September is Off to a Good Start – for the Usual Reasons

Mike Fuljenz
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Posted: Sep 07, 2016 12:01 AM
September is Off to a Good Start – for the Usual Reasons

In addition to the fundamentals from the Fed, the dollar and Wall Street’s fixation on each Fed meeting, gold is off to a good start in September – largely due to the “usual reason” of seasonal buying in India.  That has not been the case over the last two years, due in part to subpar rainfall in monsoon season.  Without rain, crop harvests are low, farm profits disappear and the demand for gold declines sharply, but with the higher rains coming this year, there should be a healthier gold demand market in India this fall.

In the first half of this year, gold demand was weak in India due to a long jewelers’ strike (running most of March and April) and higher gold prices, which discourage the price-sensitive Indians from buying.  But with wedding season and the Diwali holiday coming up (October 30), the second half looks brighter for demand in India, which is #2 (narrowly behind China) in global gold demand. The recent drop in gold prices also helped, but the biggest wild card is rain. Gold consumption among rural farmers and their extended families accounts for as much as one-third of all gold purchases in India.  Monsoon rains have been above average so far, refreshing the dry land of the last two years.  Because of these above-average monsoon rains, the precious metals analysts at Thomson Reuters GFMS project an increase of 11% in gold demand spending for India this season vs. the previous (September 2015 to August 2016) season.

Sales began picking up in early September for the Ganesh Chaturthi festival, which fell on September 5 this year. Kumar Jain, a jeweler from Mumbai (formerly Bombay) said, “Retail buyers have started making small purchases for Ganesh festival. Some buyers are even making purchases for weddings.”  

In addition, a large group of Indian gold refiners has been in talks with the New Delhi government over proposed regulation changes to permit them to export gold in bullion form.  Under current regulations, the country’s 27 gold refineries are only permitted to export gold in a “value-added” form, such as jewelry.

U.S. American Gold Eagle Sales are Up Nearly 10% So Far in 2016

The U.S. Mint sold 1.8 metric tons of gold in August, or 50% more than the 1.2 tons sold in July. There was a sharp decline in American Eagle gold sales in July and August this year vs. last summer, but that’s because July and August of 2015 were so strong.  If you look at the full eight months of 2016, however, American Eagle gold coin sales are up 9.8% in terms of ounces sold and more like 18% in terms of dollar sales, since gold’s average price so far in 2016 ($1,253) is about 8% higher than it was in 2015 ($1,160).

Gold Staged a Strong Friday Move

Gold closed under $1310 last Thursday, September 1, but then gold staged a strong Friday move after the morning jobs report came out weaker than expected.  Gold closed $1,325 on Friday and then shot up to $1,342 Monday morning when the dollar weakened. The falling dollar and rising gold reflect the new likelihood that the Fed will not raise rates at the next meeting of its Federal Open Market Committee (FOMC) on September 20-21.  Since the next FOMC meeting after that is November 1-2, right before the Presidential election, when any action would carry heavy political overtones, their next realistic chance for a rate increase will come on December 14, giving gold “clear sailing” for the next three months.

Most Wall Street Analysts Are Still Positive on Gold

One of the big “game changers” in gold this year is the bandwagon of support from Wall Street analysts, based on the global trend toward negative interest rates in Europe and Japan and stubbornly-low interest rates in the U.S.  As we reported in late August, based on the quarterly World Gold Council gold demand report, gold ETF demand was a net +579 metric tons in the first half, vs. negative totals in 2014 and 2015.

In recent weeks, several mainstream analysts have jumped on the gold bandwagon or “doubled down” on their previous bullish remarks – even though most mainstream analysts were bearish on gold last January.

Chad Morganlander, portfolio manager at Stifel Nicolaus, said on CNBC’s “Power Lunch” last week that “we believe that [gold] will continue to go higher” since gold is a “great hedge against market volatility as well as equity risk.” He even thinks that a Fed rate increase this year could be positive for gold, saying “We believe that gold will start to rally again after the Federal Reserve comes in and repositions for the next interest rate hike, which we’re expecting at the end of the year.” He expects gold to rise by an average 5% a year over the next five years, which works out to a gold price over $1,700 within five years.

Nick Peters, a portfolio manager at giant mutual-fund company Fidelity, recently added gold positions to two of his total-return funds, explaining: “With yields expected to remain lower for longer, the traditional drawback of gold, that it yields nothing, is less of an issue.  Although we have seen a significant rally in gold, I think investors should still consider an allocation to the precious metal. Gold can function as a safe haven during times of market volatility and provide strong countervailing returns to shares.”  

Lord Jacob Rothschild, chairman of the $4 billion Rothschild Investment Trust, revealed last month that he cut billions in his fund’s stock position, using some of that money to buy gold.  He raised gold and precious metals to 8% of the fund’s holdings, while cutting exposure to the weak British pound sterling from 34% to about 25%. Lord Rothschild said that the political situation is now too risky, with Brexit at home, the U.S. presidential elections coming soon, all on top of the slowing Chinese economy and endless conflicts in the Middle East.  He said that preservation of capital in real terms is important now.

Last month, RBC Capital Markets raised its gold forecast by $200 (from a previous $1,300 forecast) up to $1,500 for 2017 and 2018, citing “elevated geopolitical risk in the U.K./euro zone, increasing systemic risk with increasing negative yields for government bonds and the Fed likely to pursue a more dovish monetary policy.”  Their main recommendation for leveraging gold’s rise is to buy gold mining shares, but those shares also tend to fall rapidly when gold prices fall, making real gold a more stable investment.

Another mid-August report issued by TD Securities warned that “the risk of an equity correction and negative yields for some $13 trillion worth of fixed-income assets should see safe-haven interest in gold continue,” adding that “this should make any correction well contained. Hedge funds maintain a near-record long position in Comex gold and the opportunity (cost) to hold the metal will remain very low as global sovereign yields hover near record lows as a result of central banks’ continued experimentation with unconventional monetary policy. Indeed, the risk of ‘helicopter-money policies’ and concerns that the current and recent massive central-bank asset purchase programs create a problem likely means that investors will continue to hold gold as a hedge against the unknown.”

Mike Fuljenz is the Official Precious Metals Expert for Townhall