In July this year, Ben Bernanke, the world’s most powerful central banker, told the US Senate Banking Committee that “nobody really understands gold prices and I don’t pretend to really understand them either.”
To date, the pace at which central banks have expanded gold reserves has been costly – to the tune of USD545 billion since bullion peaked in 2011 at a price of USD1921.15 an ounce. According to the World Gold Council, Central banks own 18 percent of all the gold ever mined and will add as much as 350 tons valued at about USD15 billion this year.
They purchased 535 tons in 2012, the most since 1964. Russia holds the title of being the biggest buyer, expanding reserves by 20 percent since prices reached their record price in September 2011. Gold has since slumped about 31 percent.
The interesting fact is that as policy makers were buying gold, investors were losing faith in the metal as a store of value. The value of exchange-traded gold products dropped over USD60 billion or 43 percent this year, saddling famed hedge fund manager John Paulson with losses. Even billionaire George Soros sold his holdings in the biggest gold-backed ETP this year as mining companies wrote down the value of their assets by at least USD26 billion.
If we look back in history, we actually see a pattern of mistimed gold investment decisions by policy makers. They were reducing holdings when bullion reached a 20-year low in 1999 and when it quadrupled in the next nine years. On the flip side, central bankers became net buyers just before the peak in 2011. The common investment theory of “buy low and sell high” was thrown out the window as central bankers were effectively “buying high and selling low.”
Analysts from some of the world’s top banks say that the bear market in gold prices will continue. Goldman Sachs and Societe Generale, who correctly forecasted this year’s price plunge, predict that prices will drop to USD1,110 in 12 months while Societe Generale sees prices at USD1,125 in 2014.
Gold aside, another major problem persists in the US – the continual partial shutdown of the US government and the impending expiry of the current debt limit on 17th October. According to the US Treasury, the US government will have “only” USD30 billion after 17th October when the borrowing auction is exhausted. It would need about USD60 billion in the coming months to fulfill all of its financial obligations.
Sharon Zollner, a senior economist at ANZ Bank, said it well when she wrote the following note to clients on Monday: “This is for now an entertaining sideshow on a global markets scale. But as the days tick by and the US government’s cash gradually starts to run out, the stakes will rise considerably.”
Here comes the rub - with the “bad” decisions that policy makers have shown in gold, how can we expect US lawmakers to get it right when it’s time to raise the US debt limit on 17th October?
Australia: Employment Change. Thursday, 10th Oct 8.30am.
I expect figures to come in above 14.5K (previous figure was -10.8K).
Canada: Employment Change. Friday, 11th Oct 8.30pm.
I expect figures to come in above 15K (previous figure was 59.2K).
Short USD/JPY at 97.31
As with last week’s trade, we are continuing to short the USD/JPY because of the political impasse in US. As the problem of raising the US debt limit gets swirled around nearer to the “D-day” of 17th October, I expect risk aversion to continue. This will benefit the safe haven of the yen.
On the H1 time frame, we will go short once prices bounce off the downtrend line at 97.31. A stop loss of 30 pips is placed above the trendline. We will have two targets on this trade, exiting the first position at 97.01 and the second one at 96.71.
Entry Price = 97.31
Stop Loss = 97.61
1st Profit = 97.01
2nd Profit = 96.71