Gold Up-Date

August 6, 2013

Even though Gold falls below $1300/oz. on the Back of a Slew of Economic Data, I Remain Extremely Bullish.   After holding above the important psychological support level of $1300 for most of last week, on Monday August 05, the price of gold fell below this after a series of economic data from around the globe recorded a slight positive trend causing the US dollar to gain slightly against its peers.

In the United States, economic activity in the non-manufacturing sector grew in July for the 43rd consecutive month. According to the Institute for Supply Management (ISM), U.S. service-sector companies expanded at a much faster pace in July, The ISM said its survey of purchasing managers - the executives who buy supplies for their companies - climbed to 56.0% last month from 52.2% in June. That's the highest level since February.

The UK PMI index jumped to 60.2 in July compared to June's 56.9, the highest reading since December 2006, and, the Euro area Services Business Activity Index rose to 49.8 in July, up from the flash estimate of 49.6.

The price of gold bullion finished July up more than 6%. The weaker-than-expected non-farm payroll report released on Friday and the latest statement from the US Federal Reserve which implied that its quantitative-easing bond-buying program will remain in place at $85 billion a month supported prices as the greenback came under some pressure.

Last week was filled with the release of numerous key economic data as well as announcements from the major central banks in particular the US Federal Reserve, the European Central Bank (ECB) and the Bank of England (BoE).

On Friday, the latest US non-farm payroll report was released. It was well below consensus estimates and showed that the U.S. created 162,000 jobs in July. The unemployment rate fell to 7.4%, the lowest level since December 2008, in small part because more people dropped out of the labour force.

The number of new jobs created in June was revised down to 188,000 from 195,000, while May's figure was lowered to 176,000 from 195,000. The size of the civilian labour force declined by 37,000 and the participation rate fell to 63.4%.

On Thursday, initial jobless claims showed that the number of people who applied for new unemployment benefits fell by 19,000 to a seasonally adjusted 326,000 in the week ended July 27, marking the lowest level since January 2008. June was revised down to 188,000 from 195,000, while May's figure was lowered to 176,000 from 195,000. The size of the civilian labour force declined by 37,000 and the participation rate fell to 63.4%.

And, the latest ADP private-sector payrolls report showed that private-sector employers added 200,000 jobs in July. The previous month's figure was also revised up from 188,000 to 198,000.

The price of gold fell against a stronger US dollar after the US Commerce Department reported that the US Gross Domestic Product grew at an annual rate of 1.7% in the second quarter, buoyed by a rise in consumer spending and a sharp increase in business investment.

The US dollar came under pressure towards the end of the week after non-farm payroll report was released and the price of gold which had been drifting lower all week suddenly surged by almost $34 an ounce to end the week at $1313.50 per ounce.

Anticipation of the Federal Reserve’s policy statement caused traders to remain cautious at the beginning of the week. And, when the eagerly awaited statement was released from the US Federal Reserve it did not reveal much. 

The Federal Reserve said the US economy continues to recover but is still in need of support, offering no indication that it is planning to reduce its bond-buying stimulus at its next meeting in September.

After a two day meeting the central bank said that it would keep buying $85 billion in mortgage and Treasury securities per month in its effort to strengthen an economy that it said was still challenged by federal budget-tightening. It also pointed to a recent run up in mortgage rates.

In a post-meeting statement, policymakers described economic activity as having expanded at a "modest" pace in the first half of the year. They had called the recovery "moderate" after their last meeting in June.

The Fed also stated that inflation “persistently below its 2% objective could pose risks to economic performance,” although it expects inflation will move back towards 2% over the next 18 months.

"The committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term."

The Fed cut interest rates to almost zero in late 2008 and has since more than tripled the size of its balance sheet to around $3.6 trillion via three massive rounds of bond buying aimed at holding down longer-term borrowing costs.

The yield on the benchmark 10-year U.S. Treasury note stands about a one full percentage point above where it was in early May while mortgage rates have risen a similar amount, posing a potential risk to the housing recovery.

Gold prices weakened when other data from the US showed that second-quarter GDP unexpectedly came in at 1.7%, compared to general consensus of 1%. However, first-quarter performance was slashed to 1.1%, from 1.8%.

Earlier in the week, the financial markets awaited the announcements from the European Central Bank and the Bank of England.

In his press conference the ECB, President Mario Draghi said economic indicators signal the euro region is past the worst of its longest-ever recession, while reiterating that interest rates will stay low for the foreseeable future.

“Confidence indicators have shown some further improvement from low levels and tentatively confirm the expectation of a stabilisation in economic activity,” Draghi said at a press conference in Frankfurt after the ECB kept its benchmark rate at 0.5%. “The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time”.

As expected the BoE left rates unchanged at 0.50% and kept the size of the asset purchase program at GBP 375 billion as widely expected. The accompanying statement was brief and focus will turn to the quarterly inflation report to be published on August 7.

Even though the upward momentum in the price of gold seems to have abated for now, things can change instantly and suddenly. And, despite the negativity surrounding the market by main-stream media, I remain extremely bullish on gold as the fundamentals driving this market remain intact. And, contrary to most other writers, I believe the US Fed is not going to reduce its purchases of bonds any time soon.

One must consider the high debt burden of the US government. Any increase in yield will translate into higher servicing costs, and thus the US government has trapped itself in a situation where it finances itself by selling treasuries, but cannot afford increasing the interest rate as it will result in an even greater debt burden. So, how much longer can the Fed continue to buy bonds in order to keep rates low? And, when they stop, what will happen?

Owning gold is essential. Trading for a profit is not the same as owning a valuable asset. Having physical gold is about ownership and not about price and profit.

TECHNICAL ANALYSIS

Gold prices seem to be coming under pressure against the 50 day MA. We may see a continuation of this downward pressure until prices break above $1325/oz.                                               

 

For more information go to: www.lakeshoretrading.co.za

David Levenstein is a leading expert on investing in precious metals. Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

 His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

For more information go to: www.lakeshoretrading.co.za

 

78 percent of the yearly gold supply--is made into jewelry.

Gold Eagle twitter                Like Gold Eagle on Facebook