Gold soared 4.1% on Friday – its biggest one-day jump in about 10 months.
This massive move in gold was on the back of a lousy US jobs report. I mean really lousy. Just four months ago, the US economy created 243,000 new jobs in a month. This has fallen steadily to the current pace of just 69,000.
In a country of 311 million people, 69,000 jobs don’t even touch the sides. So the unemployment rate actually climbed for the first time in a year, creeping back up to 8.2%.
Traders took one look at all this, and decided that the US Federal Reserve will have no choice but to print more money. Gold rose the last two times the US Federal Reserve did this (QE and QE2), so traders loaded up on gold in a big way to profit.
As you may know, I’ve been more bullish about gold than most in recent years, and I still like gold long-term.
But I think the markets are getting tunnel vision over the prospect of QE3, as if it was the only thing that mattered to the gold price.
Missing the Big Picture on the Gold Price
Gold did indeed soar 70% during the first dose of QE.
But like most drugs, its effect fades with repeat use.
The fact is that during the eight months of QE2, the gold price rose just 15%.
Seeing as the US gold price rose an average of 17% a year for the last ten years anyway, QE2 hardly even pushed gold above its yearly average.
So, should we get excited about what QE3 will do to the gold price?
Judging by the trend so far, maybe not.
But it depends on what the Fed has in store. Will they go guns blazing, and announce the mother of all printing programs? And how will they execute the program? The Fed meets on the 19-20 June, so we may not have a long wait to find out.
All year, we have seen gold rise and fall on the back of speculation about QE3. The gold price has twitched on every data release from the States. Every public word from the Fed’s Chairman, and his board members, has been analysed to speculate on what their real intentions have been.
There has been so much speculation about QE3, that the market has missed the bigger picture.
Even on last Friday’s massive jump, gold is still 4% beneath its 200-day moving average (the red line below). It’s barely back up to the 50-day moving average (blue line). The 50-day is well under the 200-day, which itself is rolling over. It’s not the rosiest gold chart I’ve ever seen.
The Gold Price – 6 Months and No Progress
More QE from the Fed could give gold a bit of zip, but it would really just be the icing on the cake.
What we really need is solid buying on the gold market.
The Hole Appearing in Gold Demand
But one of the engines of gold demand has recently started spluttering – India.
Last year India imported about 1,000 tonnes of gold – about 40% of global gold mine production. This year imports have fallen out of bed. The Bombay Bullion Association’s (BBA) own report says imports could halve this year, which would be around 500 tonnes.
I reckon they’re dreaming. Media reports suggest imports were just 15 tonnes in April. At that speed, India would import just 170 tonnes this year. That would leave 830 tonnes up for grabs. That’s a lot of gold. Any takers?
The general idea is that China will come to the rescue. We have seen some incredible jumps in Chinese imports. I feared it may slow down in April, but it soared to 67.4 tonnes.
Last year China imported 380 tonnes of gold. To mop up 500 tonnes of slack the BBA forecasts, keeping Chinese and Indian imports steady as a whole, China would have to import at least 880 tonnes this year. That’s an average of 73 tonnes a month.
That’s quite a pace, and Chinese imports between Jan and Feb were well below that.
It’s possible, and time will tell. For now, analysts interviewed by Reuters reckon China’s gold imports will be closer to 500 tonnes this year. Not that they can see into the future better than anyone else, but if they are right, there will be plenty of slack in the gold market. And that translates to more weak prices.
It’s not all bad news.
There is something on the horizon for gold potentially more important than any of this.
The Game-Changer for Gold
The Basel Committee of Bank supervision, who dream up the rules that govern banks, are looking at turning gold into a ‘Tier One’ asset.
This means the banks can carry gold as capital at 100% of its market value – instead of the current 50%.
This gives gold a huge increase in status, and effectively turns it back into money at the top level. It would also give the banks a strong reason to hold gold.
Consider that banks hold around $5 TRILLION in Tier One capital today.
Just 2.4% of this capital would absorb the ENTIRE annual output of annual gold mine production.
That’s a pretty incredible thought.
Gold turning into a Tier One asset would be a total game changer. If the bankers were incentivized to transfer even a fraction of the Tier One assets into gold, we wouldn’t need to pay much attention to Indian import levels!
A quick look through which countries are on the Basel Committee, and amongst it you will see many of the central banks from countries that are behind most of the recent buying; countries like Russia, Mexico, Turkey, and China. Note that China’s central bank buys plenty of gold – but they only report it every 5 years or so.
Other countries on the committee are those that already hold the world’s largest holdings like the US, Germany, and France.
To top it off, the Basel Committee is based in Switzerland, which has one of the largest gold bullion stashes of all countries!
You can see the committee countries all have good reason to improve the status for gold to a Tier One asset. And even more reason for the price to rise much, much higher once they are all set.
There hasn’t been much mainstream press about this – banking regulations hardly make the sexiest copy.
But if the Basel Committee gets this done, it will be the biggest reason to buy gold in years.
Dr. Alex Cowie
Editor, Diggers & Drillers