Market Update: Gold range bound near USD $1300 per ounce

Precious metal prices have been relatively uninspiring the past few weeks. Whilst there has been some intra day volatility, the PM fix for gold has been stuck in a less than $50 range, trading between USD $1278oz and USD $1325oz.

Overnight we had a rally back above USD $1300oz, as a re-escalation of tensions in the Ukraine, plus much higher than expected producer prices in the USA led to some buying support.

The bullish tone for the precious metal complex carried across to silver too, whilst the gold miners were up overnight, even as broader equity markets fell.

Whilst we’re still stuck in this range bound trade, there are a number of potential catalysts, which could see gold move higher, including:

• Further deterioration in the Ukraine leading to safe haven bid

• A sharper fall in equity markets leading to portfolio reallocations

• Changes to Indian import restrictions, which would improve sentiment

Having said that, these are only ‘potential’ catalysts, and there is no guarantee that the next major move for gold is higher. Indeed, both JP Morgan and UBS made comments earlier this week with one month gold price forecasts at USD $1272oz or lower, focusing more on a slow economic recovery, minimal inflation, Fed tapering, and no escalation of tensions in the Ukraine.

Time will tell, but there’s no need to rush into the market here. Personally, I’ll be continuing my regular savings into both gold and silver, with the somewhat unexpected strength in the AUD this past few weeks only making it more attractive.

I expect the market will move more decisively one way or the other as we approach the end of Q2 this year, with all the major moving averages for gold (50DMA, 100DMA, 200DMA 300DMA) looking like they’ll converge at, or around, USD $1300oz in the coming weeks, unless the market moves substantially one way or the other in that time.

The table below shows where all these moving averages are currently sitting, as well as how each of those moving averages has changed over the last month.

It’s looking like a bit of a coiled spring, and one way or the other, this period of tranquillity won’t last.

The most interesting news piece of the week regarding the precious metal complex came overnight. It was the announcement that the Silver Fix will be no more and will finish in August this year. This news comes off the back of Deutsche Bank announcing some weeks ago that it would no longer be involved in precious metal fixings. Click here for a Bloomberg report on this subject.

Market participants do need a benchmark price to work with, so undoubtedly something will come up to replace the Silver Fix. Ross Norman, CEO of London physical broker, Sharps Pixley Ltd referred to this, when he stated; “I suspect that something will be developed that will enable an auction price to be achieved during the working day, taking the place of the fix and that will enable people to derive a benchmark figure, which is what the market needs”

Nevertheless, the end of the Silver Fix, which first occurred back in 1897, is another sign of how the precious metal market is changing.

Onto other news, and this week I wanted to touch on three subjects that I think should be of interest to readers:

• ‘Blue Gold’ and the true cost of water the world over

• The Chinese economy and its stock market

• The Australian Federal Budget.

Blue Gold

The first of two great charts from the Daily Reckoning that I wanted to share this week (neither of which are gold related), has to do with Water and the Rickards Real Cost Water Index, developed by Waterfund, whose CEO is Scott Rickards, son of the legendary gold guru and Currency Wars author, Jim Rickards.

The idea behind Waterfund, and publishing a real cost of water index (they partnered with IBM to do it) is to allow banks and the like to use this information to form the basis of new financial products or instruments, which will force investors to manage their risk, and encourage them to invest in the water sector.

As Jim Rickards stated (paraphrased, emphasis mine); “There is no such thing as the global price of water and there should be. Everyone says there's a water shortage, but it's not true. Water's in the wrong places. To get it to the right places, you need infrastructure, and to get infrastructure, you need finance. To get finance, you need risk management -- the index allows that to happen.

There is a lot of sense in that statement, and I think anyone would agree that any steps that can be taken to make the water market more efficient and transparent, and help alleviate droughts and the like, can only be a good thing.

For those interested in reading more of this fascinating subject, click here to download a free whitepaper called the True Cost of Water.

A quick word on China

Regular readers of our market updates will know that we talk about China quite a bit in these reports, unsurprising considering the unstoppable gold demand emanating from the Middle Kingdom.

This week though, we wanted to share with you an interesting chart we saw (courtesy of the Daily Reckoning) that has nought to do with Chinese gold demand, but rather, the Chinese Stock Market.

As you can see, the Chinese stock market hasn’t had a good run over the last few years. Like most equity markets, it suffered a precipitous fall during the GFC, only to begin bouncing back in 2009.

Unlike most developed world equity markets though, which have powered on to all times highs as a result of unprecedented QE and negative real rates, the Chinese market rolled over again, and is almost back to its GFC low.

This is quite extraordinary when one considers the scale of GDP growth occurring in the country, especially compared to the developed world, which, despite the stock market boom, is barely growing at all.

Make no mistake about it, China faces many challenge in the coming years. Cracks in the shadow banking system, unsustainable credit growth, a huge oversupply and overvaluation of homes, pollution in big cities, and an ageing population all come to mind, and growth rates will almost certainly slow significantly.

But if the history of the GFC, and the response of investment markets teach us anything, it’s that the market can move in a completely different direction to the broader economy.

I have no doubt China will suffer significant growing pains in the next few years, but the Chinese stock market has already been smashed, and hasn’t found any sustainable support in this post GFC era.

It’s something to keep an eye on.

The Budget (Briefly)

Australians were ‘treated’ to the first Budget of the new Coalition Government this week. Whilst negative gearing and superannuation were left alone, the Government did introduce a ‘deficit levy’ on those earning over $180,000, made changes to Family Tax Benefits, and introduced Medicare co-payments and programs to assist over 50’s back into the workforce.

They also changed the indexing of the pension to CPI, not wages, which might not end up being the brightest idea (in terms of minimising government outlays), with official inflation near all time lows, and likely to head higher, whereas wage growth is now running below CPI growth.

For those who’d like a detailed look at the numbers behind the budget, and the assumptions around growth and the like, please click here to view some numbers and commentary from Westpac. I’m not convinced that GDP growth will be as strong as forecast, or that unemployment won’t go higher, but it’s as good a summary as any from the majors.

Whilst we can debate the pro’s and con’s of each measure, I was more interested in the reaction of the broader public and business, and on this note, they were overwhelmingly negative, with 88% of consumers and 74% of businesses unhappy with it, according to Roy Morgan Research. Click here to view this article.

In the short term, this could cause significant problems for consumer and business confidence, and to me, buries the idea of any rate hikes by the RBA good and proper.

More importantly though, it goes to show just how hard it is for western democratic governments to live within their means, because we (society as a whole) have grown accustomed to ‘freebies’ from government, and we don’t like it when they’re taken away.

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