Gold: There is No Conspiracy!

by Michael J. Howell19. April 2013 14:02

The recent plunge in the US dollar gold price is unsettling but it reflects no dark forces and no sinister conspiracy by Central Bankers. The reason is the strong US dollar, and this strength maybe unusual for this stage of the business cycle, but it is driven by underlying liquidity forces. Specifically, when our PSL index exceeds the Fed CBL index the dollar soars. This is true now, with a strong Fed outpaced by even stronger private sector flows underscored by corporate revenues, household recovery, renewed shadow bank lending and shale oil cash. In short, its economics not politics that is the problem for gold.

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Dollar Strength?

by Michael J. Howell27. January 2013 15:59
Liquidity is unquestionably flowing but its mix points to US dollar strength and not dollar weakness as in QE1 and QE2 in 2009-11. A too strong US dollar is the major risk to our prediction of cyclical recovery this year, but some dollar strength in the second half of each cycle is normal. The Euro, despite recent rallies, looks to be in medium-term decline (as it must) by around 3-5% pa. What looks different is the behaviour of the Yen. Our latest research reports show BoJ activity and they make the point that BoJ easing in the face of Yen weakness is very unusual. In short, the Yen looks set to decline by around 5-10% pa. Adding this up the US dollar trade-weighted index may be set to appreciate by 3-5% pa. Not good news for gold in 2013 and a feature likely to restrain buoyant commodity prices.

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Has Gold Lost Its Glister?

by Michael J. Howell24. January 2013 18:58
Short answer: yes, temporarily. Three things are against gold in 2013; two things are are in its favour. We expect a cyclical business upturn, starting in the US and EM and touching (just) Europe this year. Risk on will be back in favour, so reducing the need to shelter in gold. Second, yield curves are set to steepen, forcing up yields and reducing the attractions of gold. Third, the huge build-up of private savings (much in the dollar area) versus the (surprising) slowness to print money, is rarely a bullish message for gold. For subscribers to our liquidity data this means high private sector liquidity (PSL) and relatively low Central Bank liquidity (CBL). Set against this are two big positives: first, gold is the reserve asset of choice, or at least number two following the Euro Crisis, for many EM Central Banks. This year like last year will see more bullion buying by them. Second,this debt crisis is not over. More, much more, monetization is needed and this will ultimately push gold towards our long-term target of US$3500/oz.

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Why Is Gold Weak?

by Michael J. Howell5. December 2012 12:47

The US dollar gold price has retreated back to test its long-term support line at circa $1700/oz. Gold is a pure liquidity phenomenon and its weakness tells us alot about how little new liquidity policy-makers are creating. We have noted in recent weeks that the US Fed has broken its QE3 'promise' stated on Sept 13th to add some US$85 billion per month to its balance sheet. It may ultimately 'catch up' thereby fuelling a 'Risk On' rally in 2013. But why has it stalled? The explanation may lie in Chairman Bernake's speech in early November to the New York Economic Club where he appeared to tie QE to progress on resolving the 'fiscal cliff'. In short, he is keeping his powder dry untill either he sees fiscal progress, or may be is forced to act by market turmoil. Gold is a convenient benchmark of this QE, as is the 10-2 yield curve. Investors can afford to wait until both indicators turn higher. It may be a jittery few weeks. Traditionally, the period between Election and Inauguration in the US has seen roughly twice normals level of market volatility, and that without a 'fiscal cliff'.

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