Putin pullback pushes gold below USD $1300oz

Gold prices eased substantially overnight, as a reported pullback of Russian forces in the Ukraine dented the yellow metals safe haven demand.

Gold, which had staged an impressive rally late last week despite the much stronger than expected US non-farm payroll report, gave up circa $30oz overnight, falling as low as USD $1286oz after trading as high as USD $1316oz earlier in the day.

The catalyst for the sell off was no doubt Vladimir Putins de-escalation of the current crisis in the Ukraine, with Putin stating, amongst other things, that:

• Russia has withdrawn its military forces from its border with Ukraine

• Suggested postponement of a May 11th referendum to ease Ukraine talks

• He backed Angela Merkel’s call for a roundtable on Ukraine

• He is ready to discuss ways to resolve the Ukraine crisis

Reuters had a piece on the subject published earlier today, which you can access here if you would like to read more.

Whether this is just more posturing remains to be seen, but it does help explain why it’s important to stagger your purchases of gold if you’re adding to your portfolio. Prices are hostage to these kinds of events, which impact the daily volatility of the metal, with something like 1 million ounces trading in about 20 minutes around the time of Putins speech.

This originally pushed gold from USD $1310oz to USD $1302oz, and from there it continued to weaken, even though Janet Yellen’s testimony before the Joint Economic Committee in the US was widely perceived as being exceptionally dovish, which should portend higher demand for gold.

In terms of where technically gold is now, the correction overnight has driven prices below the 200DMA, which is currently sitting just below USD $1300oz. It is also now further away from the 50DMA, which it looked like it may get above earlier in the week, and which currently sits at USD $1317oz.

Bottom line, anyone looking to trade the metals should approach with caution, whilst buy and hold investors would be best served staggering purchases, unless they are comfortable taking a medium to long-term view, and are unconcerned about the type of volatility the market is experiencing right now.

Gold demand in China

There has been a range of interesting interpretations on the latest news out of China regarding physical gold demand, with gold imports into China from Hong Kong falling in March, to ‘only’ 85.1 tonnes, down from 112.3 tonnes in February.

This has coincided with other analysts looking at the fact that gold bar consumption fell by 44% in Q1 this year, leading some analysts to suggest this is proof of gold demand easing in China. Not so fast we say, for whilst gold bar demand did fall, total gold demand rose and was 322.99 tonnes in the Jan to March period (just under a staggering 1,300 tonnes a year annualised).

Furthermore, whilst the Hong Kong imports did ease in March, that also happens to more or less neatly coincide with the opening of official gold imports into China through Beijing.

Click here to read an article from Reuters which suggests, this move would “help keep purchases by the world's top bullion buyer discreet at a time when it might be boosting official reserves”.

Referencing Hong Kong specifically, the article also states that the move “could also threaten Hong Kong's pole position in China's gold trade, as the mainland can get more of the metal it wants directly rather than through a route that discloses how much it is buying”.

It also needs to be stated that looking at 1 months import data is a pretty bad way to draw a long term trend (one swallow doesn’t make a summer, as the saying goes), especially so when, as per this article from MineWeb, actual Q1 imports from Hong Kong into China jumped by 27%, compared to last years already record high numbers. Click here to access related article

The bottom line is that whilst Hong Kong, for now, will remain the major conduit through which physical gold will flow into China, they are creating more avenues, and with the World Gold Council predicting that Chinese gold demand will grow by a further 20-25% in the coming years, the future of physical gold demand in the East looks incredibly robust.

When you couple this growing demand from the East with the potential portfolio reallocations in the West, where gold still represents circa 1% of investment assets at most, you can see why I maintain my long term bullish stance.

On that note, confirmation on the importance of owning physical metal came overnight in the testimony by Fed Chair Yellen, who in her testimony and Question and Answer sessions with the Joint Economic Committee stated, amongst other things that;

• A high degree of monetary accommodation remains warranted

• Labour conditions remained ‘far from satisfactory’

• There is ‘no timetable for first interest rate increase’

These are not the words of someone who is 100% convinced about the future direction of the US economy, nor especially that monetary policy can ever again be ‘normalised’.

Holding bullion as an insurance policy against the unintended consequences of the policies that Yellen Fed will continue pursuing indefinitely, remains an intelligent choice for prudent investors.

Tech Meltdown and US stock market flows

For those following broader markets, the big news of the week was the plunge in Twitter shares, which fell 18% in a day, as insiders were finally allowed to sell some of their holdings. Despite this being relatively easy to foresee, the huge sell off in Twitter cascaded across the tech sector with other social media stocks like Yelp, Pandora, LinkedIn and Facebook all suffering large falls too.

It was a subject I discussed briefly in a short blog here yesterday.

Looking at broader markets, Bank of America Merrill Lynch clients were net sellers of $1.5 billion of US stocks, with the majority of these sales coming from institutional clients, who have been selling for weeks now.

On the other hand, retail buyers were stepping into the market, with the following chart (courtesy of the Daily Reckoning where some of this data came from too) showing the divergence between the two different types of investors.

Generally speaking, this is not a good sign!

Domestic May data uninspiring

So far the month of May hasn’t been encouraging for the Australian economy, with most data points suggesting things are set to weaken in the months and years ahead, especially with the unwinding of the mining Capex boom still yet to really work its way through the economy.

In the past eight days, we’ve seen:

• HIA new home sales come in at just 0.2% for the month, a fall from 4.6%

• AiG Performance of Manufacturing index fall from 47.9 to 44.8 points

• AiG Performance of Services index fall from 48.9 to 48.6 points

• AiG Performance of Construction index fall from 46.2 to 45.9 points

• Retail sales growth fall to just 0.1% last month, down from 0.3%

• Building permits fall 3.5%, vs. expectations of a 1% rise

• TD securities inflation rise by 0.4% in a month and 2.8% for the year

• Our Trade balance fall as exports dropped 2%

• Consumer confidence plunge by 4.2% ahead of the Federal Budget

Remembering too that when it comes to the AiG surveys, any reading below 50 indicates contractionary conditions across the sector, and you can see that those latest results represent things getting worse from an already depressed level.

The only bright spot has been the stabilisation in the ANZ Job Ads survey, which rose by 2.2% for the month, although even here, the forward looking data isn’t quite so encouraging. The Department of Employment’s Leading Indicator of Employment has fallen for the seventh month in a row, portending slower job growth and potentially higher unemployment coming. Click here to access the report.

Either way, the string of mostly disappointing data in Australia this month should serve as a potent reminder to readers to prepare for a potentially much less vibrant economy in the years ahead, with implications for employment, lifestyle and especially investments.

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.