Gold Prices Rally Strongly Amid Falling Equities

The price of gold rebounded from its 15-month low last week to see its biggest weekly gain in four months. After failing to break below a key support level at $1180 an ounce the price of gold rallied higher for the first time in a long while last week, with gold bouncing $32 (2.7%) to close out the week at $1223 an ounce.

The price of the yellow metal has begun this week on a firmer note as prices extend last weeks’ gains. At the time of writing the price of spot gold was trading at $1233 an ounce after pushing through $1230 an ounce on Monday and hitting a four-week high as traders covered short positions while some bargain hunters stepped in to buy at the current low levels.

Meanwhile global equities have fallen. The Standard & Poor’s 500 Index experienced its worst three-day loss since 2011 as it fell an additional 1.6% on Monday to 1,874.82 at 4 p.m. in New York, the lowest since May and closing below its 200-day moving average for the first time since 2012. The Dow Jones Industrial Average lost 1.4% to a six-month low. Brent crude tumbled 1.5% after sliding into a bear market last week. The dollar weakened against most of its 16 major counterparts and gold gained 0.7%.

The S&P500 has fallen 6.8% from its Sept. 18 record as the Fed contemplates when to raise interest rates. The index is down 4.8% over three days, the most since November 2011.

The International Monetary Fund cut its forecast for global growth last week and said the euro area faces the risk of a recession.

The IMF now expects world growth to register at 3.3% in 2014, down 0.1% from its forecast in July. For 2015, it also slashed its forecast by 0.2% to 3.8%.

The organization, which represents 188 countries, now expects world growth to come in at 3.3% in 2014, down 0.1% from its forecast in July. While in 2015, it expects growth of 3.8%, down 0.2% from earlier expectations.

It comes less than a month after the Organisation for Economic Co-operation and Development (OECD) slashed its expectations for the global economy because of concerns about a stuttering recovery in the U.S. and the continued fragility of the euro zone.

Speaking as the IMF's World Economic Outlook was released on Tuesday, Research Director Olivier Blanchard said the world's economic recovery was "weak and uneven," and highlighted countries' "very different evolutions."

"Growth is uneven and still weak overall and remains susceptible to many downside risks," the IMF's report said.

Following the report the price of gold rebounded by 1.3%, its biggest one-day advance in two months.

The IMF also warned of bubbles building in financial assets. “Downside risks related to an equity price correction in 2014 have also risen, consistent with the notion that some valuations could be frothy,” it said.

Also comments from some of the top U.S Fed policy makers expressed increasing concern about weakening world economies, were deemed a bit dovish by the market place.

Last week, Chinese traders returned to the market following their Golden Week holiday. Bullion dealers cited solid demand for kilo bars and domestic demand for gold jewellery was strong leading manufacturers to order more of the yellow metal.

In Hangzhou, retailers saw gold jewellery sales jump 106%, while stores in Tianjin saw gold and silver jewellery sales rise by more than 40%, according to a statement from the ministry of commerce earlier this week.

Demand has also been increasing in India, the second biggest consumer, helped by the festival and wedding season.

Indian gold premium increased to $12-$15 an ounce last week from $7 two weeks ago, dealers said.

This month, India will celebrate the festivals of Dhanteras and Diwali and both are considered auspicious times for buying gold jewellery, coins or bars.

As the wedding season approaches, demand for gold is expected to increase. Gifts of gold are an important part of Indian weddings.

"Gold demand in the physical market has increased and is likely to remain firm until early next year because of festivals and the wedding season. Gold jewellery remains in demand during the marriage season as it is mandatory for Indian households to gift gold," said Yash Zaveri, director of retailer Zaveri & Co.

The big news of the week, which went unnoticed by mainstream media was the launch of the new gold kilo bar contract by the Singapore Exchange.

The new Singapore Kilobar Gold contract is for 25 kilograms of 99.99% pure gold and began trading on the Singapore Exchange (SGX) at 8:15 a.m. on Oct. 13, introducing centralized trading and clearing of a physically-delivered gold contract in Singapore.

The contract is the result of a collaboration between International Enterprise (IE) Singapore, Singapore Bullion Market Association (SBMA), Singapore Exchange (SGX) and the World Gold Council.

Commenting on the significance of the announcement, Singapore’s Minister of Trade and Industry  Lim stated, “With our close proximity to both demand and supply in Asia, I believe that Singapore is well-placed to support the bullion industry, with substantive mutual benefits.”

Asia’s incessant demand for physical gold is the biggest driver for the implementation of a new gold contract trade on the Singapore Exchange.

“Our vision is that Asia can be a driving force to continue the growth of the bullion industry, and be a global leader in areas fundamental to the demand and trade in this region,” he added.

The move comes after in 2012 the Singapore Government exempted investment in precious metals (IPM) from a 7% Goods and Services levy.

 “The global gold market continues to shift from west to east and Singapore’s ambitions to become a gold hub reflect this trend. Since its inception, the World Gold Council has worked with key market participants to drive the development of this market,” said Albert Cheng, Far East Managing Director at the World Gold Council.

Brink’s Singapore Pte Ltd has been appointed as an Approved Vault Operator and its approved vault is at The Singapore Freeport. Banks supporting the development of the contract include JPMorgan Chase Bank, Standard Bank Plc Singapore Branch, Standard Chartered Bank and The Bank of Nova Scotia.

Muthukrishnan Ramaswami, President, SGX stated, “SGX is pleased to support the consortium’s efforts to develop Singapore as a global trading hub for gold. SGX’s market place will enable the trading and clearing of the Singapore Kilobar Gold Contract and establish a fully transparent price discovery mechanism for gold in this region.”

The Shanghai Gold Exchange was launched in September inside the city's free-trade zone, offering yuan-denominated contracts backed by gold held in Shanghai.

China is now the world's largest producer and consumer of gold, and the biggest importer, as domestic demand has outstripped supply. India also is a major buyer and importer. Two-thirds of global gold purchases come from Asia.

With such demand for physical gold, it is obvious that there is a complete disconnect between the current price of gold and the real value of gold. 

This price suppression has been the result of the activities of the CME Group, together with major banks. By using paper contracts on Comex, these institutions are causing severe dislocations in the real world and the scam can’t continue indefinitely and will cause its own demise by how it distorts the real world of supply and demand.

Furthermore, the recent rally in the U.S. dollar is unjustified by the economic fundamentals and will not be sustainable in the long-term.

Gold therefore remains a crucial portfolio diversifier for the potential dangers ahead.

TECHNICAL ANALYSIS

Gold prices have rebounded strongly from recent lows and are likely to climb higher and re-test resistance at around $1270 an ounce.                                               

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