Morning Market Update: May 16

May 16th, 2013 by

Precious metals saw more selling in early morning trading, as yesterday’s gold close under the psychologically important $1,400 level spooked speculators. Looking at a 6th straight day of declines, those weak long positions that weren’t pushed out yesterday decided to jump.

New economic numbers showing inflation well below the Fed’s target level of 2% have dampened any concerns that the government’s quantitative easing program will be ending. The Consumer Price Index was down 0.4%, the largest decline since December 2008. The year over year consumer inflation rate is 1.1%, mostly from a huge drop in gasoline prices. Core inflation, which removes energy and food prices, stands at 1.7%.

Since gold is seen as a hedge against inflation, falling inflation numbers entice investors to dump gold for equities, especially as Wall St is regularly setting records lately. The U.S. dollar has been on a rampage lately, with the dollar index touching 84 yesterday. This is bad news for all commodities that are priced in dollars, including precious metals.

All is not sunshine on the economic front in the U.S., though. First-time unemployment numbers surged a shocking 32,000 last week, for a total of 360,000 newly-unemployed workers. Analysts were expecting a mere 2,000 increase in the numbers.

While physical buying in Asia is still strong, we are not likely to see the huge “gold rush” on physical precious metals that we saw the last time gold dropped under $1,400, in April. This is partially because of lack of physical supply, and partially from the physical appetite for jewelry being somewhat sated after the last buying frenzy.

One example illustrating the short-term supply shortage in gold is South Africa. Despite being the #5 gold producing nation in the world, labor strikes in the mining sector forced South Africa to import $982 million of scrap gold from the United States last quarter. This caused South Africa’s trade surplus with the U.S. to become a trade deficit. It is assumed that the nearly $ 1 billion of gold is to be refined and used to produce the gold Krugerrand bullion coin, as supplies were exhausted during the April buying spree.


by David Peterson