Market Update: Gold breaks to downside as China looks to establish global gold trading platform

The gold bears finally won the battle. After weeks of trading in an increasingly narrow range, gold finally broke down earlier this week, dropping through support in the USD $1280 range and falling all the way to USD $1258oz where the metal currently trades.

Silver has been caught up in the fall too, dropping below USD $19oz at one point, though it currently trades just above this level.

In terms of where we are today compared to the start of May and where the relevant moving averages – the following table will cover it.

As you can see, gold is now trading below all the key moving averages, a more troubling short term technical picture than a month ago, when it was sitting above or at least in line with the 100DMA and 200DMA.

Looking at the moving averages, it's also relatively obvious that the 50DMA and 200DMA will soon cross over again, with the 50DMA likely to fall below the 200DMA.

Technical analysts like to call it a ‘death cross’ – though this isn’t necessarily as bearish as it sounds, just like a ‘golden cross’ which is the opposite occurrence, isn’t necessarily bullish for prices.

For evidence of this, one needs look no further back than March of this year, when gold did perform a ‘golden cross’. At the time, the spot gold price was closer to USD $1327oz, some $70oz higher than it is today.

Sentiment, which was weak already, will have been hit further in light of the recent weakness, especially with the S&P500 hitting record highs and now over 1900 points.

Having said that, there has been some demand come to the market, with a short article in Kitco showing that GLD inventories rose by 8 tonnes. Click here to access the article.

Short term the market does look fragile and the path of least resistance is still down. Whilst that could be unpleasant for anyone whose already got a large allocation to metal, I’m still of a view we are in within a few weeks of a long term bottom, and I’ll be averaging in over that time.

On an entirely qualitative basis, scanning financial news headlines and article links on Twitter and the like, there are a lot of headlines criticising gold and ‘gold bugs’. Having also seen a ‘gold to hit USD $1000oz’ headline, which from a contrarian perspective is typically a good sign.

Global Trade Volumes Decreasing

Economic data this week has been relatively mixed. In the US we’ve seen a number of releases, which have at the headline level at least, beaten expectations. These include;

• Durable goods orders which were up 0.8% vs. expectations of a fall (it’s worth noting that Durable Goods ex Transportation was up a much less impressive 0.1%)

• Housing prices rising 0.7% for the month (and 12.4% for the year) vs. expectations of 0.5%

• Markit Services PMI data, which came in at 58.4, well above expectations for a reading of 55.6

This is not to say that all data has been strong. Mortgage applications again fell last week, which is somewhat surprising considering just how far bond yields (and therefore mortgage rates) have dropped in 2014, with the US 10 year and US 30 year Treasury bonds now at 2.44% and 3.28% respectively.

Across the Atlantic and in Germany we’ve seen a surprisingly weak report on the German job market, with the number of people without a job rising by nearly 24,000, whilst German business confidence also fell.

Even more concerning was the broader Eurozone economics news, which showed that:

• M3 Money Supply growth rose by only 0.8% in the year to April, falling from 1% and against expectations for a rise. This is the slowest annual expansion since late 2010

• Private sector lending also contracted, falling 1.8% in April, which follows a fall of 2.2% in March

The news out of Europe will put even more pressure on the European Central Bank to act at its next meeting, with cuts to interest rates expected at a minimum, whilst others are openly calling for an aggressive quantitative easing programme.

Broadening the scope from the US and Europe, and looking at the global economy as a whole, one of the best and simplest charts for the week that I’ve seen, which really helps explain the ‘non recovery’ in the global economy, is below. It shows the year on year change in global trade in volume terms.

As you can see, if you strip out Russia and OPEC, its even worse, with the year on year change in global trade volumes negative. If the economy really were picking up, then you’d expect to see trade volumes picking up along with it, as it would imply nations are importing and exporting more goods.

Economic reality, as captured by the below chart, highlights that this is not the case, and that real activity (the kind that generates jobs and sustainable incomes for people) is declining.

For anyone who wants to see how this might correlate to future GDP growth (or lack thereof), the image of global GDP growth at this link will do the job nicely.

There is also a highly relevant comment regarding China, which is slowing down now, for it has accounted for roughly half of total GDP growth the world over since 2009. Click here to access the article.

Bottom line – the global economy is weakening, despite what this incredible stock market boom might have people thinking.

China to increase its role in gold pricing!

Apart from the big price move, and the big news of the week that came from China, relating to gold Reuters has reported that the Shanghai Gold Exchange is in talks with foreign banks and other participants in the physical gold industry to establish a new international gold exchange.

Reuters stated; “The Shanghai Gold Exchange (SGE) got the go ahead from the central bank last week to launch a global trading platform in the city's pilot free trade zone, a move that could challenge the dominance of New York and London in gold trade and pricing.”

With the silver ‘fix’ coming to an end, and the banks participating in the London gold ‘fix’ under intense scrutiny (Barclays were recently fined 26 million pounds for attempted manipulation of the ‘fix’), the developments in China are not surprising.

Indeed, considering China is now clearly the heart of the physical market, it only makes sense that they want more influence over the pricing of gold.

The SGE is in talks to develop the platform with some of the largest banks in the world, including some involved in the London ‘fix’. Banks like HSBC, ANZ, Standard Bank, and the Bank of Novia Scotia have been approached, with the platform likely to start by offering spot physical contracts (100gms, 1kg and 12.5kg) before developing derivative products as well.

The Reuters article is worth reading in full, and can be found below, but mark this as another step in the transfer of wealth and influence from West to East.

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