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Gold & Precious Metals

Reassessing the Role of Precious Metals as Safe Havens

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Posted by Arkadiusz Sieron

on Friday, 31 March 2017 08:30

Last month, a new scientific paper about the precious metals was published. What can we learn from it?

In February, Dr Brian Lucey and Dr Sile Li of Trinity College Dublin and Trinity Business School published a new paper entitled “Reassessing the Role of Precious Metals As Safe Havens – What Colour Is Your Haven and Why?”. In that publication, the authors examined safe haven properties of precious metals versus equities and bonds across eleven countries. What are their main findings?

Unsurprisingly, Lucey and Li found that precious metals play safe-haven roles. As a reminder, a safe haven is an asset not correlated or negatively correlated with another asset or portfolio. However, gold is not always the most common safe haven across countries. The yellow metal is the best protection against stock market events in the UK, Italy, France and Japan, while silver turned out to be a better safe haven against the S&P500.

Moreover, the authors tried to identify the determinants of safe-haven properties. In other words, they examined under which political, economic and financial conditions precious metals are better safe havens. Interestingly, they found that precious metals are more likely to perform as safe havens across countries during market turmoil caused by political instability and in high inflation environments. However, when it comes to other factors, the results were mixed for different countries. For example, the decline in consumer sentiment is positive for gold as a safe haven in China, but negative in the U.S.

The bottom line is that gold is traditionally perceived by investors as a safe haven. And rightly so! The precious metals market is increasingly researched and most of the papers, including the newly published article by Lucey and Li, agree that precious metals play as safe-haven assets. What is important here is that the safe-haven properties may differ depending on the metal, the country, and the financial, economic and political environment. It is also worth remembering that it is very difficult to measure the safe haven properties – for example, investors may buy gold as an ultimate insurance against the collapse of the contemporary financial system, not merely as a protection against significant declines in stock and bond prices.

We urge you to join our gold newsletter today. It’s free and if you don’t like it, you can easily unsubscribe.

Thank you.

Arkadiusz Sieron



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Gold & Precious Metals

What sets the Gold Price – Is it the Paper Market or Physical Market?

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Posted by The Bullion Star

on Thursday, 30 March 2017 08:05

The following article is arranged in Question and Answer (Q & A) format. Through the Q & A approach, this article raises some important issues about price discovery in the gold markets and aims to explain the view that the gold price is being set by the paper gold markets.

BullionStar’s CEO Torgny Persson and precious metals analyst Ronan Manly are of the opinion that due to the structure of contemporary gold markets, it is primarily trading activity in the paper gold markets which sets the international price of gold.

Question: The international gold price is constantly quoted in the financial media alongside other major financial indicators. What is this international gold price, and how is it defined?

The international gold price usually refers to the price of gold quoted in US Dollars per troy ounce as traded on the 24-hour global wholesale gold market (XAU/USD). Gold is traded non-stop globally during the entire business week, creating a continuum of international gold price quotes from Sunday evening New York time all the way through to Friday evening New York time. Depending on the context, this international gold price sometimes refers to a spot gold market quote, such as spot gold traded in London, and at other times may refer to the front month of a gold futures contract price as traded on the US Commodity Exchange (COMEX). The front month contract is a nearby month which will usually exhibit the highest trading volume and activity.

The international gold price can also at times be referring to the LBMA Gold Price benchmark price as derived during the London daily gold price auctions (morning and afternoon auctions). LBMA is an abbreviation for London Bullion Market Association.

Therefore, this 'international price' could be referencing a spot gold price, a futures gold price, or a benchmark gold price, but all three would, at a comparable time, be roughly similar in magnitude.

Question: Where does this international gold price come from, where is it derived?

Recent empirical research has determined that gold price discovery is jointly driven by London Over-the-Counter (OTC) spot gold market trading and COMEX gold futures trading, and that the "international gold price" is derived from a combination of London OTC gold prices and COMEX gold futures prices. See “Who sets the price of gold? London or New York (2015)” by Hauptfleisch, Putniņš, and Lucey.

In general, the higher the trading volume and liquidity in a specific asset market, the more that market contributes to discovering prices for that asset. This is also true of the global gold market. Between them, the London OTC and New York trading venues account for the vast majority of global gold trading volume, and in 2015, the London OTC spot market represented approximately 78% of global gold market turnover while COMEX accounted for a further 8% (See Hauptfleisch, Putniņš, and Lucey (2015)).

Based on London gold clearing statistics for 2016, a quick calculation shows that total trading volume in the London OTC gold market is estimated to have been at least the equivalent of 1.5 million tonnes of gold in 2016, while trading volume of the 100 oz COMEX gold futures contract reached 57.5 million contracts during 2016, equivalent to 179,000 tonnes of gold. Gold trading volume on the London OTC gold market in 2016 was therefore about 8.4 times higher than trading volume in the COMEX 100 oz gold futures contract.

 

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LBMA Unallocated Gold Trading, 1.5 million tonnes in 2016

 

However, COMEX has been found, by the above academic research, to have a larger influence on price discovery than London OTC, despite the lower trading volumes of COMEX. This is most likely due to a combination of factors such as COMEX' accessibility and extended trading hours via use of the GLOBEX platform, the higher transparency of futures trading compared to OTC trading, and the lower transaction costs and ease of leverage in COMEX trading. In contrast, the London OTC gold market has limited trading hours (during London business hours), barriers to wider participation since it's an opaque wholesale market without central clearing, and trading spreads which are dictated by a small number of LBMA bullion bank market-makers and a handful of London-based commodity brokerages.

The bottom line though is that both sets of trading statistics, London OTC and COMEX, are gigantic in comparison to the size of the underlying physical gold markets in London and New York.

Question: So, does the physical gold market or the paper gold market set this international price of gold?



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Gold & Precious Metals

Death Valley Snowballs and Fiat Currencies

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Posted by Gary Christenson - The Deviant Investor

on Wednesday, 29 March 2017 07:11

Keep it simple!

- Two Trends That Will Force The Fed To Start Buying StocksSnowballs have a short life expectancy in Death Valley.

- Fiat currencies, backed by credit and debt, survive longer than snowballs in Death Valley, but history shows all fiat currencies are inflated into worthlessness and eventually die.

- “U.S. dollars have value only to the extent that they are strictly limited in supply.” Ben Bernanke on November 21, 2002. But we know the supply of dollars has grown rapidly since 1971, and especially after the 2008 crisis while Bernanke was Chairman of the Fed.

- The U.S. government is officially $20 trillion in debt. Unfunded liabilities are far larger.

- Official national debt has doubled every eight to nine years for decades. Debt in 2017 is $20 trillion and accelerating higher, and in 24 – 27 years it could be eight times higher – at $160 trillion. Can this fiat currency Ponzi scheme survive that long?

- If the Fed “prints” another $140 trillion, will that destroy the purchasing power of the dollar?

- Note to congress: “If you don’t raise the debt limit you will collapse the fiatcurrency bubble. But if you raise the limit and continue with ever-increasing debt you only delay a larger collapse.”

- If something can’t continue, it will stop. What specifically might stop? Economic insanity, exponentially increasing debt creation, FederalReserve credibility, the dollar as the Reserve Currency, purchasing power of the fiat dollar, euro, pound, yen …and others come to mind.

- Federal Reserve Notes are debts of the central bank and have value because they are strictly limited in supply. But the supply of dollars is huge and rising rapidly. That begs the question, “What will preserve the value of the dollar?”

- Gold has been valuable money for thousands of years. Which will retain their value longer?



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Gold & Precious Metals

Gold Price Rally Acceleration In Play

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Posted by Stewart Thomson - Graceland Updates

on Tuesday, 28 March 2017 07:27

Mar 28, 2017

  1. I’ve referred to the price action of gold in 2017 as the “Uptrend of Champions”. 
  2. Please  click here now. Double-click to enlarge.
  3. A short term pause here in the $1255 - $1270 area is likely. A pullback would only add to the already-positive look of the chart, and open the door for a powerful rally to $1315.
  4. To understand why a pullback would only add to the solid technical set-up, please  click here now. Double-click to enlarge.
  5. A pullback from the current price area would create a nice inverse bull head and shoulders continuation pattern within the uptrend channel. That pattern would mathematically target the $1343 area highs where gold traded on the night of Donald Trump’s election.


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Gold & Precious Metals

Technicals for Gold Miners Remain Weak

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Posted by Jordan Roy-Byrne - The Daily Gold

on Monday, 27 March 2017 06:17

Last week we wrote that precious metals should see upside follow through but to be wary of the 200-day moving averages and February highs before becoming excited. The metals did follow through as Gold gained 1.5% and Silver gained 1.9% (for the week) but the miners disappointed. GDX gained only 1.1% while GDXJ finished in the red as did junior silver companies (SILJ). As spring beckons, the gold stocks are showing relative and internal weakness. 

Two signs of weakness in the miners are visible in the weekly candle charts below. First, while Gold has already rallied back to its high the first week of February, GDX and GDXJ are down 11% and 15% respectively. The miners and the metals will not always be perfectly aligned but that is a rather stark divergence. Secondly, although Gold closed at the highs of the week in each of the past two weeks the miners failed to hold their gains. This is not exactly the type of price action that inspires more gains in the short term.  

Mar242017minerswk-768x672

Gold, GDXJ, GDX Weekly Candles



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