During trading in Asia, in the early hours of the morning, the precious metals took a nosedive. After spending all of last week in negative territory, gold fell another $25 per ounce overnight, briefly sending spot prices below $1,100/oz—levels not seen in at least 5 years. Silver also fell below $14.90/oz before briefly recovering, while platinum and palladium were off 1.5% each.
While many are citing a hawkish Fed and risk-off in Greece as the main drivers for the price drop, there is also the prospect of high-volume gold sales on the Chinese markets, as well; with the rout in Chinese equities, a large fund is suspected of selling its gold holdings to cover calls coming due on speculative positions. Some bearish sentiment may also be attributable to last week's announcement of China's updated gold reserves, which were well below what many market observers expected despite rising 57% from the last announcement in 2009.
Yesterday in the Markets
Friday saw the dollar advance to a 3-month high at 97.95 on the DXY index, helping the euro slide to a 6-week low at $1.08. The precious metals staggered to the finish line after losing all week, with gold falling to $1,135/oz; silver closed at a 6-year low below $15/oz; platinum also sank below $1,000/oz for the first time in six years; and palladium slid under $620/oz for the first time in almost 3 years.
Factors Affecting Gold Today
With China's official gold holdings lower than some analysts expected, one may wonder why they would understate their gold reserves. As the country looks to take control of gold's price discovery and market-moving—a role currently filled by New York and London—the government probably still wants to play its cards close to the vest until it succeeds in getting the yuan included in the IMF's Special Drawing Rights (SDR or XDR), a supplementary reserve currency valued against a basket of the world's leading currencies. The yuan is currently not part of the SDR valuation. China has also pushed for gold to be included in the SDR calculation, which may explain why it will wait to reveal the totality of its gold holdings until after the yuan is added to the SDR basket (likely sometime next year).
While a large seller in China likely pushed the gold price to its multi-year lows overnight, the downturn was also fueled by renewed expectations that the Federal Reserve may be on track to raise interest rates this fall. Solid economic data in employment, home construction, and corporate earnings have bolstered the case for a rate hike. The generally hawkish St. Louis Fed President James Bullard told Fox News that there's better than a 50-50 chance that the FOMC decides to raise rates in September. The imminence of an increase to the federal funds rate would certainly be bearish for gold, as a tightening of monetary policy generally spells a rally for the dollar. More Q2 corporate earnings will be announced this week, with major firms from Apple to Microsoft, McDonald's, Coca-Cola, Yahoo, and Caterpillar all releasing quarterly earnings this week.
With markets largely focusing on the rout in commodities, it will hardly be noticed that Greece finally reopened its banks today. The weekly withdrawal limit for account holders will go up to as much as €420 ($387) next week after being held at €60 per day over the past several weeks. For now, Greek citizens will continue to be limited to a weekly maximum of €300 while the country eases capital controls and looks to get its economy functioning again. Like many of the liberal defenders of the Greek administration's leftist ambitions, Nobel laureate economist Paul Krugman had to backtrack this week, stating, “So I, you know, I may have overestimated the competence of the Greek government.”
Even with signs of improvement, the situation between Greece and Europe is certainly not over, and could take a turn for the worse at any point in subsequent negotiations on a long-term debt deal. Ironically, as the U.S. economy appears to improve (for the moment), investors will become more and more worried about the Federal Reserve raising interest rates, which would likely spell a rally for the dollar, a downturn for equities, and still more bearish sentiment regarding gold and the precious metals.
The U.S. Redbook comes out tomorrow, giving a gauge of consumer spending. Abroad, Australian CPI will be announced while Switzerland's trade balance numbers will be released.