SocGen analyst reiterates stratospheric gold forecast as Syrian crisis drags on
Gold closed below $1,400 Friday but has advanced almost 6% in August, racking up its second straight month of gains while the stock market logged its biggest monthly slide in over a year. Bullion's rally lost some steam as uncertainty grew over the timetable for a U.S.-led strike on Syria and the dollar rallied to a four-week high, but September has historically been gold's best-performing month.
"Gold is under pressure from a firm U.S. dollar and lower oil prices after the West debates whether to attack Syria,"Commerzbank analyst Eugen Weinberg said.
But buckle up your seat belts, because after Monday's Labor Day holiday, gold's seasonably strongest period of the year starts as India's festival- and wedding-driven buying season kicks off -- combined this year with potentially major turmoil ahead from an outbreak of war over Syria, Washington's debt-ceiling and budget battles, the Federal Reserve's stimulus tapering, and the pending exit of Fed chief Ben Bernanke.
Gold's "Love Trade" to fuel Eastern demand
As U.S. Global Investors chief Frank Holmes told Fox Business: "There's a seasonal pattern, which I like to identify as the 'Love Trade,' where 55% or almost 50% of all gold demand is for love, and it's predominately coming out of China and India, Southeast Asia, the Middle East, and Turkey. And we're in that mode, and the bottom takes place in June, July, and we get a rally all the way to Chinese New Year."
And as The Wall Street Journal noted Friday, "U.S. stocks weakened, looking to close out the biggest monthly slide in over a year for major benchmarks, as traders eyed muted readings on consumer spending and income."
"We've been seeing profit-taking across the board," R.J. Grant of KBW Inc. said, adding that uncertainty surrounding Syria, the Feds potential September taper, and a looming debate on the U.S. government's debt ceiling are making some investors reluctant to take on much risk.
"September, historically the worst month for stocks"
"Anxiety has been building ahead of September, historically the worst month for stocks," CNBC reported. "This September will be especially difficult to navigate with the monthly employment report next week and the Fed's decision whether to taper its bond buying or not, expected Sept. 18. Syria has entered the picture as another potential negative in just the last week."
Art Cashin of UBS raised some key concerns as well, focusing on recent comments by Richmond Fed PresidentJeffrey Lacker. "While it didn't get wide coverage, he said some really important things," Cashin said, including Lacker's opinion that the labor market has met the condition for the Fed to begin a tapering of its asset purchases.
What is "far more important," Cashin said, is that Lacker suggested the taper would coincide with a reduction of the Fed's support of the mortgage-backed securities market. "With housing looking like it might be getting weak, that troubled the market."
Economy "just above stall speed"
However, Cashin said the comment that "hit me over the head like a two-by-four" was Lacker's view of future U.S. GDP growth. The Fed president said he expects that growth will average "about 2% going forward."
This level is "just above stall speed," Cashin said. "It's going to be dangerous to start tapering if you're just above stall speed."
More warning signs emerged in new economic data out Friday. "U.S. consumer spending barely rose and inflation was tame in July, offering a cautionary note on the economy as the Federal Reserve weighs cutting back its massive bond-buying program," Reuters reported. "Spending, which accounts for more than two-thirds of U.S. economic activity, will likely struggle to regain momentum as other data on Friday showed consumer sentiment fell this month. The reports added to a raft of data that have suggested a loss of steam in the economy early in the third quarter."
"No second-half acceleration (in economic growth), just more of the same," said RBS chief economist Michelle Girard.
Gold's "move may be just beginning"
In contrast, things are looking very much up for gold. "Gold and silver have added support from uncertainty surrounding the U.S. debt ceiling, stock markets and currency moves,"MarketWatch reported.
"The move may be just beginning," said Phil Flynn at thePrice Futures Group. "Gold seems to be a place where safe harbor is being sought. Not only from those crazy gold bugs that are worried about the potential for World War III coming out of the Syrian conflict, but because of the plunging currencies and stock markets in the emerging markets."
Mike Paulenoff of MPTrader.com argued that the bottom appears to be in for gold: "The big-picture pattern in spot gold suggests strongly that a major correction within the 1999-2011 bull market transpired between the Sept. 6, 2011, high at $1,921.50 and the June 24, 2013, low at $1,180.04. In addition, a new bull phase, or upleg, is in its infancy that should propel spot gold to new all-time (nominal) highs in the weeks and months ahead. ...
"If any forthcoming weakness in spot gold can hold above $1,395-$1,390, the pattern off the low will remain exceptionally powerful and promising, and will argue that the next up-move should propel prices toward a test of the major breakdown plateau at $1,522-$1,527, on the way to $1,560-$1,590."
SocGen stock bear predicts $10,000 gold
Respected gold guru James Turk also sounded bullish in an interview with King World News: "The big rallies since June in both in gold and silver have been nothing short of spectacular, but this is just the beginning. The moves higher in gold and silver will be absolutely breathtaking in the future."
And perhaps the most breathtaking gold forecast of the past week has come from Societe Generale analyst Albert Edwards:
"The emerging markets 'story' has once again been exposed as a pyramid of piffle. The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen's slide and then by the threat of Fed tightening. China has flipflopped from berating Bernanke for too much QE in 2010 to warning about the negative impact of tapering on emerging markets! It is a mystery to me why anyone, apart from the activists that seem to inhabit western central banks, thinks QE could be the solution to the problems of the global economy. But in temporarily papering over the cracks, they have allowed those cracks to become immeasurably deep crevasses. At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P, sub-1% US 10y yields and gold above $10,000."
Middle East demand to become long-term" if conflict extends beyond brief strike, analyst says
Gold prices rallied above $1,430 to hit 3-1/2 month highs Wednesday before pulling back near $1,420 as the threat of an imminent strike on Syria by U.S.-led forces weighed on markets.
Bullion hit a peak of $1,433.31, its highest level since May 14, and prices are up about 8% on the month -- the biggest monthly climb since January 2012. Gold is now up more than 20% from the low of $1,180 it hit in late June.
Stampede into safe-haven buying
What are some of the experts saying about gold's recent move above $1,400?
* "There's nothing like the threat of military action to bring buyers back to gold," said Richard Gotterer, managing director at Wescott Financial Advisory Group.
* "The gold and silver markets are going through a period of higher volatility, having strongly advanced for two solid weeks, but generally they are benefiting from their safe-haven status and the trend is definitely higher," said Gene Arensberg, editor of the Got Gold Report.
* "The latest move upwards is certainly related to safe-haven buying on the back of a potential attack on Syria," ABN Amrocommodity analyst Georgette Boele said. "But you already had a turnaround in sentiment around a week ago when people started to get nervous about the timing of the Fed tapering."
* "We are seeing safe-haven buying across the board," saidBernard Sin of bullion refiner MKS (Switzerland) SA. "Geopolitical uncertainty triggered this buying interest."
* "Long-term, I think investors will return to the mood of the last 12 years," said Angelos Damaskos of the Junior Goldfund. "As stocks have reached all-time highs, companies will fail to deliver promised earnings and dividend growth, which will provide the next catalyst for an upward trend in gold that will go beyond current levels."
Mideast demand for gold could skyrocket
Respected analyst Julian Phillips of GoldForecaster.comsaid Syria has helped gold's rebound gain steam, but the length of any conflict there could affect the momentum of its rise.
"The gold price is consolidating at this level of resistance and may hold there to build up strength for the move up," he said.
"Syria is a Middle East factor that is only temporarily adding to demand. (But) without Syria the gold price would rise. Syria may simply accelerate that rise." The market in gold and silver "has not only turned, but its trend has changed."
Phillips said he sees investors buying gold as a result of this growing situation in Syria "coming from the Middle East primarily and potentially central banks, not Indian or Chinese investors." And this demand "comes in addition to Asian demand ahead of the seasonal rise in gold demand.
"If the intrusion by the U.S. is limited to specific targets on a once-off basis then this demand is not expected to be lasting," he said. But "if it escalates, then we expect Middle East demand to become long-term."
Bad housing report a speed bump for tapering
Meanwhile, in the U.S., a new housing report is calling into question the health of the recovery and the speed at which the Federal Reserve might be able to taper its stimulus programs. Contracts to purchase previously owned U.S. homes fell for the second straight month in July, a sign that rising mortgage rates are taking the steam out of America's housing market recovery. The National Association of Realtors said Wednesday that its Pending Homes Sales Index, based on contracts signed last month, decreased 1.3 percent to 109.5.
"Higher mortgage rates (are) beginning to take some bloom off the buoyancy in the housing market," said Millan Mulraine at TD Securities in New York.
Syria crisis puts Fed "in a fix"
MarketWatch columnist Matthew Lynn argues the Syrian crisis will force the Fed to slow or even halt its stimulus plans."The threat of an end to QE in the U.S. had started to create a crisis in the emerging markets. Now the threat of military action in Syria will intensify the downward spiral. That is going to spread to Europe next. It is already lapping at the shores of the continent's peripheral countries.
As the turmoil grows worse, it will stop global growth in its tracks. And the net result? The Fed will carry on printing money longer than it planned to. It won't have any other choice. ...
If the emerging-markets crisis spreads, and if a military intervention in Syria pushes up the price of oil, then the euro zone will be pushed back into recession as well. Very quickly, 70% of more of the global economy could have ground to a halt.
Where does that leave the Fed? In a fix. In reality, the U.S. cannot simply shrug aside an emerging-market crisis or a conflict in the Middle East as a matter of little consequence. Its own growth depends on trade with those nations, and so does the stability of its banking system. With no expansion in those markets, U.S. growth will evaporate, and with it the case for the taper."
BMO sees potential for $1,500 gold
"Even if the Fed confirms some tapering of bond purchases after the September FOMC meeting, which continues to beBMO's expectations, there could be limited downside for gold prices as tensions in the Middle East intensify over coming weeks," commodity strategist Jessica Fung said, saying bullion has support at $1,400. "In addition, the imminent debt ceiling debate in the U.S. provides support to precious metal prices." Gold could get back over $1,500 if Middle East tensions continue to escalate, the Fed maintains quantitative easing next month, and the debt ceiling debate drags on for an extended period of time.
With the rupee in India hitting its lowest levels in two decades, making gold more expensive in that currency, "demand for physical gold in Asia slowed this week," Reuters reported. What's unknown is how much buying will pick up once festivals start next week there and in China. But with their currency collapsing, it seems natural that many Indians will seek shelter in gold when imports resume. A similar dynamic has occurred in Iran as its currency collapse under Western sanctions sent demand for physical gold soaring.
Coin sales soaring at top European mint
One place that is seeing demand surge is Austria, home of theMuenze Oesterreich AG, the mint that makes Philharmonic coins. Sales of gold coins from January to July rose 79% from a year earlier to 383,500 ounces, it said, almost matching those for the whole of last year of 400,000 ounces.
"As soon as the gold price went down, many individual buyers thought: 'Now it's the best time for us to get into the gold market,'" said Andrea Lang, the mint's marketing director. "People feel a little insecure about the whole economic situation over Europe and they are worried the interest that banks give them is now quite low," said Lang. "These are two very good motives to buy gold."
"Mints from the U.S. to the U.K. reported a surge in sales after gold's plunge into a bear market lured buyers,"Bloomberg noted. "The U.S. Mint's sales of its American Eagle gold coins rose 82% this year through the end of July to 679,500 ounces from a year earlier, according to data from the U.S. mint. Sales peaked at 209,500 ounces in April, before dropping back to 50,500 ounces in July. Britain's Royal Mint saw its gold-coin sales triple in April, while Australia'sPerth Mint, which refines nearly all of the nation's bullion, said that month that demand jumped to the highest level in five years.
South African strike highlights mining woes
Meanwhile, gold shortages could be exacerbated as South African miners threaten to strike in one of the world's top-producing nations. South Africa's National Union of Mineworkers will give gold producers on Friday a 48-hour notice of its intention to strike over deadlocked wage talks, a source said Wednesday.
Rising mining costs and supply shortages should support prices, one executive said. "The real bottom of the gold price will come not from the demand but from the supply side,"Polymetal CEO Vitaly Nesis told CNBC on Wednesday. "The structure of the industry is such that any gold price below $1,500 per ounce will in the medium term lead to massive closure of producing capacity. That's why over the longer period of time, let's say three years, I am quite confident there is no way that gold can go below $1,500 per ounce. The industry will just not survive that level of pricing."
"The stars kind of align around $1,500"
Remember that gold should be held for the long haul, both for the possibility of capital appreciation but also as a hedge against inflation and stock crashes. "We don't look at gold as a trading vehicle. I think you should look at gold as an investing vehicle," Mike McGlone of ETF Securities said. "We think this whole correction within a really significant bull market. … The stars kind of align around $1,500 in gold and S&Ps. That's basically where the 200-day moving average is. That was where support was on the way down. So once we get to near $1,500, people who have short-term profits can taken them. Bigger picture, we think this is just a correction within the bull market."
'70s parallel takes gold to $3,500
How high could the bull market run? Far, says Citi's top technical analyst, Tom Fitzpatrick. In a new interview withKing World News, Fitzpatrick reiterated his view that the yellow metal could head to $3,500:
"Within the gold dynamic, we believe this recent correction was very similar to what the gold market witnessed from 1974 to 1976 -- as the equity markets recovered from the bear market bottom in 1974. In this instance, very recently gold went 14% below the 55-month moving average, exactly as it did back in 1976. After the low in gold in 1976, the equity market peaked four weeks later. So far, following the $1,181 low in gold, the peak in the equity markets has been five weeks thereafter. And as we started that historic upward movement in gold, beginning in 1976, this was also when the equity market peaked and went into a corrective phase, and that is when gold really came into its own.
"So we believe we are back into that track where gold is the hard currency of choice, and we expect for this trend to accelerate going forward. We still believe that in the next couple of years we will be looking at a gold price of around $3,500."
More information can be found online at http://www.goldbullionadvisors.com
"Investors are selling equities and moving into safer assets" as geopolitical risks rise
Gold Tuesday blasted to its highest level since May 15 as geopolitical tensions over Syria escalated and sent jitters through the stock market. The price topped $1,423 in a 1% surge as investors scrambled for a safe haven as China and Russia warned the West that any strike would carry "catastrophic consequences."
Iran also got into the act, with one official saying Israel "will be the first victim of a military attack on Syria."
"The possibility of U.S. military action against Syria is driving demand for safe-haven assets including gold," said Jeffrey Sherman, commodities portfolio manager at DoubleLine.
Gold "is clearly finding support from the geopolitical risks in the Middle East and North Africa, amongst other things,"Commerzbank analyst Eugen Weinberg wrote.
The fear trade is back -- and slamming stocks
"Investors are selling equities and moving into safer assets today, of which gold is one asset," said Paul Herber of theForward Commodity Long/Short Strategy Fund.
Indeed, the Dow Jones Industrial Average dropped nearly 150 points to head for its 13th decline this month, the most number of drops in a month since July 2012. The S&P 500and the Nasdaq also slumped, on track to post their worst day in two months. The Dow and S&P 500 are on track for their biggest monthly declines since May 2012.
Meanwhile, uncertainty is soaring, with the CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, spiking near 17.
The re-emergence of the fear trade has sent gold back into bull-market territory, analysts say. Yes, it's still down on the year, but it's gained about 20% since hitting its June lows, and that's the definition of bull-market action.
Gold's break above $1,400 on Monday for the first time since June 7, and a bullish "cup and handle" chart pattern, suggest more gains are in store.
"There is a very high likelihood that we saw the near-term low on June 28, the last day of second quarter, as many big investors capitulated," said Adam Sarhan, chief executive ofSarhan Capital, referring to a final wave of selling at the market's bottom before prices rose again.
After touching $1,406 briefly on Monday morning and running even higher amid the Syrian crisis, bullion has recovered more than $200 since the end of June, when prices hit three-year lows of $1,180 amid talk that funds were being forced to sell to meet client redemptions. On Aug. 9, the yellow metal's breakout of its "handle" coincided with its breach of its 50-day moving average, indicating gold had bottomed and hedge-fund managers could aggressively buy back their gold positions, Sarhan said.
Next momentum target: 200-day moving average
With gold now trading above its 50-day moving average and below its 200-day moving average, the 50-day is heading for a break above the 200-day, a significant bullish formation known as "golden cross" which would suggest the metal's momentum is growing..
Rick Bensignor, head of trading strategies at Wells Fargo Securities, is watching for it to break the 200-week moving average around $1,471. "I can't say it's out of the woods yet. Technically it's too early to necessarily say that this is anything more than a short-term bounce in a somewhat negative market," he said.
More bullish on gold is Citi futures specialist Sterling Smith. "Momentum has shifted in gold," he said. "Gold is very much a momentum-oriented market, and after months and months of downward (motion), we've finally seen momentum turn positive. … We're coming into a good seasonal time of the year. We're getting past the summer doldrums and the market should be able to pick up a little bit. Along with this we should see some good buying coming from India, and I think we're going to see improved Asian buying, so the physical market should be able to improve a little bit. I think we can probably take the market above $1,500. I think if we can get above that, taking the market above $1,600-$1,625 by the end of the year is not out of the question."
Trend is your friend: Stocks weak, gold strong
"A lot of time gold historically performs very well between the months of July and October," agreed Greywolf technicianMark Newton. "Gold's been trending up for the last couple of months. … The target I have is right near $1,525, which is the area where gold broke down from early in April, and so that's a decent target. Gold might be a better place to invest than stocks, I think, over the next couple of months. The trend in stocks has been shaky to say the least really since the beginning of August. … We're in a seasonably weak time for stocks, and gold is in a bullish-type season."
Also adding fuel to gold's fire is a growing awareness of the fiscal fight looming in Washington starting in September, a situation underscored Monday in a letter sent to Congress by Treasury Secretary Jack Lew. In it, he urged lawmakers to raise the debt ceiling to to allow the government to borrow more money, saying it could default on its obligations if they don't act by Oct. 15.
"Act as soon as possible" on debt ceiling
"Congress should act as soon as possible to protect America's good credit by extending normal borrowing authority well before any risk of default becomes imminent," Lew wrote. "If investors should become unwilling to loan the United States money, the United States could face an immediate cash shortfall," Lew said.
By mid-October, Treasury would be left to fund the government with "only the cash we have on hand on any given day," now estimated to be about $50 billion.
"Operating the government with no borrowing authority, and with only the cash on hand on a given day, would place the U.S. in an unacceptable position," Lew said. "A cash balance of approximately $50 billion would be insufficient to cover net expenditures for an extended period of time."
Since May, Treasury has been using extraordinary accounting measures to avoid hitting the debt limit, but these tools will be exhausted around October 15, Lew said.
The revised timeline puts more pressure on lawmakers and the White House to find a way to increase the $16.7 trillion debt ceiling.
If the debt ceiling isn't raised, the country could face a rerun of the financial crisis that shook the nation in the summer of 2011, when Standard & Poor's took the unprecedented step of downgrading the U.S. credit rating. Gold later shot up to its all-time nominal high above $1,920 an ounce.
Miserable durable-goods report raises fresh doubts about recovery
Gold burst past the key $1,400 level in Asian trading, before U.S. markets opened Monday, but fell back into the $1,390 range as the day progressed. Still, the metal's performance of late prompted talked of a renewed bull market.
In one gold-bullish narrative in the mainstream media, CNBCpublished a story headlined "Gold within striking distance of bull territory."
"When you look at gold, it only has to travel back through $1,416 to re-enter the bull market. So we're pretty close to that and it [the gains] has been the result of physical demand, geopolitical issues and also in the U.S. and what's happening with tapering," Jonathan Barratt of Barratt's Bulletin told CNBC.
OCBC bank officials attributed gold's advance to Friday's poor new-home sales report. "Further weakness in the U.S. housing market triggered some downplay over the possibility of a QE [quantitative easing] tapering, with gold rising past its $1,400 this morning," said in a note on Monday. "In fact, the positivity has been observed since last week, with net-long positions gaining."
MarketWatch tackled the bull-market issue with its own post (titled "Gold near a bull market? This week may not answer the question"): "For a myriad of reasons, investors have been moving back into gold. Short-covering by hedge funds, a recent pullback for stocks, waffling by Fed members over tapering and technical factors are all among the explanations," it said.
Gold ETFs showing signs of life
Another bullish sign for gold: Investors are moving back into ETFs. "Exchange-traded products recorded their biggest daily inflow since Jan. 1 on Friday at 5.8 metric tons, with holdings of SPDR Gold Trust rising by 6.6 metric tons," MarketWatch reported.
"Flows for the month-to-date remain negative at 17 tonnes, but the pace of outflows has showed signs of slowing as equity markets have weakened and prices have risen, meaning fewer ETPs are loss-making," said analysts at Barclays. "Given that we continue to expect tapering to be announced in September and that we expect the dollar to strengthen, ETP holdings are likely to remain fragile but flows will remain a key area to track."
"Physical demand is very strong, and that is lending support to prices, and we think it's time to increase our holdings," saidMichael Mullaney, chief investment officer for Fiduciary Trust Co. "The economy is improving, but there are some misses, which intensify the debate on tapering and increases demand for gold as a safe-haven investment."
September tapering "could be premature"
Speaking of tapering, the Federal Reserve wrapped up its annual Jackson Hole, Wyo., conference over the weekend, and "most business economists in the U.S. expect the Federal Reserve to begin to slow bond purchases before the end the year, perhaps starting in September," one poll found.
However, some economists are not so sure. Barry Eichengreen of the University of California at Berkeleynoted: "There is a desire to return to conventional monetary policy, but we don't have a normal economy." A September move "could be premature."
He said he was surprised how little "visible alarm" there was from Fed officials about recent volatility in emerging markets tied to the Fed's tapering plan.
"I think it is too soon" for the Fed to taper, agreed Susan Collins, dean of the University of Michigan's Gerald R. Ford School of Public Policy, noting recent mixed indicators.
Durable-goods, home-sales data disappoint
Those mixed indicators include Monday's big economic report, following on the heels of Friday's home-sales number, both of which underscore their concerns: "The Commerce Department reported the latest durable goods numbers which were a total disaster: the headline print plunged by 7.3% on expectations of a -4.0% decline driven by a drop in airplane orders," Zero Hedge wrote. "Well, airplanes orders did indeed slide by 52.3%, but it was weakness in transportation (-19.4%) and computer (-19.9%) orders as well as manufacturing (-9.8%) that took the market by surprise. This was the biggest miss to expectations since August 2012."
However, even if the Fed does taper its stimulus program in September, it won't be ceasing its bond buying altogether, and Chairman Ben Bernanke in past statements has reserved the central bank's right to increase asset purchases as necessary if the economic data justify such a move.
And around the world, central banks (such as those in Japan and England, for example) are continuing with easy-money policies. "We don't think that all central banks will phase out from unconventional monetary policies," International Monetary Fund Managing Director Christine Lagarde said. "In Europe and Japan there is a lot more to be done."
Debt-ceiling fight "looking kind of 2011ish"
And keep your eyes peeled for "black swans" out of Washington, D.C. Even the gold skeptics at Business Insidersay the biggest danger for the economy is not tapering but looming budget battles in the nation's capital:
"The bigger immediate story for the market is the fiscal fight, which is getting almost no attention outside of the political press, but is looking kind of 2011ish.
"First at the end of the summer, a new budget needs to be passed. There's a 'shut it down' caucus inside the GOP that wants to halt the government if Obamacare isn't defunded, which is something that will never happen, but which is causing John Boehner some headaches, as he tries to defuse this wing of the party.
"More ominously though is the debt ceiling, which comes later in the fall, and which once again the GOP will attempt to use as leverage to get what it wants (spending cuts, perhaps something related to Obamacare). And unlike with the normal government shutdown (which would be very damaging to the GOP politically) the party feels the threat is serious enough that the White House would have to blink, preventing an outcome that would make the party look bad.
"It could all get nasty, and nobody is talking much about it."
Gold heading into its strong season
"Kind of 2011ish," the report notes. Remember what occurred in 2011 during the debt-ceiling standoff? Standard & Poor'sdowngraded the U.S. credit rating, which slammed the dollar and sent gold soaring to all-time nominal highs that September.
A new budget battle could do the same to the dollar just as gold's seasonably strong period gets under way this fall. With gold already showing signs of renewed vigor, the time to prepare is now.
As for what to watch this week in gold, iiTrader CEO Rich Ilczyszyn advised: "Major support this week will come in at $1,383 to $1,384.10 as the uptrend continues. A close below this band will likely signal a consolidation lower. Only a close below $1,352 will signal a failure. So how high can gold go? The major upside target on the week is $1,422. In fact, we expect to see this price within the next session."
More information can be found online at http://www.goldbullionadvisors.com
