Tuesday, October 4, 2016

Gold Settles At Lowest Value Since June As Brexit Fears Boost Dollar (and a short primer on knowing your numéraire)

The link below quotes the soon-to-be-gone front futures while we use the more popular December's (318,897 contracts traded vs 1,805 for October and 1,438 for November) as our reference, currently at $1272.70 down $40.00 on Globex. Here's today's action via FinViz:

From Barron's Focus on Funds:
Gold slid again on Tuesday, as fears related to Brexit fueled a rally in the US dollar.

Gold for October delivery slumped $42.70 per troy ounce, or 3.26%, to $1266.30 today, its third straight day of losses and its largest one-day percentage decline since December 2013. That’s its lowest settle value since June 23.

Silver also lost ground, falling $1.0820 per troy ounce, or 5.76%, to $17.71, the largest one day dollar and percentage decline since January 2015.

The British pound hit a three-decade low today as the UK government said that it would start the process to extract itself from the European Union no later than March. That’s sent the dollar up against many world currencies, dampening demand for gold, which is priced in dollars: The metal is “falling off a cliff” as MarketWatch reported earlier today....MORE
The triple-leveraged funds are going nuts.

We've been babbling about understanding the numéraire for years, here's one from 2013:

"Bitcoin Is No Longer a Currency"
It never was a currency. It was always quoted as "dollars per Bitcoin" not Bitcoins per dollar".
Swiping a line from the Wikipedia entry for "Numéraire":
...If a store sells 1 can of soup for $1.20, the numéraire is dollars. If the store would buy $1 for 5/6 of a can of soup, the numéraire is cans of soup. Trading a can of soup is simpler than trading fractional cans of soup, so most stores use a numéraire of money, which has fractional units....
The numéraire was the whole point of my comment on the FT Alphaville article "Debunking goldbugs":
Are you quoting rocks per dollar or dollars per rock?
As long as gold is quoted as dollars-per-ounce it is the dollars that are money, not the gold.
Or the Bitcoins.
Here's a quick hit (and excellent link) from Kitco:

Dollar Strength, Weakness and the Price of Gold: A Primer
When the US Dollar gets stronger, it takes fewer dollars to buy any commodity that is priced in $USD. When the US Dollar gets weaker it takes more dollars to purchase the same commodity.
The price of all US Dollar denominated commodities, like gold, will change to reflect the fact that it will take fewer or more dollars to buy that commodity. So it’s quite possible, in fact it’s almost always the case that a portion of the change in the price of gold is really just a reflection of a change in the value of the US Dollar. Sometimes that portion is insignificant. But often the opposite is true where the entire change in the gold price is simply a mathematical recalculation of an ever-changing US Dollar value.

When the dollar gets strong, gold appears to go down, and vice versa. That accounts for part of the fluctuations that we see in the value of gold.

The other part is an actual increase in the supply or demand for gold. If the price is higher when being measured not only in US Dollars, but also in Euros, Pounds Sterling, Japanese Yen, and every other major currency, then we know the gold demand is higher and it has actually increased in value.
Consequently, if gold is higher in US Dollars while at the same time cheaper in every other currency, then we can conclude that the US Dollar has weakened, and that gold has actually lost value in all other currencies. But the price, because it is being quoted in $USD will be higher and give the illusion of gold becoming more valuable. In such a case the devaluation of gold, due to increased supply on the market, is camouflaged by a weakened US Dollar.

Our feature on kitco.com breaks the change of the price of gold into 2 components. One part shows you how much of that change can be attributed to US Dollar strength, or lack of it. The other portion is indicative of how much the price changed as a result of normal trading. Interestingly whatever changes happen to the price of gold as a result of US Dollar strength/weakness also occurs to every other US Dollar denominated commodity by the exact same proportion.
"Precious Metals Panic-Selling Continues"