Market Commentary---Gold

July 2013, 2013 Global Hedge Book Analysis Q1
https://bbs.pinggu.org/thread-2567612-1-1.html


The downward trend in the gold price seen over the last quarter of 2012 persisted during the first quarter
of 2013. The peak gold price for the quarter (also the year to date), of $1,694/oz, occurred on 2nd
January, and by the end of the period the price had fallen to $1,598, passing through a low of $1,574 on
6th March.

In the first quarter, a number of macroeconomic indicators pointed towards an improving global economic outlook. Furthermore, worries about quantitative easing (QE) programs leading to high inflation were not realised. Consequently, sentiment towards gold remained weak, with the predominant influence being a strengthening US dollar and increasing US bond yields. The strong performance of equities during the first quarter was also negative for gold, as indices rallied to all-time highs, encouraging investors to move away from the ‘safe haven’ of gold into other asset classes. Consequently, liquidations by macro hedge funds and in ETFs were unrelenting during the first part of 2013.

In late January, gold was supported by FOMC statements acknowledging that the economic recovery remained weak, as well as the disappointing US GDP data for Q4 2012. However, FOMC minutes of the 29th-30th January meeting, indicated internal debate within the committee regarding the schedule for QE3 and the possibility of QE ending sooner than expected, with the result that the gold price dropped to a 7-month low. Gold regained some ground in late February as Fed Chairman Ben Bernanke sought to calm fears of an imminent end to QE, as well as on renewed physical demand from Asia and safe-haven buying following the Italian election results. However, strong US economic data released at the end of February, together with a strengthening US dollar and equity indices hitting record levels in early March had gold under pressure once more. The Cyprus bail-out negotiations in March provided some support to gold, although this was short-lived and the market reaction was muted compared to the price swings seen in response to other news. Monetary policy easing in Japan should have benefited gold, but in the event had limited impact.

Into the second quarter, the gold price began to decrease more rapidly on technical selling as key supports were breached. The minutes of the March FOMC meeting, released in mid-April, provided little reassurance to the market as the committee discussed the possibility of ending QE by year end. This is thought to be one of the triggers for the dramatic price crash between 11th and 15th April, when the price fell by 15%, reaching a 2-year low of $1,353. Fears of central bank selling in the wake of the Cyprus bail out negotiations are also thought to have played a part in affecting sentiment.


There was some recovery from the sharp drop premised on short-covering and retail demand in Asia, enabling gold to regain the $1,400 level once again. This was boosted further by disappointing US GDP data in late April, but it wasn’t long before the gold price once again dropped below $1,400, in mid-May. A further sharp sell-off occurred in late June, with the gold price falling from $1,295 on 21st June to $1,192 a week later. This followed FOMC minutes that appeared to confirm that Fed monetary easing will be tapered at some point in the foreseeable future. Since then, there has been a weak recovery on renewed fears over stability in Europe, particularly Portugal, as well as the political unrest in Egypt. While some support has come from physical demand in China and India throughout the quarter, this has not been sufficient to override the downward price trajectory, particularly as India imposed further measures to curb gold imports.


There has been much discussion of the largescale selling of gold ETF holdings this year; this is clearly illustrated in the chart on the previous page, which shows the steep fall in ETF holdings from approximately 87 Moz (2 t) at the beginning of January, to 65 Moz (2 t) by early July, a decrease of approximately 25%. The value of the ETF holdings has correspondingly fallen, from a 2013 peak of $147 Bn on 2nd January, to a minimum for the year of $79 Bn, on 5th July. Net long positions on Comex have also fallen dramatically over the course of the year. In mid-January, the number of contracts was close to 200,000; however, by the end of Q1 there were 158,000 positions outstanding. By 2nd July, the number of contracts outstanding had fallen below 23,000, the lowest number of net long positions since December 2001.