Gold continues to move further and further away from the peak it made August 28 following the latest rally in the shiny yellow metal.
This morning, it’s down 2.5%, trading right around $US1329 an ounce. Earlier, it fell as low as $US1326.
On Tuesday, Société Générale commodities strategists, who have been bearish on gold all year, declared that the “gold bounce is over,” and advised clients to “sell gold with a $US1200 target.”
The strategists outlined a few bearish arguments against the metal:
A US military strike now looks much less likely with Syria having accepted Russia’s proposal for Syria’s chemical weapons to be given up for UN control. While it is yet to be seen whether Syria is serious about its offer, it does make near-term US military strikes much less likely. And even if the Syrian offer turns out to be just a delaying tactic, it is not clear that the US Congress would vote in favour of military action. Recent polls, political soundings, and preliminary vote counts in Washington suggest that the US Congress is unlikely to back a military strike, as President Obama has requested. From a political perspective, it would be extremely difficult — indeed, almost impossible — for him to take military action after asking for Congressional approval and not getting it. Finally, gold has a mixed record as an effective hedge against geopolitical risks from the Middle East. The gold price peaked on several occasions early during crises in the Middle East. For example, when Iraq invaded Kuwait on 2 Aug 1990, gold peaked 11% higher within the first month and was trading below its starting point shortly after the beginning of the US-led counter-attack. Another example is the US-led 2003 invasion of Iraq. Gold rallied hard in the run-up to the invasion but peaked already in early Feb 2003, i.e. ahead of the 19 March 2003 start of the invasion, and by April, gold had dropped 15% from the February 2003 peak. In other words, gold has often peaked ahead or during the early phase of military action in the Middle East.
Foreign exchange rate trends have turned bearish for the gold price. The dramatic trend decline in the Indian Rupee against the US dollar has sharply increased the local price of gold with the gold price measured in Rupee up some 20% since late June. The Indian jewellery market, which is a major component of global jewellery demand, has tended to be price sensitive. Thus the high local gold price is likely to dampen Indian jewellery demand and boost scrap supply. Furthermore, the trend weakening of the South African Rand and the Australian dollar have lowered gold mining cuts in the two countries with the highest production costs which makes production costs less likely. It is also worth noting that the gold labour strikes in South Africa are now over.
Asian gold price premiums over the London price have declined and so has the backwardation at the front end of the forward curve. This suggests that the recent surge in Asian physical demand for gold is weakening and that supply from ETF selling is finding its way to Asia. The Asian gold premiums and forward curve backwardation came about as a result of a mismatch between strong Asian demand and the time-consuming process of refining ETF gold supply into more deliverable parcels.
We expect strong ETF gold selling to resume soon as Syria is no longer a bullish factor and US Fed tapering is likely to start at the September meeting. Our US economists expect the Fed to start tapering at the next meeting despite the weaker than expected payrolls data last month. The Fed has stated they want to halt asset purchases once the jobless rate hits 7%. The latest downtick in the jobless rate to 7.3% tips, in our view, the scales toward the announcement of a small ($10 billion) reduction in asset purchases following the 18 September meeting. If the FOMC were not to act in September, then that would mean waiting until December because a post-meeting press conference is not scheduled following the October meeting. With US real bond yields sharply higher recently and geopolitical risks abating, investors are likely to resume large-scale ETF selling soon.
The chart below shows the move in gold this morning.
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