Shifts in the gold price may provide a leading indicator of what happens next.
Shifts in the gold price may provide a leading indicator of what happens next.
Headlines
Japan: As expected, retail sales rose 3.2% year-on-year in June after a 2.9% gain in May and a 4.9% increase in May. Sales rose due to gains in auto sales, fuel and summer clothes, a government official told reporters at a briefing. But sales of cars and fuel are showing signs of slowing after rapid gains earlier this year.
US: California Governor Arnold Schwarzenegger has declared a state of ‘fiscal’ emergency over the state’s finances. The state is USD 19 Bn in the red with its budget five weeks overdue due to an impasse by lawmakers over how to balance the state’s books. Schwarzenegger said the state was on the verge of a “fiscal meltdown” and could be forced to issue IOUs as early as next month and has ordered three days off without pay per month beginning in August for state employees to pay off their debts. New York state is reportedly in a similar predicament.
China/US: The People’s Daily writes “If the United States cannot find a way of recognising and accepting China’s entrance on the world stage as a big player, relations will swerve up and down like a roller coaster … This instability in relations will have a negative effect not only on bilateral ties but on the world, and that is not something anyone wants to see.”
New Zealand: The RBNZ raised interest rates by 25bp to 3% as expected. Governor Alan Bollard said “Some further removal of monetary policy stimulus is appropriate at this stage … The pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement.” Last month’s statement forecasts had implied rates rising to around 4.0% by the end of this year and close to 5% by the middle of 2011.
The trade surplus for the year to June 30th was NZD 639 Mn compared with a revised surplus in the year to May of NZD 32 Mn. Exports fell 9.8% m/m after rising 5.9% in May whilst imports rose 2.3%.
Euro-zone: The European Commission says that its economic sentiment indicator for the zone increased to 101.3 in July from an upwardly revised 99.0 in June (forecast 99.0). The increase was driven by Germany were economic sentiment rose to 110.1 from 106.1. The figure also increased in France and Italy, but fell in Spain.
German adjusted unemployment falls by 20,000 m/m in July (in line with expectations). The adjusted jobless rate falls to 7.6%.
The FT writes that ‘banks have started early-stage planning to deal with the potential fallout on the derivatives and bond markets of a European country being forced to leave the EUR’. It states ‘after having received queries by some banks about the impact of such an event, the body representing the swaps and derivatives industry (International Swaps and Derivatives Association) last week contacted some of its members to form a group to consider what they may need to do if a Euro-zone state is ejected’. While those close to the process believe the likelihood of such an event is remote, the sovereign debt crisis of recent months has led banks and other firms to start questioning what impact it could have.
UK: British finance minister George Osborne has said there is no tacit agreement with the Bank of England’s governor Mervyn King on keeping interest rates low.
The European Commission’s consumer sentiment index for the UK falls to-17 in July from -11 in June.
Mortgage approvals fall to 47,643 in June from a downwardly revised 49,461 in May. This was the weakest level since February. Net lending to individuals in June was GBP 567 Mn from a downwardly revised GBP1.13 Bn in May (forecast GBP1.4 Bn).
Nationwide’s index of house prices fell 0.5% month-on-month in July after a flat month in June. This is the first fall since February and yielded an annual rate of increase of 6.6% – its lowest since December – from 8.7% in June.
Comments
On Tuesday of this week we began the debate over whether the current market environment is more reminiscent of the summer of 2007 or of 2008. As we noted, despite the mounting problems within the US housing market, sharply easier monetary policy settings in H2 07 fed directly into sharp rallies in commodity prices, relative stability in the equity markets, declining long term yields and a fresh slide in the USD. In contrast, the summer of 2008 saw the commodity price rally reverse sharply (the NYMEX crude future hit an all time high of USD147.27 on July 11th of that year before falling by 38% even before the Lehman’s crisis hit) as investors began to worry more about an impending economic slowdown. Equity markets suffered in tandem while the USD picked up a safe haven bid.
In line with this we noted that the leading indicator of investor sentiment in both 2007 and 2008 was the price of gold. In mid-August of 2007 the price of gold stood at a relatively modest USD650 a troy ounce. However, in the aftermath of the FOMC’s aggressive actions later that month, the metal began a rally that would see it add 58% to its price by March of 2008, hitting USD 1030 on the 17th. Tellingly though, this proved the peak in the price. Although the oil price continued to rally into mid-July of 2008, the gold price struggled. After a 15% slide through into early May, it only managed to make to just below USD 990 by mid July before starting a more sustained move lower. Although the downtrend in H2 08 proved a volatile one (with the Lehman’s debacle leading to a brief but dramatic surge in demand), by late October the price had sunk back to USD 680, just a few USDs above where the price had started in the summer of 2007.
In light of this we find the recent weakness seen in the price of gold particularly telling. Although it is tempting to say that much of the 7.7% slide seen since in the price June 21st has been driven by the supposed rehabilitation of the EUR as a credible store of value, this doesn’t really fit with the available facts. A study of an hourly price chart over the past month and a half reveals that with one exception (June 21st – the day, tellingly, that China changed currency policy), each of the major slides in the price of gold has come after the publication of uninspiring US economic data. We note, for example, the 3.4% slide seen in the price on July 1st following the publication of a disappointing ISM survey, the 1.4% decline on July 16th after the release of the CPI numbers and the 2.1% drop seen on Tuesday of this week following the publication of poor consumer confidence data. In other words the current decline in the price is down to a deterioration in sentiment about the economic outlook (and the threat of rising deflationary pressures) rather than a reflection of greater optimism about the standing of the single currency. This seems entirely reasonable to us. Indeed, with Governor Arnold Schwarzenegger declaring California in a state of fiscal emergency overnight how could it be any different?
It is worth noting that there have been some signs of both short term and longer term shifts in the demand pattern emerging as well. Holdings in SPDR Gold Shares (the largest fund backed by gold and managed by a subsidiary of the World Gold Council) have dropped 1.4%, from a record 1,320.44 metric tons at the end of June to 1,301.74 tons while the number of outstanding futures contracts on COMEX are down substantially. We also note reports that demand out of India for jewellery has fallen sharply over the past two years. Last year saw demand fall by close to 30% (to 480 tonnes) while the president of the Bombay Bullion Association, predicts that India’s gold imports will fall by 40% this year.
All this comes at a time when the technical picture for gold is sending some very clear warning signals. Most notably, a series of lower highs on our favoured momentum indicator since Q4 of last year speaks of a longer term trend that is looking increasingly tired. With the oil price flashing a similar warning it seems we are getting closer to answering the question whether this feels more like the summer of 2008 or that of 2007. On the basis of the current evidence it seems like July of 2008 provides a better fit. As to what this means for the currency markets we will continue to explore in the days ahead. (simon.derrick@bnymellon.com)
Key Levels
Key Economic Data Releases
Canada June PPI: previous 0.3% m/m, consensus forecast 0.0% m/m (1330 BST)
Leave your response!