Today’s AM fix was USD 1,338.50, EUR 970.21
and GBP 810.57 per ounce.
Yesterday’s AM fix was USD 1,327.00,
EUR 962.64 and GBP 802.78 per ounce.
Gold dropped $2.30 or 0.17% yesterday to
$1,327.00/oz. Silver fell $0.28 or 1.36% to $20.29/oz.
Gold
in U.S. Dollars, 5 Days – (Bloomberg)
Gold rose 1%, it’s first rise in five days,
trimming a weekly decline of 2.8%, as the crisis over Ukraine led to
a renewed safe haven bid for gold. Palladium surged 3.1% to the
highest since 2011 on concern supply from Russia may be restricted.
Gold had become overbought after its surge to 6
month highs and was due profit taking and a correction. A perception
of an abatement of tensions between Russia and the West has
contributed to the pullback this week. Momentum could lead to further
falls next week but we expect weakness will be short lived.
Gold’s
TechnicalsThere
is a risk that gold could fall below immediate support at $1,320/oz
and the next levels of support are at $1,300, $1,240 and then back
where we started the year at $1,200. A 50% retracement would not be
unusual after the speed of recent gains and that would take us to the
psychological level of $1,300/oz again.
Gold
in U.S. Dollars, 1 Year – (Bloomberg)
A political solution needs to be found as
governments continue to opt for economic sanctions of various
degrees, it could degenerate into a full blown trade and economic
war. Were this to occur the benefits of free trade and globalization
that we have seen in recent history would be at risk – creating
real challenges for the global economy.
The premiums that risk assets such as stock
markets command could quickly be lost as market participants
reevaluate asset allocations in the light of the more risky economic
and geopolitical situation.
Gold
in U.S. Dollars, 43 Years – (Bloomberg)
Hopefully, calm and wise counsel will prevail
and a diplomatic political solution will be found. However, in the
meantime, gold continues to be an important asset to own in order to
hedge these and other geopolitical and economic risks.
Yellen
At Fed – Print Baby Print
It
was very welcome to see a woman taking over the helm of the Federal
Reserve. However, we cannot allow our goodwill in this regard to
cloud judgement and impact our analysis of her and the Fed’s
performance and policies.
Yellen gave mixed messages, both on the economy
and on monetary policy, but market participants have chosen to focus
on some of the more hawkish comments that she made. She acknowledged
that the Fed may have been too optimistic about the economic outlook
recently. Yet, she and the Fed largely stuck to their projections for
how growth and inflation will unfold in the coming years.
It is important to remember that the Fed did
not predict or foresee at all the sub prime crisis, the housing
bubble, Bear Stearns, Lehman, the global financial crisis and
subsequent recession.
The dollar is set to be structurally weak in
the coming years given the still significant imbalances in the U.S.
economy and still very poor fiscal state of the economy. No amount of
jaw boning or Fed tinkering with interest rates will change that.
While interest rates may rise from nearly 0%,
they are set to remain low for the foreseeable future. At least until
the bond markets decide to enforce fiscal discipline on the U.S. Then
interest rates will likely rise substantially leading to a severe
U.S. recession.
U.S.
Govt 10 Year Yield, 1971 to March 2014 – (Bloomberg)
On a long term basis, it is likely that the
dollar will remain weak and gold’s bull market will continue until
the end of the interest rate tightening cycle which will likely be
between 2020 and 2025.
This was seen in the 1970s when interest rates
surged higher that decade from a low in March 1971, to a high in
September 1981. The U.S. 10 Year went from 5.38% to 15.84% during
that period and gold rose from near $35/oz to over $850/oz in January
1980 (see charts).
Thus, contrary to the popular perception,
rising interest rates are not bearish for gold. High interest rates
and real positive interest rates in a sound economy are very bearish
for gold prices and will burst the coming gold bubble. However, that
is a long way off – likely between 2018 and 2025 and likely when
gold prices are well above their inflation adjusted high (CPI) of
$2,500/oz. Indeed, longer term prices over $4,000/oz or $5,000/oz are
quite feasible.
EU
Agrees Banking Union – Bail-Ins Cometh …Early
this morning European Union politicians struck a deal on legislation
to create a single agency to handle failing banks and bail-ins in the
Eurozone after another all night negotiating marathon ahead of a
summit of EU leaders starting in Brussels today.
German Finance Minister Wolfgang Schaeuble was
drawn into the talks around 0530 GMT as the negotiations dragged on
into the night. The politicians emerged around 0715 GMT with the
deal, which now will need formal approval by the European Parliament
and by national governments.
Negotiators persuaded nations that had been
opposed to the proposed Single Resolution Mechanism and the
legislation for bail-ins to agree.
Insolvent banks will be treated equally
regardless of the country they are based in. Failed banks creditors,
both bond holders and depositors, will be subject to bail-ins in the
same way in all countries.
“It’s a very good agreement,” European
Central Bank President Mario Draghi said before the meeting of EU
leaders in the Belgian capital. The banking union was shaped in part
by Draghi and he hailed the compromise plan as “great progress for
a better banking union. Two pillars are now in place.”
Plans for a single banking union were put
together two years ago due to fears for the euro and the EU’s 6,000
banks. Countries wanted to break the link between sovereigns and
insolvent banks to ensure taxpayers were not forced to bail out
insolvent banks and to prevent contagion and a systemic crisis.
It had already been agreed that shareholders
and importantly now depositors will be bailed in before the single
resolution fund can be tapped. About 100 banks plus transnationals
and those already bailed out will come under the direct supervision
of the ECB from January.
While most of the coverage is on the European
Union member states and the European Parliament agreeing the final
details of a single resolution mechanism (SRM) to wind up failing
banks, there is little coverage of the developing bail-in regimes and
the heightened risk that depositors in the Eurozone now face.
Banks
in the Eurozone remain extremely vulnerable. Our research
on
bail-ins and
the developing bail-in regimes clearly shows how banks remain very
vulnerable and it is now the case that in the event of bank failure,
your deposits could be confiscated as happened in Cyprus.
It is important to realise that not just the EU
but also the UK, the U.S., Canada, Australia, New Zealand and most
G20 nations all have plans for bail-ins in the event that banks and
other large financial institutions get into difficulty.
The coming bail-ins will pose real challenges
and risks to investors and of course depositors – both household
and corporate. Return of capital, rather than return on capital will
assume greater importance.
Evaluating counterparty risk and only using the
safest banks, investment providers and financial institutions will
become essential in order to protect and grow wealth.
It is important that one owns physical coins
and bars, legally in your name, outside the banking system. Paper or
electronic forms of gold investment should be avoided as they along
with cash deposits could be subject to bail-ins.
