Gold slips back below $1,300 on weak Russia sanctions, U.S. data

New York (Apr 29)  Gold and silver both slipped back again yesterday, the former falling below the psychological $1,300 level in New York yesterday and staying between $1,290 and $1,300 overnight, before falling back below $1,290 this morning in Europe. Commentators variously put this down to better U.S. economic indicators, which they see as negative for the gold price, a month-on-month fall in Chinese gold imports through Hong Kong and the perception that the latest swathe of sanctions against Russia are still pretty insignificant – weak enough not to prompt any serious repercussions from any likely Russian retaliation.

We commented yesterday on the Chinese gold import situation. Although month-on-month figures have fallen since December, they are still running 27% higher than they were a year ago when the country’s imports hit a new record. Given that there can be some serious fluctuations on a month by month basis we don’t think too much can be read into the month-on-month falls so far until there is more data as the year progresses.

See our take on Chinese gold imports: Chinese gold imports from Hong Kong jump 27% in Q1

Indeed the recent negative premiums for gold on the Shanghai Gold Exchange, which have been seen, justifiably, as adverse for gold, have now fallen away suggesting supplies have again tightened there, while there are also reports that premiums in India have been rising strongly as well. Asian demand is not going away.

As for the Ukraine situation, this is becoming stale news and will likely have little effect on the gold price unless some kind of Russian military incursion into Ukraine territory is seen as inevitable. President Putin seems to be playing a clever game at the moment in trying to pressure the Ukraine Government into accepting a de facto significant degree of autonomy for the country’s south eastern, mainly Russian speaking area, around the industrial centre of Donetsk. But this area is no Crimea. The ratio of Russian speakers to ethnic Ukrainians, is far lower and it is by no means certain that any referendum, as proposed by the separatists, would result in a Crimea-type request for the area to be annexed into the Russian Federation. President Putin is looking for a buffer against what he sees as encroaching Western political and military influence on his borders and is prepared to go to some lengths to mitigate this – even if it means a further degree of isolation.

The West is also playing something of a dangerous game here. Armed conflict between NATO and Russia seems extremely unlikely – the costs to both sides would be too high both logistically and politically. However the advance of Western ideology eastwards is difficult for Russia to accept after nearly a century of communism which, although replaced by a form of democracy, still has many adherents among Russians and other former Soviet Union states. In a way this is a little like a religious war, and history is riddled with horrendous conflicts in the name of religion. Russia sees Western democracy being imposed on areas which it feels do not really understand its implications as opposed to the perhaps more autocratic eastern ex-Communist variety.

As for U.S. data – there was some positive economic news which led to an initial stock market surge which reduced interest in gold. This week will see a number of other potentially significant economic announcements and meetings, including the next U.S. Fed FOMC meeting on Tuesday and Wednesday, a report on GDP also due out on Wednesday and the latest U.S. Labor Department’s jobs report on Friday, with a number of other key U.S. reports to be announced throughout the week. The latest Chinese manufacturing data is also due this week and if the majority of these economic indicators are seen as positive for the U.S. economy in particular, or perhaps negative for China, then precious metals could drift back further unless there is some other significant news to counter the trend.

The whole premise of the gold-bearish bank analysts is that if the U.S. economy is seen as moving ahead significantly, equities markets will continue to be strong leading to a fall in investment interest in gold in favour of general equities. However there is still the prospect of continuing strong Asian demand putting restraints on the availability of physical gold which could negate this trend. We suspect that Chinese interest in gold will underpin the market as although the Chinese government may not want the gold price to rise significantly if it is, as many suspect, building reserves, it may also not want it to fall much either. Having been promoting gold investment to its general population, a big decline in their wealth due to a falling gold price is not in the Chinese government’s interests and it does have the monetary clout to keep the price where it sees it as best suiting its overall economic purpose.