Gold may trade sideways for a few weeks before the next break to the upside.
According to reports that appeared in the Wall Street Journal and Financial Express some of the central banks that had recently increased their gold reserves have entered into gold swaps (exchanging their gold in return for cash, agreeing to repurchase the gold at a later date) with the Bank for International Settlements (BIS) in order to take advantage of the recent high prices we have seen in the yellow metal.
The report that was released last week by the BIS shows the international agency has taken 349 tons of gold since December – allowing central banks to raise a record $14 billion.
While there is some uncertainty regarding the news which has not been confirmed or clarified by the BIS or the IMF, central banks that have had to swap their gold in order to raise funds is another sign of the deterioration of the global financial and monetary system. The fact that the central banks swapped the gold rather than sold it is also a very positive sign and shows that they have a bullish outlook towards gold. If they believed that the price of gold was headed south, they would have opted to sell their holdings. And, if the BIS did not share this view, they may have been reluctant to hold gold as collateral. After all, if the price was to plummet, how would they get their money back if one of these central banks defaulted on their loans?
The BIS annual report covers the 12-month period through March. April data show that an additional 32 tons of gold were put up as collateral that month, suggesting further loans were taken out with the BIS. At this rate, the BIS holdings represent the biggest gold swap in history.
Despite signs of a recovery, the problem of huge budget deficits and massive sovereign debt will continue to plague the currency market. Deficit reduction alone is not going to solve the debt issue. Even as the U.S. economy seems to be improving — gross domestic product has climbed three straight quarters, more than forty states face budget deficits.
The other problem facing the US economy is the state of their employment. Since the beginning of this recession some 8 million people lost their jobs. At the current rate of employment it will take years to recoup all these lost jobs. Include the high budget deficits in the UK as well as every country in the Eurozone, and we have a recipe for further currency turmoil.
With more than fifty percent of all bank reserves around the world in U.S. Treasuries and since most commodities are traded in US dollars, a collapse in the greenback would have serious global consequences. Whilst I do not see this happening, with increasing budget deficits the US government may have no other choice but to engage in further "quantitative easing," which is simply a way of saying increasing the money supply. And, the consequence of this will be a further devaluation of the green back which of course will be good for gold.
Nothing seems to be stopping Chinese appetite for gold and recently a statement from the Shanghai Gold Exchange mentioned that demand in China increased in the first half of the year as government measures to cool the property market and falling equities spurred investment demand. The total volume of gold traded on the exchange jumped 59 percent in the first six months from a year earlier to the equivalent of 3,174.5 metric tons, said Song Yuqin, vice general manager at the exchange.
"Gold and silver trading volume expanded sharply in the first half of this year because a declining stock market, the government's efforts to cool the property market and the general volatility in the global financial market have all fueled the investors' enthusiasm," Song said.
"I expect China's gold demand to rise by 11 to 12 percent this year from 440 to 450 tons because Chinese investors have shown their willingness to buy more when prices are on the rise," Hou Huimin, deputy secretary-general at the China Gold Association, said. "I expect prices will rise over the remainder of this year and next year," said Hou.
Sales of gold products such as bars and coins by China Gold Group, owner of the country's largest gold deposit, jumped as much as 40 percent in the past six months, Song Quanli, deputy party secretary at the company, said today in an interview. "We have witnessed some really good sales in our retail outlets," said Song at China National.
According to Marcus Grubb, the managing director of the World Gold Council, gold prices have been gaining support from all areas of the marketplace from private investors and central banks looking to stock up on physical holdings to shareholders seeking greater positions in gold miners. "The backdrop is the continuing financial crisis and people's desire to protect their wealth by investing in something that they believe is going to hold its value."
There are numerous reports and studies that show that the months of June and July have been the worst performing months for the gold price. So, if this seasonal cycle is going to repeat once again, these pull-backs that we are seeing may be short lived and could represent good buying opportunities.
It looks as if gold is building a new trading range between $1180/oz and $1260/oz, and after traders failed to knock the price below the $1180/oz support level last week we have seen some consolidation in the price of the yellow metal (see blue circle). I expect to see further choppy trading during the coming week with a bias towards the upside.
About the author
David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.