Gold Resilient in the Face of Stronger Dollar

by Peter A. Grant

Gold continues to trade in a choppy manner within the range established early in the week. In light of some better than expected U.S. data this morning, the yellow metal is showing good resilience.

U.S. retail sales rose 1.3% in April, well above expectations of +0.8%. Not surprisingly, we are already seeing some upward revisions to Q2 GDP forecasts. The preliminary read on consumer sentiment jumped to 95.8 in May, above expectations of 90.0, vs 89.0 in April.

IMG_0341

However, the stock market is less than impressed. The same is true of the bond market. The prospect for a rate hike late in the year, based on Fed funds futures, improved modestly. While the dollar did seem to like the news, as previously noted gold remains underpinned as is trading higher on the day.

Perhaps markets are putting greater emphasis on this morning’s business inventories report for March, which rose 0.4%, above expectations of +0.2%. ZeroHedge notes that “overall business inventories at their highest to sales since the crisis and deep in pre-recessionary territory.” The gist being that the persistent rise in inventories portends an imminent recession. ZeroHedge warns, “This won’t end well.”

I think gold remains underpinned because investors remain skeptical about the recovery. Something doesn’t feel right and they are making the requisite portfolio adjustments to protect themselves. That is clearly reflected in the gold demand data released yesterday, which showed a 21% jump in Q1, the best first quarter on record. That of course led to the best Q1 price performance in three-decades.

As economist continue to worry about “secular stagnation” and the likely reactions by central banks with ever-more experimental policy approaches, the demand for gold is likely to remain robust. Something the WGC eluded to their report in saying “the sector does appear likely to benefit further from the improved outlook towards gold among a broad investor base.”

John Hathaway Warns Panic Into Physical Gold To Cause The Price Of Gold To Skyrocket

“We are seeing record inflows into gold ETFs.  I’ve been saying for over a year that there is very little gold vaulted in London to support that demand, so you are going to see a scramble for physical gold, which is what the ETFs have to have.  That, to me, is the big story.

IMG_6906

Investors will buy an ETF and then they will see something like the Barclays ETF have a glitch and they will start to ask questions about whether synthetics or surrogates for physical gold are the right thing to own because of the counterparty risks and the type of things we saw with Barclays.

So we will start to see more investors move up the food chain into physical metal, but the metal just isn’t available at this price level.  You will then see a serious scramble for physical gold and that will translate in to much, much higher prices than what is being quoted today.”

 

Market Update

The current downward pressure on Gold is due to the Fed still entertaining an interest rate hike in December. If this continues through the holidays we might see more decline in spot prices. During the 4th Quarter lots of good hiring and consumption data may be reported, as it has most years at this time – this may also keep precious metals from rebounding.