While Geopolitical Tensions are Supporting Gold Prices in the Short-Term, New Developments in the Mid-East and Asia will Send Prices Higher in the Long-Term

Gold prices remain well above the important support level of $1300 an ounce as geopolitical tensions in Ukraine and Iraq continue to spur demand.  Also, despite the printing of trillions of dollars, the U.S economy tanked in the first quarter putting pressure on the greenback.

Gold prices rallied during early afternoon trading on Comex on Monday pushing the price of the yellow metal to a 10 week high while the U.S dollar continues to languish at seven-week lows against a basket of major currencies.  The price of spot gold hit an intra-day high of $1329.10 an ounce but ended slightly lower.  

Last week, news that the U.S. economy contracted in the first quarter by the most since the depths of the last recession as consumer spending cooled, sent gold prices slightly higher as the greenback fell against other major currencies. The dollar index extended its recent fall from 81.00 to reach as low as 80.01 before closing at 80.00 at the end of week, only to continue its slide on Monday. The dollar index fell to a low of 79.759, a low not seen since May 9, while the euro hit a six-week high near $1.3700, a move  that is bound to put more pressure on the European Central Bank. 

According to the U.S. Department of Commerce, Gross Domestic Product (GDP) fell at a 2.9% annualised rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1% drop. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976. According to consensus forecasts, economists were anticipating the worst, expecting GDP to fall 1.8% in the first three months of the year. 

“With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was smaller than previously estimated, and the decline in exports was larger than previously estimated,” the report said.

The figure just goes to show that the expansionary monetary policies of the US Federal Reserve have done little if anything to stimulate the economy. And, as I have stated on numerous occasions, all it has done is to artificially prop up prices of stocks, bonds and in some instances houses.

Also, the latest report on inflation from the Bureau of Labour Statistics showed that the final first quarter price index was unchanged from the preliminary increase of 1.3%.  Excluding food and energy costs, the core price index also remained unchanged at 1.3%, down from the fourth quarter’s reading of 1.8%. Durable goods orders increased 1.2%, down slightly from the preliminary estimated increase of 1.4% and down from the fourth quarter increase of 2.8%. Yet, despite the US government assuming that inflation is running at a rate of 1.3%, to anyone who eats prices show a very different story. Over the last 3 years, prices have increased substantially. And, the price of fuel in the U.S is at record highs in many states. It seems that the U.S government is using deceptive inflation numbers when calculating GDP and inflation is a lot higher than reported. Fears are mounting that the dovish Fed will risk out-of-control inflation in a desperate gamble to spur growth. 

Last week, Ukraine signed a landmark economic trade pact with the European Union. Petro Poroshenko, the president of Ukraine, signed the accord at a ceremony in Brussels, calling it a “new perspective for my country”.

The leaders of Georgia and Moldova also signed “association agreements” in a historic step for the three former Soviet countries.

The EU agreements signed with Ukraine, Georgia and Moldova lift trade tariffs and promise help with economic reforms, while stopping short of a pathway to membership. The deals are seen as part of an ongoing struggle between Russia and the West to exert influence over former Soviet states. Moscow had tried to entice Kiev into membership in a customs union with itself, Belarus and Kazakhstan, and may raise its own tariffs in retaliation at the EU agreement.

The trade deal came amid tense talks over a peace plan suggested by Mr Poroshenko. He er announced a week-long ceasefire in an attempt to persuade pro-Russia rebels in the east of Ukraine to lay down their arms.  However, Poroshenko has ended the ceasefire with separatists in the east, saying: “We will attack, we will free our land.”

Mr Poroshenko said the chance to implement a peace plan was lost because of the “criminal activities” of pro-Russian militants.

Both sides have accused each other of violating the truce.

“The decision not to continue the ceasefire is our answer to terrorists, militants and marauders,” Mr Poroshenko said.

With regard to the other current hot-spot violence continues to rage in Iraq. Iraq says it has received the first batch of fighter jets it ordered from Russia to help it as it fights an offensive by Sunni rebels. 

Fresh clashes have been reported between jihadist-led Sunni rebels and government forces around the Iraqi city of Tikrit.

A local source told the BBC the rebels had meanwhile seized parts of a nearby military base in a counter-attack.

US President Barack Obama has announced he is sending about another 200 troops to protect the US embassy in Baghdad.

This means about 750 US troops are in and around Iraq, but President Obama has ruled out sending combat troops to fight alongside the Iraqi army. 

While Western governments together with their financial institutions continue to propagate misinformation about gold, Asian countries look at it with an entirely different perspective. For them, owning gold is essential and they are doing whatever they can to encourage their citizens to have some of the yellow metal. 

In the longer-term, developments in Dubai, Singapore and China are most certainly going to help boost the price of gold. 
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The Shanghai Gold Exchange (SGE) have plans to introduce a global trading platform in the city’s pilot free trade zone, a move that could challenge the dominance of New York and London in gold trade and pricing.

SGE, the world’s biggest physical gold exchange, where domestic banks, miners and retailers buy and sell gold, could also open up the international platform to foreign brokerages and gold producers. 

Evidently, according sources, the SGE is looking to launch three yuan-denominated physical gold contracts, of 100 grams, 1 kg and the bigger London good delivery bar weighing 12.5 kg. 

According to Thomson Reuters GFMS, the SGE is the biggest physical exchange. And, it has the world’s second-most traded gold futures contract though trading is largely limited to the domestic market with volumes of about 41,176 tons last year, still well behind COMEX’s 147,083 tons. 

So, instead of flowing through the gateway of Hong Kong, much of China’s gold imports in the years ahead will be coming directly into Shanghai’s free trade zone. This will make it difficult to correctly determine the quantity of gold flowing into China, since China doesn’t release trade data on gold. Information through the SGE comes out months after the fact, and there are questions about its accuracy.

Traditionally, most gold imports into China have been transported through Hong Kong. And, the data provided by the Hong Kong authorities was very transparent often being used as proxy for overall Chinese gold demand.

So, the more gold that flows into China via Shanghai, the more difficult it is going to be to get an accurate read on China’s gold demand.  In addition, the Chinese government is also permitting gold imports directly into both Beijing and Shenzhen. But the majority of the gold should go to the SGE. 

At the same time, it was announced at a conference in Singapore that Singapore intends to launch a physical gold contract as well. 

The contract is expected to debut in September and will be the first wholesale 25 kilo bar contract, and it will introduce centralized trading and clearing of a physically delivered gold contract in Singapore.

The new contract will allow gold suppliers to “connect more effectively with their Asian clientele,” the WGC said. There will be six daily contracts, which will give physical users access to competitively priced kilo bars, they added.

The moves underscore rising pressure from Asia, home to the top two gold consumers – China and India – to have pricing references that better reflect the region’s market dynamics, and the growing disenchantment with prices set in the West.

The London fix, the global benchmark for spot gold prices that is determined by a group of four banks over a teleconference, is being investigated by regulators in Europe and the United States under suspicion it may have been manipulated.

And, while these two major centres aim to become leading global trading centres for gold, Dubai has similar plans as well. The Dubai Gold and Commodities Exchange (DGCX) which originally planned to offer the first spot gold contract in the Middle East this month, is expected to launch the contract in the next two or three months.

DGCX is working with bullion banks and refineries to design a spot gold contract to suit the needs of the sector. The new spot contract is also going to for one kilogram (32 troy ounces) of 0.995 purity gold.

As much of 40% of the gold traded globally comes through Dubai, the commercial hub of the United Arab Emirates, with US$75 billion of gold traded through the city last year, according to Ahmed Bin Sulayem, executive chairman of the Dubai Multi Commodities Centre, which facilities the trade. 

The exchange hopes to attract mining companies, refiners, fabricators, traders and international banks to the new spot gold contract. The DGCX will aim for the delivery of gold within two days of a trade.

With slowing growth and rising inflation, I wonder what central bankers will do next. So far, all they have done is create an ocean of credit that is acting as a lifeline to bankrupt countries and financial institutions. And, if the central banks stop printing, these institutions will be in serious trouble. Even worse, governments will lose their main buyer of debt and be in serious danger of default. 

On the other hand, the inflationary effects of their monetary policy are starting to be felt all over the world. So if central banks keep printing, they will do even more damage to their currencies and anyone who uses them. 

I am very happy that I own physical gold and silver.

TECHNICAL ANALYSIS
 

Gold prices continue to hover around the $1320/oz. level and above the support at $1300/oz. as well as the 200 and 50 day MA. While it is possible to see a small correction and re-test of $1300/oz. the price looks set to continue in an upward bias.