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Three Reasons Why Gold Is Not In A Bubble
Real Gold Price Still Below Record, but Just Barely
The real gold price has not yet reached the high of about $1,952/ounce at today’s prices seen in January 1980, but it is very close. In addition, prices have gone “parabolic,” meaning they have risen by an extraordinary amount in a very short period of time. When asset prices go parabolic, they usually do not stay at those levels very long and often see a quick reversal. Thus, it is possible we could see a near-term pullback in gold based on this technical pattern. However, based on the aforementioned factors driving gold’s meteoric rise, the pullback may not be very large and will probably not last very long before gold prices start to rise again.
Gold Still Hasn’t Risen as Much or as Fast as NASDAQ or Oil
In the five years prior to their respective peaks, the NASDAQ rose 500 percent and oil rose 340 percent. Over the last five years, gold has not seen nearly the trajectory of increase, rising only about 200 percent. Thus, based on this metric, gold does not yet appear to be in a bubble à la the NASDAQ in 2000 or oil in 2008. However, the 200 percent five-year increase has risen from 150 percent in our April report.
Gold-Oil Price Ratio Above Average, but Not Unprecedented
While gold has soared, oil has dropped to around $84/barrel amid growing concerns about slowing global growth. As such, the gold-oil ratio has jumped to 22.4, well above the historical average of 15.5 but certainly not unprecedented. Furthermore, just because the ratio is above-average does not necessarily mean gold is overvalued or oil is undervalued. At this time, both the jump in gold prices and the plunge in oil prices appear to be justified by fundamentals. This ratio may decline a bit in the coming weeks, but we do not foresee an outright crash in gold prices. |
Posted Aug 24, 2011 2:00 AM by Shikha Jain
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Silver may outperform gold in the near term
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we expect gold and silver prices to remain buoyant, but silver has the potential to outperform gold on a short-term horizon, as it tends to act as a high-beta play on sovereign debt fears and worries about currencies. From a technical perspective, if the market can build a base above USD 39.5/oz, silver should target congestive resistance around USD 45/oz and then potentially USD 49.45/oz. On a ratio basis there is reason for caution – the gold/silver ratio is at 40, compared to a 30-year average of 64, suggesting that silver is expensive. But this should be ignored if technical signals turn strongly positive. We therefore recommend a long position in spot silver, targeting USD 49.45/oz, with a stop-loss at USD 35.22/oz |
Posted Aug 11, 2011 5:37 AM by Shikha Jain
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Crude oil – US gasoline demand weak in July
Market outlook and summary
Brent price maintains strength on supply concerns
The ICE Brent crude oil price has been much more stable than the NYMEX WTI price over the past four weeks, trading in a USD 116-119/bbl band since 7 July, while WTI has traded in a USD 94-100/bbl range over the same period. Brent is being supported by maintenance of the Forties pipeline, which is key for Brent crude
production. Meanwhile the WTI price has been weighed down more by both wider macroeconomic concerns and strategic stock releases into an already well supplied market.
The Brent-WTI spread should narrow once North Sea maintenance comes to an end during August, bringing Brent lower. However, with the US market, and particularly the Cushing delivery point, set to remain well supplied, we expect the double-digit discount of WTI to Brent to persist, particularly if the US market remains soft, although our forecast is still for a rebound in US growth in H2-2011.
US – A weak and weakening picture
The budget deficit deal in the US, given the emphasis on spending cuts, has intensified oil market concerns about US growth. On Friday, US Q1 GDP growth was lowered to 0.4% (from the original 1.9%) and Q2 was just 1.3%, softer than the 1.8% q/q SAAR expected. The lack of recovery in the labour market and the continued effect of gasoline prices hit US consumers significantly harder than the market had expected. Personal consumption rose just 0.1% q/q SAAR, against 0.8% expected.
Oil-market data suggests little improvement in consumer spending in July, but an improving trend in industrial/trade activity. According to the US Energy information Administration (EIA), product supplied to the domestic market was down 2% y/y in the four weeks to 29 July. Gasoline demand has been particularly disappointing, and was down 3.6% y/y. Retail prices in the US are close to the highs seen in 2008, and demand has suffered, although it is difficult to extricate the influence of prices from that of overall economic activity. That said, distillate demand – which is more of an indicator of industrial and trade activity – is up 1.7% y/y. It remains at a relatively weak level, but the improving trend supports the view of a recovery in H2-1011. |
Posted Aug 4, 2011 12:10 AM by Shikha Jain
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Gold prices remain elevated as worries about debt levels persist
In the past week the precious metal markets saw risk aversion weigh on cyclical markets, such as palladium and silver, but gold was boosted by fears about the US’ debt ceiling and a potential downgrade of the country’s AAA rating. Global equity markets are currently down 3.8% from their most recent peak on 21 July, reflecting the latest political turmoil in the US. Gold prices are currently up 0.5% w/w, with silver down 3% w/w. Palladium and platinum have both performed well in recent weeks (in line with our positive rating) but are currently down 0.5% and 0.8% w/w, respectively.
Also important for gold is that recent PMI data has been weak, which has helped lift safe-haven flows. China’s official manufacturing PMI was 50.7 for July (barely changed from the previous month), but showed continued weak growth and orders. Furthermore, the US ISM manufacturing survey fell to 50.9 in July, from 55.3 in June. This raises renewed doubts about the pace of recovery in the world’s largest economy and US non-farm payroll data out at the end of this week will be more keenly watched than usual. As we write, it seems likely that the US government will pass legislation to raise its debt ceiling. Despite this, our US economists see a high likelihood of a downgrade by S&P in the weeks ahead. While this might cause some minor concern, and could lift gold prices, it has been relatively well flagged and we do not believe it will result in a major upset to risk appetite.
Despite high prices, central banks continue to buy gold in substantial volumes. This week the Bank of Korea announced that it had bought 25t of gold in the past two months, taking its holding to 39t. This was the first time the country had bought gold since the Asian crisis in 1997-98, and was in response to worries about the outlook for reserve currencies such as the euro (EUR) and US dollar (USD). Korea still has a modest amount of its reserves in gold compared with the region’s other central banks, so there is scope for continued opportunistic buying, especially if gold prices fall back. China currently has 1,054t of gold (1.6% of reserves), India has 558t of gold (8.7% of reserves), while South Korea’s is now 0.5% of reserves. The global average for central banks is 12%. According to the World Gold Council, the official sector became a net buyer of gold last year for the first time in 20 years and bought 155t in the first five months of this year.
Investors are buying as well, adding to the bullish story. Physical gold ETFs reached 69.2mn oz on 1 August – up 4% m/m – and are at a record high once more. We believe that this most recent surge has been driven first by worries about the sovereign debt crisis in Europe and then by the latest problems in the US. Assuming that these issues settle down, this could result in some selling of long positions in the weeks ahead, which would limit the upside for gold and silver.
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Posted Aug 3, 2011 12:38 AM by Shikha Jain
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Is it 2008 all over again
The powerful but temporary correction from late Q2 to early Q3 that we warned of in the Q2 editions of Macro Strategy Views appears to be taking place, albeit later than we envisaged. We took this view at the time because of an alarmingly similar fundamental backdrop in early H1-2008 and H1-2011, including soaring food and energy prices, broad US dollar (USD) weakness and a hawkish European Central Bank (ECB). More generally, global asset markets were being inflated by excessive credit and liquidity – in the first case by the credit market, and in the second case by the Federal Reserves QE2 programme, which ended on 30 June 2011. In both cases, once the source of global excess liquidity was removed, the underlying weakness of the global economy was displayed for all to see.
In H2-2008, the massive implosion in the credit markets and the contraction in bank lending across the US and Europe helped to trigger a global recession. For H2-2011, we see good news and bad news; the bad news first. Unlike in H2-2008, G4 – US, euro-area, UK and Japanese – policy makers have few policy levers left to avert renewed recession. In Q4-2008, it has been argued that China saved the world with massive fiscal easing. This time, China could still enact fiscal easing to support growth. However, with CPI inflation at 6.5% y/y, the policy bias is still towards tempering inflation (though we expect this to change sooner rather than later).
More positively, we do not expect the global economy to tip back into recession. To be sure, there are risks aplenty. Moreover, the collapse in equity-market sentiment could yet weigh on real economic activity. However, our base case is a muddle-through economy rather than a recession, for three reasons. First, G4 bank lending, while improving, has remained anaemic compared to pre-global financial crisis levels. As such, there is little room for a sharp contraction in bank lending. Second, the trend in economic data in the US and Japan in particular has been improving. Third, Asia ex-Japan (AXJ) remains a strong source of support for global final demand.
There are similarities between H2-2008 and H2-2011, but there are also major differences. First, as the S&P downgrade of the US reflects, the USD is less of a safe haven than it was in 2008, so one should expect it to be less of a beneficiary of „risk-off moves. Second, EM local bond markets have benefited from a structural reallocation away from G3. The AXJ has seen part of this reallocation, which has in turn changed the flow dynamics for IDR, KRW, SGD and MYR in favour of bonds. Third, FX and equity vols remain well short of 2008 levels.
Given the state of the cycle, with banks continuing to revise down growth estimates, AXJ currencies may remain choppy near-term. In this context, market positioning may play a part, with the likes of the CNY, KRW and IDR underperforming given heavy market positioning. However, the THB and PHP should do better, in our view, due to lighter positioning. Moreover, the SGD is likely to benefit from accelerated reallocation away from the USD in the wake of the US downgrade.
Overall, from late Q3, we expect sovereign debt issues in the US and euro area to lead to accelerated diversification from DM to EM. Within this, AXJ and some Latin American currencies should benefit on stronger fundamentals. Liquidation has been evident in Latam currencies, with the Brazilian real (BRL) and Mexican peso (MXN) down 4.16% and 5.00% in August. Given Mexicos particularly strong ties to the weak US economy, we expect the MXN to underperform. The BRL has also been hit, but Brazil's more closed economy provides more fundamental medium-term support for the currency relative to the MXN.
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Posted Aug 11, 2011 5:35 AM by Shikha Jain
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U.S. Triple A Debt Rating Cut and the Week Ahead
The United States late Friday lost its triple-A debt rating from Standard & Poor’s for the first time in history, with the credit-rating agency saying the political system of the world’s top economy has become less stable and that budget cutting announced earlier this week didn’t go far enough.
Global policymakers held emergency talks Sunday to discuss the first-ever downgrade of the U.S. government’s top-tier credit rating by Standard & Poor’s and the euro-zone debt crisis in Europe, according to media reports. In addition, the European Central Bank reportedly held a meeting Sunday evening to discuss whether to start buying Italian debt in an effort to calm the markets, according to reports.
Stocks plunged around the Middle East on Sunday as most markets in the region opened for a new week of trading following the S&P downgrade. Trading in the Middle East was the first since the downgrade, to be followed in hours by Asian and European markets. Asian markets will be the first on Monday to confront a brave new world - one in which the U.S. government does not have the full faith and confidence of the major ratings agencies. This could make Asian assets look more attractive relative to those of the West, though the immediate fall-out could well be a flight from risk that sends stock markets plunging and bond yields rising around the globe. In particular, emerging markets could face greater scrutiny from institutions and investors with a renewed awareness of danger.
Investors are now looking to the Federal Reserve to adopt further quantitative easing — pumping money into the American economy, but critics argues it will add to make inflationary pressures in the U.S. Investors do feel that if QE3 will be announced, it could be as soon as 25 -27th Aug 2011
CHINA and the World Currency Markets
The reaction of currency markets will be the key focus this week; we believe the dollar is going to continue to get pummelled.
China’s official news agency, Xinhua, is certainly not downplaying America’s diminished credit standing. “China, the largest creditor of the world’s sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets,” Xinhua said. China also urged the United States to apply “common sense” to “cure its addiction to debts” by cutting military and social-welfare expenditure. The reason for the alarmist reaction in China, whose Treasury holdings are estimated at $1.1 trillion, to the S&P downgrade of U.S. credit to AA+ is that it is expected to trigger further dollar weakness. As a weak dollar tends to drag China’s currency down with it due to the loose peg of the yuan to the greenback, this also makes life uncomfortable for Asian exporting economies. We may see more interventions to devalue currencies in the region. China may raise the value of the yuan in its daily fixing, perhaps to a new all-time high against the dollar. Analysts feel that People's Bank of China may set a fixing in the 6.4350-6.4400 range, from Friday's 6.4451.That could be an important benchmark for Asian FX in general, as authorities throughout the region, fearful that rapid appreciation of their own currencies will erode their export competitiveness, keep a close eye on the yuan.
In India, currency traders will definitely watch out from any RBI buying around 43 levels. We do expect rupee to appreciate to 44.10 - 43.80 levels this week.
Indian Equity Markets and Gold
Last week, the Sensex on a weekly basis closed down by 891 points or -4.9%, to close at 17305.87 levels whereas the Nifty closed down by 270 points, or -4.9%, to close at 5211.25 levels. In the coming week, volatility is likely to stay higher for at least couple of sessions before index finds its ground. Going forward, Nifty has an important support in the range of 5070-5000 levels. Meaningful recovery could be expected only if index manages to close above 5350 levels. On the rallies, 5300-5330 is likely to act as stiff resistance. We recommend that investors could now pick few A List stocks which are now available at good valuation from a a long term investment perspective. Indian equities could see a return of around 15 - 20% from these levels in next 12 month time. For short term investors, we would suggest that if Nifty falls by another 150 points, then cover your shorts and wait and watch the market, it will be messy for a couple of weeks and risky trades should be avoided.
We believe that a weakening USD might cause gold to rise in USD terms, but with INR appreciation, the impact on gold in rupee could be limited. Still as investors we believe that you remain invested in gold with every dip acting as buying opportunity. |
Posted Aug 9, 2011 1:36 AM by Shikha Jain
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US Debt Crisis and the Time Ahead
US Markets actually started freaking out about the debt ceiling last week.
If it were just a matter of stocks falling, that would be one thing, but there
are clear signs that the short-end of the US yield curve is starting to take
notice in a bad way. Yields are still ultra-low, but they're not 0% either.
That's notable. Last Thursday and Friday actually saw a small inversion of
yield curve over 1month vs. 3 month
Investors have been looking for other vehicles for their cash. Gold started
out really hot at the start of the week but faded and have then been hovering
around the 1620 level.
In addition to the US debt ceiling fiasco, there was also just general bad
news in global markets, which in a more normal period would have gotten a lot
of attention. The US GDP report came out very bad. US GDP grew at a meager pace
of 1.3%. Even worse, the first-quarter number was revised down from 1.9% to an
anemic 0.36%.
Europe is still not out of trouble. Spanish and Italian bond yields rose on
Friday after credit rating agency Moody's placed Spain's credit rating on
review for downgrade fuelling fears about the spread of the euro zone debt
crisis. Spanish 10-year bond yields were 11 basis points higher at 6.16
percent, back to levels seen before details of the second rescue package for
Greece were known. Meanwhile, US money market funds have been withdrawing from
Eurozone bank commercial paper, leaving Eurozone banks with a big gap in
availability of short-term funding and a severe shortage of dollars. Thus, in
parallel with the US debt ceiling uncertainties, the Eurozone appears to be
entering into renewed crisis of breakdown in interbank trust and escalating
borrowing costs for Italy and Spain, and maybe even France. Whatever happens
with the US debt ceiling, attention will soon turn back to Eurozone sovereign
debt problems and threats to the viability of Eurozone banks from debt
contagion.
In commodities we might see a reversal in trend. Crude as we write has
already lost around 2% and is below 96. If the weakness continues we might see
it below 94 before end of August
We believe that the US debt crisis will be resolved by Monday. This might
lead to a short rally in markets. We might see Indian equity indices rising for
a couple of days with the resolution of the debt crisis. But we expect the rise
would not be more then 4-5%. The inflation situation in India will remain bad
for a couple of months but then the inflation will ease out. But the recent
hikes will cause the lending rates to hike and we would be seeing a slowdown in
coming months in India. Equity markets will remain choppy and will trade
sideways in coming weeks. Situation in Europe will keep the volatility high in
markets and a further downgrade might pull back NIFTY to 5300 level
US Dollar has taken a lot of beating because of the whole debt crisis, but
we expect the dollar to strengthen against EUR and other currencies in coming
week once the debt crisis is resolved. We expect USD – INR to be in range of
44.15 – 44.55 in the coming week, but if we start seeing interbank crisis in
EUR, dollar can easily fall to 45.20 levels against INR in next few weeks. The
yen appreciation will continue and we might see USD JPY below 75 by September
end. In terms of trading currencies, we would suggest that you keep long
position in AUD, NZD and CHF.
We expect a slight correction in gold and other precious metals with the
resolution of US debt crisis. Gold might for once come below 1600, but we
believe that any such dips are just buying opportunities and the gold bubble is
not anyway close to bursting. We feel that the deepening of EUR crisis and the
very slow recovery in US might cause US FED for a QE3 which would easily take
gold to level of 1800
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Posted Aug 2, 2011 4:00 AM by Shikha Jain
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JPY intervention risks are rising
With USD-JPY nearing recent, all-time lows, market jitters about intervention by theJapanese authorities have returned. The Japanese yen (JPY) has strengthenedagainst more than just the USD ...
Posted Aug 3, 2011 12:45 AM by Shikha Jain
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posted Oct 18, 2011 11:03 PM by info IG
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