The selloff in gold intensified again this morning as the yellow metal dove below $1,100 before regaining its footing and bouncing back a bit. Over the last week, a number of events and trends have come together to create what looks like a perfect storm for gold: 1) Reduced demand for defensive havens: Gold has historically been seen as a store of value and a haven for capital in times of tension, at the moment, however, the pendulum has swing back the other way. With Greece passing austerity measures last week, receiving bridge financing to meet its immediate obligations and reopening its banks (although capital controls remain on and the Athens stock exchange remains closed) the risk of an imminent Grexit has passed for now. Negotiations on a third bailout package are about to get underway and with Germany hinting at the potential for debt relief over the weekend in exchange for more reforms, the crisis phase appears to be passing although it could return or something else could pop up down the road (there is the potential Greece could have another election this fall and Spain plus Portugal are already on the schedule for later this year). Political tensions around the world also appear to be easing with the completion of the Iran nuclear deal and the US burying the hatchet reopening diplomatic relations with Cuba today. Chinese markets continue to stabilize and fears about its economy have eased following last week’s better than expected GDP, industrial production and retail sales figures 2) Reduced need for inflation hedges Gold as world’s premiere hard asset currency has historically been seen as a hedge against inflation. With Iran preparing to return to the oil market amid an ongoing supply war among other producers, the price of oil has tumbled back toward $50.00 for WTI and $56.00 for Brent, meaning that headline inflation looks likely to remain subdued for some time. 3) US interest rate liftoff and USD rally Gold is priced in USD and often trades in the opposite direction from the world’s premiere paper currency. The risk that financial crises in Europe and China could spiral out of control and upset the world economy has eased dramatically in the last week, keeping the Fed on course toward interest rate liftoff. Last week, FOMC Chair Yellen indicated in testimony she still expects rate liftoff this year, while this morning St. Louis Fed President Bullard indicated he sees the odds for a September liftoff above 50%, pushing USD higher against other currencies. 4) China and gold purchases One factor that gold bugs had been using this century to underpin their bullish outlook for gold had been that the PBOC has been buying gold and could potentially eventually make CNY a gold backed currency. Last week, China announced that it has increased its gold reserves by about 60% since 2009 to 1,658 tonnes. That sounds like it would have been great for gold except that gold only represents about 1.5% of China’s forex reserves and this percentage has not grown in the last six years crushing hopes China would save the gold market. Stock markets are trading higher to start the week, although it appears the relief rally sparked by last week’s Greece and Iran deals appears to be fading. Focus now shifts to earnings season with a number of major companies set to report this week, particularly Apple tomorrow night. Corporate News Morgan Stanley $0.79 vs street $0.73 Halliburton $0.44 vs street $0.29 Hasbro $0.33 vs street $0.29 Economic News Significant announcements released overnight include: UK Rightmove house prices 5.1% vs previous 4.5% NZ service PMI 58.2 vs previous 58.0 Upcoming significant announcements include: There are no major announcements scheduled for North America today. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
Gold plunges as a perfect storm unfolds
01:00, 20 July 2015