Daily Market Update

‘Lehman Moment’ Coming? Chinese Credit Markets Freeze

DAILY PRICE REPORT
Today’s AM fix was USD 1370.00, EUR 986.46 and GBP 824.41 per ounce.
Yesterday’s AM fix was USD 1371.00, EUR 982.30 and GBP 821.70 per ounce.

Gold rose $4.50 or 0.33% yesterday to $1,371.60/oz. Silver dropped 11 cents or 0.52% to $21.17/oz.

Gold in US Dollars – 5 Days (Bloomberg)

Heightened tensions ahead of Ukraine’s weekend referendum in Crimea and concerns over China’s financial system and economy and indeed the global economy pushed world stocks to their lowest in a month on Friday and sent investors into safe haven gold.

Gold is 2.3% higher again this week and reached a 6 month high of $1,376.64/oz today and is poised for its sixth straight weekly rise. Gold is now 14% higher so far in 2014. It’s technicals look good and from a momentum perspective gold looks bullish.

European shares started the day down 0.6% after the Nikkei plunged 3.3% overnight and is down 6.2% for the week. Stocks globally are on course for their biggest weekly drop since January. The German DAX whose German constituents have the most exposure to Russia, is down 4.3% for the week and facing its largest weekly losses since the height of the euro crisis in June 2012.

Ordinarily, one would expect a pullback for gold after a succession of such price gains. However, the very serious geopolitical situation is making traders reluctant to take profits or go short. Gold may test the $1,400/oz level prior to seeing any correction and traders will want to be long over the weekend. There is of course the possibility that a further breakdown in diplomatic relations between Russia and the West leads to further safe haven price gains.

Silver was up 0.4% at $21.23/oz, platinum was down 0.2% at $1,469.30/oz and palladium was up 0.3% at $775.80/oz.

GoldCore featured in Bloomberg’s ‘Chart of the Day’ today:

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Gold, rebounding from the cheapest level against equities in five years, will keep outperforming stocks as concern about slowing economic growth and political turmoil spur haven demand, according to brokerage GoldCore Ltd.

The CHART OF THE DAY shows gold traded at 2.94 times the MSCI All-Country World index of equities on Dec. 30, the lowest level since September 2008. The ratio, at 3.36 now, will keep rising in the next few months and may reach above 6 in the next few years, said Mark O’Byrne, a director in Dublin at GoldCore, which has more than $200 million in bullion under management.

Gold / MSCI All-Country World Index – 2008 to March 2014 (Bloomberg)

The stocks gauge climbed to the highest since December 2007 last week on speculation the Federal Reserve will support the economy as factory output to service industries indicated the U.S. recovery may be slowing. China’s industrial-output, investment and retail-sales growth cooled more than estimated, data showed this week. Gold, after slumping the most since 1981 last year, advanced to the highest since September as the Ukraine crisis triggered the worst standoff between Russia and the West since the end of the Cold War.

“Equity valuations look over extended, especially given the uncertain outlook for the Chinese and global economy,” said O’Byrne. “The poor data could lead some investors to allocate funds to gold again to hedge macroeconomic risk. Geopolitical risk could see gold outperform global equities.”

Bullion has risen 13% since the end of December to $1,367.89 an ounce by yesterday in London. It slid 28 percent last year, after 12 successive annual gains. The MSCI measure of stocks is little changed at 407.63 this year after a 20 percent jump in 2013. It reached a record 428.63 in November 2007.
(Bloomberg)

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Geopolitical Risk Could See Gold Outperform Global Equities
Events in Ukraine, the deteriorating relations between Russia and the West and what some have called the worst geo-political crisis since the end of the Cold War are leading some investors to reduce allocations to risk assets and increase allocations to safe haven assets such as gold.

We expect this trend to continue in the coming months as the crisis in Ukraine looks intractable and tensions between Russia and the West seem likely to remain tense. Not just over Ukraine, but over a number of geopolitical issues including the Ukraine, Syria and Iran.

The excellent performance of stocks since April 2009 and the poor performance of gold since August 2011 may be reversed with gold outperforming stocks in the coming months.

The benchmark S&P 500 has nearly trebled in value from 667 in April 2009 to new record highs at 1883 in recent days.

Gold and the S&P 500 – Quarterly, 1970 to March 2014 (Bloomberg)

Global equities have also had a great run since April 2009 and the benchmark MSCI World Index has more than doubled since April 2009.

Meanwhile, gold has fallen from over $1,900 in August 2011 to a low of $1,180.50/oz at the end of June 2013. Today, with gold at $1,365/oz, gold remains 40% below its all time record high. The MSCI World Index is near all time record highs.

Equity valuations look over extended especially given the uncertain outlook for the Chinese and global economy after some recent poor economic data.

Conversely, the poor data could lead some investors to allocate funds to gold again in order to hedge macroeconomic risk.

Thus, we believe that gold will outperform the MSCI World Value Index in the coming months. In the coming years, the ratio should keep rising as gold ekes out gains against stocks.

Gold Analysts And Traders Bullish for First Time in Month on Ukraine to China
Gold traders and analysts are bullish for the first time in a month as Ukraine turmoil and China slowdown seen increasing haven demand. The Bloomberg survey results for next week are:

Bullish: 12

Bearish: 9

Hold: 3

‘Lehman Moment’ Coming? Chinese Credit Markets Freeze
After years of massive economic growth, China’s credit fueled economy is slowing down.

This is leading to, for the first time in Chinese history, domestic corporate bond defaults.

There are increasing concerns that China could be sliding towards a ‘Lehman Moment’ of its own, when a major default sparks dozens more and the Chinese banking system freezes up.

Any default of loans in China will not set off systemic risks in the world’s second-largest economy, Premier Li Keqiang said at a press conference yesterday. Li reiterated the government’s standard line that debt risks in China are under control.

Beijing’s challenge is laid bare by the failure of Haixin Steel, a privately owned mill, to repay loans that came due last week. There are concerns that the default could send shockwaves through the local banking and shadow banking sectors.

Lending in China’s shadow banking system in February evaporated to almost nothing from $160 billion in January. Worsening credit conditions promise to hamper economic growth even more.

China’s bad debt problems added to global market jitters this week and today, exacerbating concerns about the recent frothiness of US shares and the deepening confrontation between Russia and the West.

Will these Chinese snowflakes trigger the global contagion avalanche? It is quite possible. However, China’s debt problems are just one of a myriad of serious macroeconomic, systemic, monetary and indeed geopolitical risks facing investors today and necessitating an allocation to gold.

The 7 Key Bullion Storage Must Haves
A diversification into precious metals remains prudent and will again protect investors, both retail and institutional, pensions owners and savers, over the medium and long term. However, this is only the case if bullion owned is physical bullion coins and bars.

For first time buyers of gold bullion, or even those looking to select a new storage partner, GoldCore has drawn up a list of key must-haves: the absolute benchmark list that will enable you to evaluate potential bullion or storage partners. Download your copy of ‘7 Key Allocated Gold Storage Must Haves’ here.

Mark O'Byrne
Executive Director

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