Gold has moved up quite sharply, in thin trade, in the opening days of 2014, but it is worth recalling that it did in 2013 as well – and then went downhill thereafter for most of the rest of the year.
The pro-gold element has already seen light at the end of the tunnel with a positive gold price start to 2014. But don’t get too carried away yet – it could just be a train coming in the other direction! While this observer does see a turnaround in the gold price coming, it may not be this soon!
Perhaps one should take heed from 2013. Gold opened well last year moving up from the final LBMA fixing of 2012 at $1664 to open the year on Jan 2nd, the first day of London trading, at $1681.50, with an afternoon fix that day of $1693.75. That figure of $1693.75 proved to be the yellow metal’s London Fix high point for the year and it was mostly downhill from there onwards! It did get back into the low $1690s later the same month, but by February 1st had fallen to the $1660s, March 1st to the $1570s, and most months thereafter gold closed lower and lower down to a nadir in the $1190s just ahead of Christmas. Pro gold enthusiasm at the good start to 2013 gradually evaporated and it was mostly gloom and doom from then onwards.
We do see pitfalls ahead for gold this year too – notably in the first half, particularly if the U.S. Fed extends its tapering program. As we noted in a previous article here, the seemingly positive reaction by the U.S. stock market to the initial tapering announcement may well encourage the Fed to continue sooner rather than later, although a generally adverse market reaction does seem to have set in belatedly at the beginning of this month with the S&P and Dow coming back a few points as the implications of the initial ‘toe-in-the-water’ Fed taper begins to sink in. But one suspects this fall will be shortlived as the government manages to come up with statistics appearing to show the U.S. economy is indeed on an upwards path. Public perception that things are getting better is everything here.
Things do seem to be improving in the Eurozone too, although many of the economies remain in dire straits – notably France, Greece and Spain – but good improvement in exports is being seen from Germany, the Netherlands and Ireland in particular. Statistics seem to show the U.K. economy is also in a good growth phase although austerity measures are continuing and the feelgood factor is still missing in many parts of the country.
While there is little doubt that the global economy, for the most part, is on the mend – but very slowly - any recovery is fragile and could easily be derailed, which is why the U.S. Fed needs to be so cautious in its unwinding of its bond-buying program with its potentially negative effects on the all-important stock market which is presented to the general populace as a great indicator that the economy is getting better. Stocks are rising, so de facto things must be improving, mustn’t they? The Dow and the S&P are the most visible indicators of all – a point’s move in the jobless claims, or a stated inflation rate which is out of sync with most of the population’s own experience, means little to the general public, but heavily trumpeted new highs in the main stock market indices do have a positive impact on public perception, however misleading they may actually be. In truth a rising stock market virtually purely due to liquidity being pumped into the markets by the Fed actually has little drop down effect on the person in the street who does not have the money to invest – indeed who has seen incomes fall in real terms. It is only the rich who are benefiting and probably getting richer – and by rich I mean the 12% of the population earning perhaps $75,000 a year or more, many of whom would not even consider themselves as being in a high income category.
This is why the Fed has been so cautious on tapering. The stock market may well have got hooked on the crack cocaine of QE and withdrawing it could provide a huge shock to the system, not only in the U.S. but globally.
But how does this affect gold. Investors have fled gold for the gains to be made on the stock market. If these stock market gains start falling away, or reversing, which they may well do with any continuation of Fed tapering, then investors may return to gold as a safe haven. Unless the markets do turn down sharply now with the initial taper coming in this month then one can expect a second taper announcement at the next FOMC meeting in mid-March – and that may well provide the key to what will happen to markets. One thinks that Ben Bernanke’s comment that tapering could be completed by the end of the year is a little premature and will serve to put unfair pressure on incoming Fed Chairman Janet Yellen.
The taper could well be positive for gold, as would the cessation of the taper if the stock market is spooked. Gold supplies to the market are likely to diminish in 2014 with offloading out of the big gold ETFs slowing down, or ceasing altogether with only the strong holders remaining invested. Low gold prices will likely see mine cutbacks beginning to come in seriously during the year and China seems to be buying up all the gold available anyway. True, November imports via Hong Kong were down quite sharply but this will likely reverse in December as anecdotal evidence is Chinese gold dealers are being flooded again in the run up to the lunar New Year at the end of this month.
Middle Eastern and Thai gold dealers are also apparently being overrun – the theory being that they are selling gold which is subsequently being smuggled into India to help meet that country’s still heavy demand, despite government restrictions, while there are a number of other countries also buying gold. One just wonders how this continuing demand can be fulfilled?
But, there is a lot at stake in the U.S. financial sector over gold trading and this has been very successful in controlling the market to date. One wonders how long this can go on given the likely shortage of physical metal. Sooner or later gold will start to move seriously upwards, but this move may well not come ‘til later in the year, if then. It’s still likely to be a difficult period for the gold investor.