HomeBullion & Precious MetalsGold Markets Report - Gold Breaks Lower over Possible Interest Rate Hike

Gold Markets Report – Gold Breaks Lower over Possible Interest Rate Hike

Commentary for Tuesday, May 24, 2016 (www.golddealer.com)

Gold Market Newsletter with Richard Schwary

By Ken Edwards and Richard Schwary of California Numismatic Investments Inc …..

Gold closed down $22.60 at $1228.90 – this was the other shoe falling.

The easy answer as to why gold continued to sag this morning… new home sales. The actual number blew past the estimate further adding to the now rather large choir claiming that the Federal Reserve will raise interest rates this summer.

A few of the Fed governors have already thrown their two cents into the interest rate pot claiming a rate hike while not mandatory may be prudent. I don’t get this posturing – in the old days these guys did not opine in public but today it would seem anything goes.

At any rate the US economic numbers support a rate hike (according to their tally sheet) and a rate increase we shall have – perhaps a small one this summer and another small increase by year end.

gold_bullion_coinsWall Street loved this housing news this morning – all in the green. So the main reason gold continues to struggle after a booming 2016 beginning – is its old nemesis. The potential for higher interest rates pushes the dollar and stocks higher as gold trends lower.

The Dollar Index is solid – the 5 Day chart have moved from 94.50 to 95.51 – a full point to the upside in a week – so it’s easy to see why gold has lost $40.00 since the beginning of last week.

I was saying yesterday that a break-down below $1,250.00 is technically weak and may portend further downside as gold tries to get comfortable with a more aggressive Federal Reserve. With today’s close ($1,228.90) we are in bearish short-term territory.

This position however can change on a dime pending bargain hunting or renewed problems in Europe or China. For now however the next support in prices shows up around $1220.00 which goes back to early March.

I still think this latest weakness may be an overreaction to an interest rate hike which will amount to maybe a ¼ point but there you have it – like usual wait to see if this market stabilizes. If it does we are oversold and prices may present another buying opportunity. If it does not gold will remain on the defensive looking for fresh news to change this interest rate dynamic.

This view may be even more conservative than most. I have posted the widely read Citi Bank position – they welcome the drop as a buying opportunity. Also keep in mind that gold is up 17% on the year and gold accumulations (ETF numbers) are steady and hit a new record on the year today at 61.16 million ounces – that level was 48 million at the first of the year.

Silver closed down $0.18 at $16.23.

Platinum closed down $10.00 at $1004.00 and palladium closed down $13.00 at $537.00.

This from Reuters – New home sales hit 619,000 in April, versus 520,000 estimate – New U.S. single-family home sales surged to a more than eight-year high in April and prices hit a record high, offering further evidence of a pick-up in economic growth early in the second quarter.

The Commerce Department said on Tuesday new home sales jumped 16.6 percent to a seasonally adjusted annual rate of 619,000 units, the highest level since January 2008. The percent increase was the largest since January 1992.

March’s sales pace was revised up to 531,000 units from the previously reported 511,000 units. Economists polled by Reuters had forecast new home sales, which account for about 10.2 percent of the housing market, rising to only a 523,000 unit-rate last month.

New home sales are volatile month-to-month and April’s increase probably exaggerates the housing market strength.

This from Allen Sykora (Kitco) – Citi Hikes Gold Forecast, Sees $1,300/Oz Average In Third Quarter – Citi Research hiked its forecasts for most commodities, including gold, on Tuesday. The bank now looks for Comex gold to average $1,280 an ounce in the second quarter, $1,300 in the third, but then cool to $1,250 for the fourth. Citi’s full-year average forecast is now $1,255 an ounce.

“Commodities markets appear to have turned the corner and, led by the petroleum market, are accelerating their price recovery from the lows of the last year, especially since this past January,” Citi said. “While the price increases experienced since early 1Q (first quarter) remain subject to the ‘new normal’ of relatively high volatility, it appears there is no turning back any time soon.”

The report addresses a wide range of commodities, including oil (Brent crude seen topping $50 a barrel by the third quarter and around $65 by the end of 2017), grains, natural gas, softs, base metals and precious metals.

“We push out our constructive view on gold prices into 3Q’16 despite mixed messages from the Fed,” Citi said.

The bank commented that recently released minutes of the U.S. Federal Open Market Committee suggest a more hawkish outlook among policymakers, leaving open the possibility of a June or July rate hike, assuming data do not point to an economic downturn and there is not severe market volatility.

“However, the risk of ‘Brexit’ (U.K. exit from the European Union) is likely to complicate matters for U.S. policymakers, and we do not expect the Fed to move until after the June referendum…,” Citi said. The bank said its economists anticipate just one rate hike in 2016 toward the end of the year, “effectively limiting the likelihood of a correction in gold prices for the next two quarters.”

As a result, Citi hiked its full-year average forecast to $1,255 an ounce from $1,200 previously.

“Hence, while prices have fallen 3% (month to date) in May, we believe this may in fact prove to be an opportune moment to ‘buy the dip,’” Citi said.

Citi analysts said they expect investment demand to remain robust in the month ahead. Macroeconomic uncertainty, a softer U.S. dollar since the start of the year and shrinking inflationary expectations globally have made gold one of the best-performing assets for the year to date, Citi commented. Analysts added that while Asian demand softened in the early part of 2016 from a year ago, this “should return to normalcy over the court of the year.”

Citi now anticipates a full-year average silver price of $16.15 an ounce, with a platinum forecast of $975.

The implementation of stronger emissions standards for motor vehicles, which use platinum group metals for catalytic converters, should “dominate the demand profile” for these metals, Citi said. However, the debate about the size of above-ground stockpiles “remains a key question” for PGMs, Citi added.

The walk-in cash business was active today and still mostly buyers. The phones slowed down considerably after lunch.    

The GoldDealer.com Unscientific Activity Scale is a “5” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 5) (last Thursday – 6) (last Friday – 7) (Monday – 6).

The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be busy and see a low number – or be slow and see a high number. This is true because of the way our computer runs what we call the “book”. Our “activity” is better understood from a wider point of view. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.

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