Award-Winning Metals Market Report: May 2016 - Week 3 Edition

Mike Fuljenz
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Posted: May 18, 2016 12:01 AM

May, 2016 – Week 3 Edition

Gold retreated last Friday and so did stocks. Through mid-May, gold has outperformed stocks by 20%. Gold held up well through Thursday, but some positive economic indicators released on Friday sent the price of gold back down to $1273. One major Friday indicator showed retail sales rising a robust 1.3% in April, well above the expectations of 0.8%. Ironically, gold often declines on good economic news and rises on bad news. In the previous two weeks, gold rose after a weak jobs report and a weak GDP report.

World Gold Demand Increased 21% in the First Quarter

Last Thursday, May 12, the World Gold Council (WGC) released its quarterly “Gold Demands Trends,” which documented the facts behind gold’s strongest first quarter ever – and the second best quarter for gold in history. In the quarter ending March 31, gold demand rose 21%. This is all the more amazing since gold jewelry demand actually fell 19%, mainly due to weaker-than-usual demand in China and India, traditionally the top two countries for gold demand. Offsetting weak jewelry sales, investment demand soared 122% (year-over-year) and 201% (quarter-over-quarter). Demand for physical gold (coins and bars) rose 55%, but the biggest gain was in gold ETF demand, which rose by a huge 300%.

The main causes, according to the WGC, were volatile stock markets and negative interest rates. Central banks in Europe punished savers with negative interest rates since 2015, and then Japan instituted their own negative rates in January, 2016. In the U.S., the Federal Reserve retreated from its predicted four planned interest rate increases in 2016 to just one and perhaps none. “Real” (after-inflation) interest rates around the world are mostly negative now, giving gold an advantage over cash savings in the bank.

Gold’s performance is especially impressive since gold historically tends to rise the most in the final four months of the year, when gold fabrication for seasonal jewelry gifts tend to rise. This year, when China and India resume their normal fall demand, we should see a further surge in gold in the fall. Indian gold dealers were recently on strike, creating pent-up demand. For the year 2016 as a whole, the WGC sees Indian gold demand reaching 850 to 950 tons, and another 900 to 1,000 tons in China. In addition, WGC predicts that the world’s central banks will buy another 400 to 600 tons of gold by the end of 2016.

More Big Banks Change Their Tune on Gold

The experts who looked out into 2016 last December uniformly predicted lower prices, but gold is up 20% so far in 2016, so these banks are changing their mind. I suppose that’s better than being stubborn.

JPMorgan Private Bank (a division of JPMorgan Chase for high net-worth investors) says that this is just the start of a “new and very long bull market.” JPM’s global head of fixed income, currencies and commodities, Solita Marcelli, told CNBC that “$1,400 is very much in the cards this year.” This is a big shift from January, when JPMorgan forecast that gold would average $1,104 in 2016. Marcelli cited negative interest rates as a positive for gold, saying “Gold is looking more and more attractive every single day. As a non-yielding asset, it has a minimal storage cost, so when you compare it to negative-yielding assets …Gold is a great portfolio hedge in an environment where world government bonds are yielding at historically low levels.” She also said that gold could wind up replacing government bonds as a safe haven: “We're recommending our clients to position for a new and very long bull market for gold.”

BMO Capital Markets also expects to see $1,400 gold by the end of 2016. Like many others, BMO cites the advent of negative interest rates – even though that trend was clearly evident at the end of last year. “If the probability of a Fed rate hike by November-December continues to decline,” BMO says, “this should remain supportive for gold prices.” Likewise, they said, gold could correct if the Fed raises rates.

Paul Singer, a billionaire fund manager, says that gold’s strong first quarter is just the beginning of a major bull market. “It makes a great deal of sense to own gold,” said Singer, head of Elliot Management. “Other investors may finally be starting to agree,” he said. “Investors have increasingly started processing the fact that the world’s central bankers are completely focused on debasing their currencies.”

Goldman Sachs is still bearish on gold, but they increased their three, six and 12-month gold targets to $1,200, $1,180, and $1,150 an ounce from $1,100, $1,050 and $1,000 respectively. Apparently, they are just trying to catch up with reality, but they might have to keep raising those numbers throughout 2016.

A New Theory on the Deutsche Bank “Price Fixing” Conspiracy

On April 13, Deutsche Bank agreed to settle a precious metals price-fixing lawsuit for an undisclosed amount of money. They also agreed to provide the plaintiffs with their private communications with other banks. Lawyers for the plaintiffs said that Deutsche Bank’s cooperation would “substantially assist plaintiffs in the prosecution of their claims against the non-settling defendants” (the other big banks).

We haven’t seen any updates over the last month, but in our mid-April issue we said this, in bold type: “Silver may have been lifted by the result of a price-fixing lawsuit settled by Germany’s Deutsche Bank last week. It’s too soon to comment on this developing story, but we will be following it closely.”

After looking more closely at the silver connection, we see that silver fell far more rapidly than gold after the London Bullion Market Association (LBMA) took over the silver price fixing for the London market from the previous provider, London Silver Fixing, Ltd in August 2014. Since then, silver performed far worse than gold, but since the price fixing scheme surfaced in April, silver has recovered faster than gold.

From July 31, 2014 (right before the change in the London silver fix mechanism) to April 8, 2016 (the Friday before the Deutsche Bank revelation), gold fell only 3.5% while silver fell 26.7%, creating an unusually high 82-to-1 spread between gold and silver. Since the Deutsche Bank fix became public, that ratio has fallen back to a more normal range. Since April 8, silver is up 13% vs. just 2.7% for gold. This is not proof, of course, but it is unusual for silver to rise and fall this rapidly when gold moves very little.