By Barani Krishnan
What’s the true value of gold?
It’s a head-scratcher, no doubt. And given that it’s going down for the wrong reasons at times, it’s also getting increasingly difficult to figure out.
Gold futures on New York’s Comex are precariously close to breaking below $1,700 an ounce, threatening to extend this year’s 9% plunge.
Friday’s loss alone was 2.6%. It came on the back of bets that the U.S. economy might perform way beyond the Federal Reserve’s expectations for the second half - diminishing the need for so-called safe havens like gold.
Be that as it may, this week’s seismic selloff across markets was also on the insinuation that price pressures were already soaring in the U.S., only that the Fed hasn’t noticed - or refuses to. Case in point: Commerce Department data for January showing a 10% growth in personal income (above forecast) and 2.4% rise in consumer spending (just below forecast). It was a perfect excuse for short-sellers looking to extend Thursday’s bloodbath, which had already handed Wall Street’s Nasdaq its worst day in four months.
But there was one problem with the Commerce data though: the January spike in both personal income and consumer spending were both skewed by the $600 checks sent out to most Americans in December by the Trump administration under its last Covid-19 relief program. That fact was conveniently brushed aside in the Sell-First-Ask-Questions-Later narrative that has taken shape in gold since November.
But even if inflation is running away in the United States and the Fed is asleep at the wheel - which I can assure you it’s not - shouldn’t that be a reason for investors to seek cover in gold? For decades, the yellow metal has been touted as the best store of value and protection against any loss in the dollar’s purchasing power. With the U.S. headed for more nerve-wracking budget deficits and debt-to-GDP from the continuous battle against the Covid-19, if now isn’t the time to hedge in gold, then when?
But some like Jeffrey Halley, the Sydney-based Asia-Pacific head for online brokerage OANDA, argue that the inflation the world is seeing is a cost/push inflation - not the economy destroying "sticky" inflation.
“Price rises on this side of the economic vortex drop out of the CPI measures after one year and reflect economic activity expansion,” said Halley in a note issued Friday. “Absent is the more dire wage/price spiral inflation.”
With markets becoming “myopically fixated” on inflation of this type, markets were counting on an explosion in demand as vaccines reopened developed economies, said Halley. He adds: “The fact is, data has shown we have seen an increase in demand anyway up till now, despite the pandemic walls erected globally.”
But one can also argue that the investors who said no to gold lately were indeed myopic in their responses to some of the data that have been coming out.
Take for instance the U.S. jobless claims reported on Thursday, showing a 13% drop in filings last week to their lowest in three months. There were two important back stories to that drop. In the first, snowstorms in central and southern United States, particularly Texas, knocked out power and disrupted regular activity - possibly filing of claims too. In the second, officials were investigating fraud filings in the state of Ohio. If the following week’s numbers are adjusted for these two events, non-filings from the storm could turn out to be higher than the fraud cases in just one state. But when you have a narrative in gold that tells you to sell first and ask questions later, who cares?
And that’s the bottomline: fewer people really care about adding gold to their portfolios now than they were six months back, when futures on Comex had just hit all-time highs of nearly $2,090 an ounce.
The amount of bullion held against SPDR Gold Shares (NYSE:GLD), the world’s largest exchange-traded fund, had dwindled by 63.5 tonnes year-to-date, data showed.
As Thursday, the fund’s gold holdings were down 2.3% from the previous week. This represents a withdrawal or sale of 26.53 tonnes of the metal. In the week to Feb. 24 alone, some $1.5 billion of physical gold flowed out of the fund.
Some of the heated exchange on forums discussing this year’s tumble in gold is whether the big investment banks that specialize in trading the metal - traditionally the largest movers of its price - were deliberately shorting even when economic data was supportive of gold. Case in point: When U.S. nonfarm payrolls showed a shocking 140,000 job-loss for December - the first slump since April - gold actually fell 3.5% over the course of two days as the Dollar Index sprung higher. These investment banks can easily short - or suppress - the metal as there are always central banks looking to build gold reserves at cheaper prices. Aside from selling down gold, the bullion banks can concurrently bid up the dollar, profiting both ways. Unless they’re caught spoofing trades, which has happened before, there’s nothing to stop from legitimately shorting gold.
So back to the question: What should be the real value of gold now?
It really depends whom you’re asking. If it’s a gold bug, the answer will be at least $2,000 an ounce over the next couple of months, and possibly $3,500 and beyond in the next couple of years. If it’s a gold bear, do not be surprised to hear even $600 an ounce (a level from 15 years ago) or some equally ludicrous number that defies all conventions of inflation.
But gold is also non-yielding. That happens to be its main ill. As proven only too clearly since November, whenever the yield on the U.S. Treasury’s 10-year note spiked, investors fled from the yellow metal without a thought, and into any asset that simply paid better. Based on this, gold is worth only what an investor thinks it’s worth - or calculates what that worth will be over time by applying projected inflation, production costs and other economic effects. Also to remember is the huge global demand daily for gold bars, either to be held in central bank vaults as reserve or be turned into jewelry (I had a quite an amusing time this week reading the demented logic of a few commentators on Investing.com arguing that gold was just a “color” or its best non-investment use was as plating for microchips).
All said, the best immediate indicator for gold now are technical charts. And almost all signals point to the $1,700 support for gold being a tenuous one - meaning a break to $1,600 levels is very possible. But chart history also suggests that once gold hits a “hard floor” of between $1,691 and $1,642, it could snap back violently, possibly even to $1,800 levels and beyond.
Crude oil markets are, meanwhile, in a precarious position of their own, after posting a fourth straight month of gains in February.
The enlarged OPEC+ alliance of oil producers, banding the Saudi-led Organization of Petroleum Exporting Countries and allies steered by Russia, is to meet next Thursday to set output quotas for April. The previous meeting had ended in a face-saving compromise which allowed Russia and Kazakhstan to raise their output, while Saudi Arabia offset the net increase in world supply with a temporary 1 million barrel a day cut of its own.
The kingdom pledged to make these extra curbs only in February and March, but some see signs that could change as the negotiations get underway.
Bloomberg reported earlier this week that Riyadh was publicly urging fellow members to be “extremely cautious,” despite crude prices rebounding to a one-year high. In private, the kingdom has signaled it would prefer that the group broadly holds output steady, delegates said. Moscow, on the other hand, is indicating that it still wants to proceed with a supply increase.
But some analysts are optimistic that crude prices will weather the OPEC meeting just fine.
“To stop and potentially reverse slightly the meteoric rise in oil, I'd expect a multi-million barrel increase may be needed to push oil back to $50,” said GasBuddy analyst Patrick de Haan. “With recovering demand, feels like the market probably could use 2+ (million b/d) increase.
“Anything under 1 is too low and risks oil breakout,” he added.
Gold Price & Market Roundup
Gold for April delivery on New York’s Comex did a final trade of $1,732.45 an ounce on Friday, after officially settling the session at $1,728.80, down $46.60, or 2.6%. It earlier tumbled to $1,715.05, its lowest since June 8 bottom of $1,700.10.
For the week, the benchmark gold futures contract was down 2.7%, following through with the previous week’s slide of 2.5%. With Friday being the last trading session for February, it wrapped the month down 6.6%, its worst since a 7.2% decline in November 2016 .
Spot gold, which reflects real-time trades in bullion, setted at $1,734.40, down $36.44, or 2.1%. Hedge funds and other money managers sometimes rely more on the spot price than futures for determining direction in gold.
Oil Price & Market Roundup
New York-traded West Texas Intermediate, the benchmark for U.S. crude, did a final trade of $61.62 on Friday. It officially settled the session at $61.50, down $2.03, or 3.2%, on the day.
For the week, WTI was up almost 4%. For the month, it was up nearly 18%, extending advances of around 8% in January, 7% in December and 27% in November. At current prices, WTI is also trading at levels last seen in January 2020, before the onset of the coronavirus pandemic that decimated the market for months.
London-traded Brent, the global benchmark for oil, did a final trade of $64.43 per barrel on Friday. It officially settled the session at $64.42, down $1.69, or 2.6% on the day. For the week, it was up almost 5%. For the month, it was up 18%, extending gains of 8% in January, 9% in December and 27% in November. Brent also hit a 13-month high of $66.81 in February.
Energy Calendar Ahead
Monday, March 1
Private Cushing stockpile estimates
Tuesday, March 2
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, March 3
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, March 4
EIA weekly report on {{ecl-386||natural gas storage}
Friday, March 5
Baker Hughes weekly survey on U.S. oil rigs
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. As an analyst for Investing.com he presents divergent views and market variables.