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LAWRIE WILLIAMS: GLD adds 230 tonnes of gold so far this year and rising despite gold price fall

There’s something decidedly strange going on in the gold market, which seems to be something of a battle between different major financial interests.  The gold price has fallen quite substantially in the past week to 10 days, and today slipped below the $1,240 level which had proved to be a bit of a resistance point.  But, on the other hand investment into the big gold ETFs has been rising – and rising quite sharply.  Normally rising gold ETF purchases are accompanied by a rising gold price, as we have seen throughout most of the year to date – and vice versa, but this pattern isn’t panning out – for now.

Interestingly some of the biggest names in North American financial circles have been piling into gold and/or gold stocks which gives the gold bulls a certain amount of confidence as to where gold and the other precious metals are headed, but the dreaded gold market doldrums are also ahead of us – the usually weak period from late May though to September when the big money players take off for their summer vacations to the Hamptons or the Caribbean and North American markets are thin.  Most years the gold market picks up after the U.S. Labor Day holiday is over in early September although one should perhaps recall that gold’s four year plus decline started immediately after Labor Day in 2011, although that followed an almost unprecedented gold price rise through the normally weak summer months.

This time around gold had been doing pretty well up until a week ago when the U.S. Fed Open Market Committee (FOMC) published the minutes of the deliberations at its meeting a week earlier.  This was interpreted by the markets as an indication that a second Fed rate rise might yet be on the cards as early as June – something that had previously been seen as unlikely by the majority of analysts.  A rate increase, so the theory goes, would lead to strengthening of the dollar resulting in a weakening in the dollar price of gold.

Whether there’s June rate increase or not – the odds are that the Fed will talk itself into one or two more rate increases this year as if not its ever decreasing credibility will be even more at risk – the question should still be asked:  Would a Fed rate increase necessarily lead to a fall in the gold price?  Apart from a knee-jerk reaction immediately following an increase, we’re not so sure.  Look what happened after the Fed’s last rate increase in December last year.  The gold price fell ahead of the increase, but immediately following it, if anything the gold price rose a little over the next couple of weeks and then took off into its January to May surge.  The anticipation of the rate increase was obviously far worse for gold than the effect.  Given that a 25 basis points rate rise is pretty small in the scheme of things and even the increased rate effectively still ended up as negative in real terms, would another 25 basis point rate increase in June be any different.  Even the ‘hawks’ are not suggesting a higher increase.  Conversely, after the anticipatory downturn, should the Fed fail to raise rates this could see gold take off again, back to towards the $1,300 level and possibly higher.  That is perhaps what the big money investors buying into the gold ETFs are looking for and they didn’t get where they are today by making wrong decisions, although they are probably not totally infallible!

For the record, the biggest gold ETF of all, GLD in the U.S. added another 3.27 tonnes of gold to its holdings yesterday despite the fall in the gold price.  Its holdings now are at 872.254 tonnes – up a massive 230 tonnes since the beginning of the year and are now at the highest level since end-October 2013.

24 May 2016 | Categories: Gold

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