'Little Reason' to Buy Gold Before US Fed Rate Rise, Say Analysts, as ETF Discounts Widen

[The Machine]

 

 

PRICES to buy gold gave back a $5 pop for the second session running in London's wholesale market Tuesday, trading back at $1089 per ounce as US stock markets opened lower after a noted Federal Reserve "dove" said he expects interest rates to be raised soon, if slowly.

 

Boston Fed president Eric Rosengren said late Monday he sees "real improvement" in the US economy, with last week's Non-Farm Payrolls jobs data marking "very good news" to make a rate rise "possible" in December.

 

With US households cutting their debt since the financial crisis of 2007-2011, US corporations have doubled their debt instead according to a new report from investment bank Goldman Sachs, using "low interest rates to issue record levels of debt over the past few years to fund buybacks and M&A."

 

Gold prices "still seem to be some ways away off from" fully discounting a December rate rise from the US Federal Reserve, says a note from US brokerage INTL FCStone, "suggesting more near-term pain ahead, at least until next month."

 

"Yes, we are on the lows and looking pretty terrible, which is quite often the time to buy," says David Govett at London brokers Marex Spectron.

 

But also pointing to the US Fed's expected rate-hike in December, "There seems to be little reason to buy gold at the moment," Govett says, adding that "Physical demand even at these levels is fairly muted and from an investment standpoint, who wants to buy a commodity that has performed fairly dismally all year?"

 

"Physical markets subdued," agrees a brief note from Chinese-owned investment and bullion bank ICBC Standard Bank.

 

"Precious metal ETFs still in liquidation mode, many trading at a discount to NAV."

 

The giant SPDR Gold Trust – the world's largest exchange-trade trust fund by value at gold's peak of late-summer 2011 – yesterday shrank to a new 7-year low by size, dropping another 3 tonnes from the bullion needed to back its shares(NYSEArca:GLD) as stockholders liquidated their positions.

 

Shrinking to 666 tonnes, the GLD's backing has now fallen for 8 of the last 10 trading days, the worst run since November last year.

 

The giant iShares Silver Trust (NYSEArca:SLV) ended Monday with its 9,756 tonnes unchanged for almost a week, but the share price closed New York trade at a 1.4% discount to the net asset value of that bullion backing.

 

Shares in the closed-end Sprott Physical Gold trust fund (NYSEArca:PHYS) meantime widened to a 0.7% discount to NAV Tuesday morning, and have now traded at a premium to NAV only once since the start of March.

 

Between the trust's launch in early 2010 and the gold-price crash of April 2013, a discount was only seen once according to data on Sprott's site.

 

Wholesale-market silver prices fell again on Tuesday, dropping for the 9th time in 10 sessions in London to reach new 8-week lows beneath $14.40 per ounce.