Market Update: Gold ‘stuck’ as Central Banks ink new gold agreement

Another relatively uneventful week for precious metal prices so far, with both gold and silver still trading in relatively narrow ranges. Using the London PM Fix as our guide, USD gold has averaged USD $1293.60oz for the month of May, with the high/low range for the period coming in at USD $1306.25oz and USD $1278.50oz, respectively.

Silver, typically the more volatile cousin, has closed in the USD $19 range each and every day since the middle of April, with moving averages for both the metals continuing to converge.

Even the release of the minutes from the last Federal Reserve Open Market Committee meeting didn’t ruffle any feathers in the precious metal market, or other markets for that matter, with little in them to surprise the markets.

Whilst the Fed did admit to discussing issues involved with the 'eventual normalization of the stance and conduct of monetary policy' they also noted that 'The Committee’s discussion of this topic was undertaken as part of prudent planning and did not imply that normalization would necessarily begin sometime soon” and that “No decisions regarding policy normalization were taken; participants requested additional analysis from the staff and agreed that it would be helpful to continue to review these issues at upcoming meetings'.

The Fed was also adamant that there was no inflation risk from their various attempts to stimulate the economy. You can read the Fed minutes here.

Back to gold, and the tight range that the market finds itself in right now was pretty well captured by Chris Weston, market strategist for IG Capital Markets. In a note to clients yesterday, he stated; “Technically neutral positions are favoured in gold, with a rather pronounced triangle pattern in play. A break of $1285 to $1303 could set the metal off on a better trend and a downside break would clearly put the April low of $1268 in play.”

If you’re interested in shorter term trading and want insights on not just gold but other markets, Chris is worth following via Twitter @ChrisWeston_IG

Bottom line for me remains the same – this period of relative tranquillity will likely end soon, and right now, it’s an even money bet as to which way it breaks. The path of least resistance is still to the downside (and most expect that), but gold has also proved pretty resilient this past few weeks.

In terms of a catalyst for an upside move, it may have been ‘priced in’, but the election of the ‘pro gold’ Narendra Modi in India could be what markets are waiting for, especially if it does lead to a reduction or removal of capital controls relating to gold in India.

For investors, if you’re looking to build wealth for the long term, now is a good time to be averaging into the market. Staggered purchases will also help you deal with the volatility that will inevitably return, and allow you to pick up more metal if it breaks out of its current range to the downside first.

A new Central Bank gold agreement

Earlier this week, a handful of countries sat down to agree a new, fourth Central Bank Gold Agreement, which will apply as of September 2014.

Key highlights from the agreement, which included the ECB, Swiss National Bank and the Riksbank of Sweden and which will last for 5 years, included statements to the effect that;

• Gold remains an important element of global monetary reserves

• Participants to the gold agreement will continue to coordinate their gold transactions so as to avoid market disturbances

• Participants currently have no plans to sell any substantial quantities of gold

Considering the ongoing problems and uncertainty in the Eurozone, its no surprise there doesn’t appear to be any willingness by central banks in the region to part with any of their over 10,000 tonnes of physical gold.

These gold holdings are a strategic asset, and remain a major component of many countries foreign exchange reserves.

Indeed, whilst the new agreement didn’t specify an upper limit in terms of how much Gold could be sold by the Central Banks (nor how much could be bought), it’s worth stating that countries didn’t sell anywhere near as much gold as the previous Central Bank Gold Agreement would have allowed.

Indeed the last Central Bank Gold Agreement allowed for the sale of up to 2,000 tonnes over a five year period, but in that time, there were barely any central bank sales, despite rising prices and skyrocketing sovereign debt levels, which gold sales theoretically, could have helped service.

The World Gold Council have an excellent chart which shows European gold sales within the previous three central bank gold agreements, shown below. As you can see below, since 2008 Central Bank gold sales pretty much stopped, irrespective of the allowed quotas. No coincidence that happens to tie in with the GFC, I think you’d agree!

As we have often said, an unwillingness to sell on behalf of Western Central Banks, coupled with higher demand from Eastern Central banks, will provide a major tailwind for gold prices in the coming years, despite the uncertain short-term outlook.

As Natalie Dempster, the World Gold Councils managing director stated; “This is extremely positive news for the global gold market, especially against a backdrop of ongoing gold purchases by emerging market countries. It underlines the commitment to gold that European central banks continue to have with regard to their monetary reserves. Of equal importance is the message it sends to gold-producing countries, who can be reassured that their economic development will not be undermined by uncoordinated sales of gold.”

The World Gold Councils full statement on the new CBGA is available to view here.

The last point is particularly relevant to Australia considering we are one of the world’s largest gold miners, and with the fall in iron ore prices (now around USD $100 per tonne), we could use a boost in one of our other key commodity exports.

Further on the point of Central Banks and gold sales, it was also interesting to note that Russia, which has been selling US Treasury bonds, continues to build up its gold reserves, buying 900,000 ounces, or roughly $1.17 Billion worth of gold in April.

For those of you who’d like a look through the archives so to speak, you can click here to see an older article on Gordon Browns infamous decision to sell down UK gold reserves over a decade ago. Infamously referred to as the “Brown Bottom”, it didn’t stop him becoming Prime Minister.

More from the World Gold Council

Earlier in the week, the World Gold Council also released its latest research update, with a report looking at Q1 2014 gold demand the world over. Highlights from the report included the fact that;

• Jewellery demand rose by 3% to reach a record 571 tonnes in Q1, which would come to near 2,300 tonnes per annum. In China, over 80% of citizens see 24k gold jewellery as a leading form of investment

• Investment (Bar and coin plus ETFs) demand falling to 282 tonnes, down 2% overall, with a large fall in bar and coin demand largely offset by the fact ETF outflows slowed to a trickle

• Central banks continued their accumulation, picking up 122 tonnes in Q1, the 13th straight quarter they’ve added to their gold holdings, and on track to pick up circa 500 tonnes for the year.

Whilst the fall in bar and coin demand might alarm some, it must be said that’s a fall from what was a previously record number, and therefore shouldn’t be seen as a major surprise.

Charts which highlight just show incredible 2013 physical bar and coin demand can be seen in the World Gold Council report which you can access here.

Until next week

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