stronger move higher in silver would have been more bullish for the overall precious metal complex, and does to a certain degree suggest that the overnight rally may prove short lived.

Equity markets had a mixed night, with shocking data out of Europe (more on this below), leading to a sea of red on the major bourses on the continent, whilst US stocks were largely unchanged.

Back to gold, and as you can see from the table below, with the spot price now back above the USD $1300oz mark, there is some breathing space between it and the key moving averages, which continue to tighten to within a less than $15 range, between USD $1285 and USD $1297oz.

In other gold related news, a report over at Bullion Star suggests that year to date gold demand in China has now topped 1,000 tonnes, whilst investor sentiment toward the metals, as measured by Bullion Vaults surveys, strengthened somewhat in July, from what had been a yearly low the previous month.

Despite this slight up-tick, sentiment is still nowhere near the levels seen back in 2011, as you can see on the chart below, plotting the gold price and the ‘investor index’

Italy Back in Recession

Madre di Dio, Italy is back in recession. Whilst economists, analysts and central bankers were hoping the worst was past for the Italian economy, overnight figures showed that the economy shrunk by 0.2% in Q2 this year, off the back of a decline of 0.1% in the first quarter.

This triple dip recession for Italy puts real GDP back to 2000 levels, essentially 15 years of going nowhere.

It wasn’t just Italy who were struggling overnight, with economic data across the board in Europ,  particularly weak. Factory orders in Germany plunged by 3.2% for the month of June (against expectations of a 1% rise), whilst across the channel, industrial production in the UK rose by only 0.3%, half of what analysts were expecting.

The Aussie economy

Big news today is coming with the next set of unemployment numbers due out at 11.30am. We’ve seen manufacturing and services surveys out, which have been tepid at best, as well as retail sales which, once inflation is stripped out, have also hardly set the world on fire.

We also saw the performance of construction data, from Australian Industry Group and the Housing Industry Association released today, which showed a slight firming, with the index rising from 51.8 to 52.6 points. Engineering (think mining) fell, whilst home building slowed its pace of expansion, with the best news coming out of commercial construction, which appears to be booming according to the survey

This result is really interesting in light of the just published Property councils bi-annual office report, which showed that the national office vacancy rate continues to rise, up to 10.7% in July 2014.

The following table breaks it down state by state.

As you can see, with the exception of Sydney (and Melbourne to a smaller degree), the news is almost all bad, particularly in the resource states of WA and Queenslands, as well as Adelaide, where things are deteriorating considerably.

Its very difficult to understand the rationale behind all the commercial construction occurring in the country right now, when the existing space now has a vacancy rate that continues to climb.

Consider that, as per the report; “vacancy rates may remain high for Brisbane and Perth into the future with supply pipelines equivalent to more than 10 per cent of current stock in Perth and almost 9 per cent of current stock in Brisbane over the next four years.”

The full report is here

Over the next 48 hours we’ll receive news on home lending (the next – perhaps only hope for the Aussie economy) and the RBA monetary policy statement, with markets looking for any insight into the banks, on interest rates and the Aussie dollar.

Income inequality in the US – growing with every economic expansion

One of the major talking points of the last 5 years “post GFC” environment has been the growing gap between the have’s and the have nots. Much attention has been paid to the fact that the majority of the “wealth” generated in these past 5 years has gone only to a wealthy few, who own a disproportionate share of financial assets.

Job gains, and particularly income growth have been much harder to come by, which is why the average man on the street still feels like they’re going backwards, 5 years on into the supposed recovery.

The disparity of the past 5 years, and how it all fits into a longer term trend, is captured brilliantly in the chart below, which shows the distribution of average income growth during economic expansions going back to 1949.

How on earth the Fed, Wall Street or Washington can say they’re on the right track with the policies of the past few years is beyond me in the face of such data, for as Elliott’s Paul Singer so aptly stated (quote via Zerohedge) "Inequality in the U.S. today is near its historical highs, largely because the Federal Reserve’s policies have succeeded in achieving their aim: namely, higher asset prices (especially the prices of stocks, bonds and high-end real estate), which are generally owned by taxpayers in the upper-income brackets. The Fed is doing all the work, because the President’s policies are growth-suppressive. In the absence of the Fed’s moneyprinting and ZIRP, the economy would either be softer or actually in a new recession.

The greatest irony is that the President is railing against inequality as one of the most important problems of the day, despite the fact that his policies are squeezing the middle class and causing the Fed – with the President’s encouragement – to engage in the radical monetary policy, which is exacerbating inequality. This simple truth cannot be repeated often enough."

You can read that article here

ABC - Anything But Capex!

Last read for the week comes courtesy of Reuters, and has to do with corporate America’s reticence to engage in capital expenditure. Titled ABC – “Anything but Capex”, the article highlights that the lack of Capex by corporates suggests that underlying demand for goods and services is weak, which is why companies are preferring to engage in Mergers and Acquisitions, as well as stock buy backs.

There are some other alarming statistics in the article, including the fact that:

• The average age of industrial equiptment in the US is nearly 10.5 years, the highest since 1938

• Productivity growth is near its lowest in 30 years

• Capital expenditure in this “post GFC" world is running at 15% below the level seen between 1990 and 2007. That’s a $400bn hit to the US economy

The article, which shows just how far away the US is from a sustainable economic recovery, can be read here

Until next week

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