Friday, November 27, 2015

Gold Drops to 6-Year Lows

There was a tiny amount of backwardation earlier but that has flipped back to very mild contango. $1056.5, down $13.50 on the front futures after trading as low as $1051.10. Although we are still looking for $875 before all is said and done (and looking at the gold commentators, more is said than done) there is a real possibility of an overshoot to the downside.

Amateurs and guys paid by the word will tell you backwardation in gold is a sign of strong physical demand but that's just not so. See for example "Indian gold demand seen falling to 8-year low in festive quarter". Backwardation is often the result of financial shenanigans or even something as simple as a lack of demand down the road.

As to the latter, a strong (and still strengthening) dollar makes gold cheap in $ terms and another 6% move in the buck drops gold out of four figures. Combine distaste for a wasting (price) asset and the move down continues without need for conspiracy theories.
Further, as the story points out, real rates matter.*

Here's the headline story from Reuters:

Gold slips to near 6-year low, set for 6th straight weekly drop
* Dollar at 8-1/2 month peak of 100.17* Silver, platinum, palladium head for weekly declines
* Chinese buying unable to support prices (Updates prices, adds comment)
Gold slipped almost two percent to a near six-year low on Friday and was heading for a sixth straight weekly decline under pressure from a firm dollar and prospects of a U.S. interest rate rise next month.
Spot gold hit $1,052.46 an ounce, its lowest since February 2010, and was down 1.5 percent at $1,055.06 by 1428 GMT.

Spot prices were down 2.1 percent for the week. U.S. gold futures fell 1.3 percent to $1,052.49 an ounce and were also headed for a sixth consecutive weekly decline.

Gold was undermined by a firm dollar, trading at an eight-month high against a basket of major currencies, mostly boosted by euro and Swiss franc weakness.

The dollar-denominated metal becomes more expensive for foreign investors when the U.S. currency rises.

"Since 2012 we have been in an environment where lower real rates and higher equity risk premium have both been strong and negative factors for gold," Deutsche Bank analyst Michael Hsueh said....MORE
June 12, 2013
or, that time I was crabby, on:
Aug. 22, 2013
I have become very reluctant to link to most economist's blogs. More and more it seems economists are nothing more than wannabe politicians who don't have the guts to run for office and who, instead, gussy themselves up in a bit of math before finding an echo chamber to preach their politics to.
Life's too short.

However, here's a guest post by a student who seems not to have picked up the playground-squabble tone that so much econ writing exhibits these days.

Plus, for me anyway, it just oozes confirmation bias....
...Focus on Funds points out the use of TIPS for the measure whereas I used the 10-year treasury -YoY for my quick-and-dirty.
At least two readers emailed the St. Louis Fed's "5-Year Treasury Inflation-Indexed Security, Constant Maturity" chart:
 Graph of 5-Year Treasury Inflation-Indexed Security, Constant Maturity

Some folks use Fed Funds as the measure but that doesn't make a lot of sense.
Last December Izabella used TIPS in one of her posts which we finally got around to in January.
From our "Spot Gold Down $21.80 as HSBC, Credit Suisse Lower Forecasts (GLD)":
Back in early December FT Alphaville's Izabella Kaminska modestly wrote in "Capping the gold price":
The following chart, we propose, has the potential to inspire a whole new way of looking at the gold and Treasury market...
Now if you cut out the upside (...Capped) you are left with the semi-variance which means you can figure out all kinds of extremely high reward bets.

As I said in April's "Gold Hammered to 15 Month Low on Heavy Technical Selling, Weak Long Liquidation":
Woulda, coulda, shoulda.
If I had been paying attention when Izabella Kaminska wrote "Capping the gold price" , I'd have more chips to play with.
Alphaville posted it on December 7, 2012, five days before the $1715 intermediate term top.
Instead it took me four weeks to get around to it, Jan. 3, with "Spot Gold Down $21.80 as HSBC, Credit Suisse Lower Forecasts (GLD)"
Here's the trading from that day:
As you can see, my thought process was something akin to "Saaaay, something appears to be happening with gold". We just hadn't been paying attention....
$1276.80 last....
November 27, 2015: $1056.30, we're going lower.