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Gold May Hit $1,300 by End of Year, ICBC says

Gold May Hit $1,300 by End of Year, ICBC says

Release Date:  Friday, August 10, 2018

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In case you missed it, Jim Cramer, host of CNBC's Mad Money and one of Wall Street's most respected and successful money managers, recently told viewers that even with our "roaring" economy investors should be adding gold to their portfolios. Pointing to the work of a technical analyst, Mr. Cramer explained why gold prices may be ready to "snap back":

"[T]he price of gold still hasn't really reacted to the current trade war or the exploding budget deficit which I know a lot of you care about tremendously of course. Or even the recent uptick in inflation. With inflation on the rise and the government borrowing insanely high, you'd expect precious metals to be more popular than the Wall Street fashion show as gold is a natural hedge against inflation and higher interest rates….Let me give you the bottom line. For those of you who are genuinely worried about inflation and trade policy and rising rates, don't forget hey let's throw in the budget deficit, you don't need to dump your stocks. Instead though, how about buying some gold as insurance against economic chaos."

You can watch Mr. Cramer's full comments at CNBC's website here.

Gold and Silver Prices

Gold gave up earlier gains in the day and closed slightly lower on Friday and the week overall as the U.S. dollar gained strength with the Turkish lira plunge.

"The U.S. currency has drawn global buying interest Friday as a shelter from an economic crisis in Turkey and market volatility kicking up in Russia. Gold, too, has historically had a role as a haven asset in times of global market turbulence. Instead, the precious metal's inverse relationship to a firmer dollar, boosted in large part by rising U.S. interest rates relative to other major economies, has held the upper hand recently, as it did again on Friday.

"Gold firmed slightly after a reading on consumer-price inflation came in hotter than expected and showed a continued uptick for particular economic hot spots. Inflation data poses a mixed scenario for gold. Short term, it is likely to keep the Fed's hand on the rate-hike lever, a gold-negative development; longer term, gold often serves as a hedge against inflation's corrosive effects on other assets." ("Gold closes slightly lower as dollar's jump outweighs Turkey contagion fear," Rachel Koning Beals, Market Watch, 08/10/18.)

Gold ended the week down $2.10, closing at $1,211.20. Silver ended the week down $0.11, closing at $15.27.

Gold May Hit $1,300 by End of Year, ICBC says - Afonso

ICBS, the largest bank in the world by total assets, believes gold has reached its low and is heading up.

"Gold's plunge to the lowest level in more than a year is close to ending, and prices will probably climb back to $1,300 by December, according to ICBC Standard Bank Plc.

"Bullion may average $1,260 an ounce in the third quarter and rise further in the following three months as interest rate increases are priced in and physical demand emerges, Marcus Garvey, a London-based commodities strategist, said in an interview in India. 'We are going to see almost certainly two U.S. interest rate hikes come this year, but they are already, if not fully priced, fairly nearly. So there isn't a huge scope for a surprise there.'

"'There is a risk in the short term for a dip below $1,200 if the current market dynamics persist,' Garvey said on the sidelines of a conference in Kochi. 'But looking at the next six months, we are actually around the bottom for this cycle already, so it is more suited in the long term for investors as a decent level for purchasing for their portfolios,' he said.

"Although the headline level for the U.S. business cycle looks very healthy, there are some concerns over credit stress, making it questionable whether the U.S. consumer can withstand materially higher interest rates, he said.

Hedge Funds

"The view that bullion's pain may be nearing an end is shared by Nic Johnson, a Pacific Investment Management Co. money manager, who said late last month that falling gold prices in the absence of rising real yields suggest the metal has cheapened versus other U.S.-denominated haven assets. That along with comments by President Donald Trump 'lamenting the strong dollar' could reignite interest in the metal, he said in a blog.

"Gold in dollars has the potential to rise as global output may have peaked, Northern Star Resources Ltd. Chief Executive Officer Stuart Tonkin told Bloomberg Television. 'Even that slight scarcity, or the view of a declining profile' of production, reserves and resources among the biggest companies will keep a base under gold, he said." ("Gold May Hit $1,300 by End of Year, ICBC Says," Swansy Afonso, Bloomberg, 08/06/18.)

The ongoing gold price battle - Williams

Gold is still in a limbo when it comes to whether the metal will move higher or lower but there's optimism about an upward move.

"Gold price followers can hardly not be aware of the battle between the gold bulls and bears which has been ongoing for the past couple of weeks. This was seemingly very much precipitated by the most recent Federal Open Market Committee (FOMC) meeting on July 31/August 1 and then by U.S. Fed chair Jerome Powell's statement on the U.S. economy and likely Fed interest rate policy for the remainder of the year…

"There has been a remarkably consistent price pattern over this period of time. Most days gold is marked down early in the day, makes something of a recovery and then is brought down again when the American market gets under way, before again making something of a recovery and trading flat to the U.S. close.

"Some commentators point to the timings of the price downturns as evidence of manipulation by the big bullion banks following a pattern they see as initiated by the U.S. Fed and Treasury who may see the price of gold as a potentially unwelcome bellwether for the perception of how well the U.S. economy is really doing.

"Whatever, the distinct price pattern of the past couple of weeks suggests a continuing tug of war between those who would like to take the gold price lower - perhaps below the psychological $1,200 price level - and those wanting the gold price to return to some of the strength it showed in the first three and a half months of the year when it seemed to be heading inevitably towards $1,400 and higher.

"We still have around three weeks of a traditionally weak month for gold remaining and we could well see the current ongoing price battle continue over that period. However, gold could be due a run with some alternative investment options looking less optimistic - notably general equities which are trading nervously again with the indexes hugely dependent on a very limited number of mostly tech stocks.  Bitcoin too has been coming back down again after a brief surge prompted by a plethora of promotional comment from perhaps not uninterested parties. Re the cryptos we like to keep an eye on Ethereum which has fallen to its lowest point since November last year and around 75% off its peak at the height of the bitcoin bubble euphoria as recently as in January this year. This makes gold's rises and falls look almost minuscule by comparison and demonstrates the real risks attached to bitcoin investment.

"But back to gold's recent trading pattern - will it break out and if so in which direction? We suspect it may continue around where it is until after the U.S. Labor Day holiday which often seems to provide an inflection point for markets with the financiers returning refreshed from their Summer breaks.

"A certain amount will depend on the dollar. President Trump's latest batch of Chinese import tariffs are set to kick in later this month, as are retaliatory measures by the Chinese. In combination and with other tariffs and events U.S. inflation may begin to notch up noticeably which could limit the Fed's program to normalize interest rates and the dollar could start turning down as a result. If this happens and the dollar continues to drift downwards the gold price could receive a welcome boost, driving it back up through $1,300 again." ("The ongoing gold price battle," Lawrie Williams, Sharps Pixley, 08/08/18.)

How China Wins the Trade War - Lovely 

The proposed tariff Chinese imports will really hurt American companies and American consumers who will have to face higher prices on products as a result. "To inflict more pain on China, the Trump administration last week raised the ante in its trade war. It now promises that the next round of tariffs, on $200 billion in imports from China, will be 25 percent instead of the 10 percent announced earlier. President Trump exhorts his supporters that tariffs 'mean jobs and great wealth.'

"If jobs and wealth are the metric for "winning the trade war," China, not America, will emerge the victor. China will win not because of one-party rule, although it certainly helps President Xi Jinping weather difficulties caused by trade tensions. Rather, China will win because it is playing this game more skillfully. The tariffs imposed by the United States will mostly be paid by American companies and consumers, while China is retaliating with moves that soften the blow for companies in China, including those that are foreign-owned.

"To 'win' a trade war on these terms, the United States would have to impose tariffs that somehow hurt the Chinese economy so badly that its leaders improve their treatment of American intellectual property, a longtime demand by American trade negotiators. The health of China's economy depends on exporting to the United States, so, the thinking goes, the Chinese government will capitulate to American demands.

"This strategy is certain to backfire.

"First, about 60 percent of China's exports to the United States are produced at factories owned by non-Chinese companies. Many of them produce customized inputs for American manufacturers, such as computer routers, LED fixtures and boat motors. That means the tariffs imposed by the Trump administration that are directed at China actually affect many American (and European) companies that own factories in China.

"These companies cannot immediately respond to tariffs by quickly moving their operations out of China. Instead, they will absorb the import tax or pass it along to American consumers in the form of higher prices…So most of the revenue raised by the tariffs is coming out of the pockets of American consumers, not Chinese companies.

"Reduced American demand for Chinese products does hurt China. American merchandise imports account for about 3 percent of Chinese manufacturing revenue. That's a large enough share for tariffs to do a bit of damage, but certainly not catastrophic.

"Moreover, much of what the United States imports from China contains value created in other locations, including America. Much of the value in an iPhone imported from China, for example, includes displays from South Korea, chips from Japan and design and programming from America. So each dollar of sales lost by a Chinese company actually has a less-than-$1 impact on the Chinese economy. In computers and electronics, which account for the largest share of China's exports to the United States, the Chinese value added in each dollar of imports is about 50 cents. Consequently, the negative effect of tariffs on Chinese manufacturing is unlikely to be large enough to have much of an impact on China's trade practices.

"As the trade war escalates, China's leadership appears to have deepened its commitment to international supply chains. This is the opposite of the Trump administration, which seems intent on isolating American manufacturers.

"For example, in its first round of retaliatory tariffs, China avoided hitting the imports that feed its foreign-owned factories. That helps cushion Chinese manufacturers and foreign investors from the impact of the trade war. After further tariffs were announced in late July, China restated its intention to "further open up its economy." Tesla recently became the first foreign automaker in China to get approval to operate without a local partner, with a deal for a wholly owned factory in Shanghai to produce electronic vehicles. These moves send a powerful signal to investors that China remains committed to its international partners, even in the middle of a trade war.

"To be sure, China still engages in policies that undermine fairness in the world trading system…But the tariffs imposed by Mr. Trump fail to address these challenges.

"Instead, when the next round of tariffs hits, American households will face higher prices on computers, clothing and thousands of other products. China, not the United States, will improve its standing in the world as a place to make and build the future." ("How China Wins the Trade War," Mary E. Lovely, The New York Times, 08/08/18.)

3 reasons the selloff in Turkey's lira matters for markets all over the world - Tappe

The lira plunge in Turkey can affect the economy worldwide.

"The dramatic unraveling of Turkey's lira has ignited fear in markets around the world that the country's currency woes could ripple through the world's banks, notably in Europe.

"On Friday, things came to an apparent head, with the lira USDTRY,+15.8103% breaching another key level when the U.S. dollar bought more than 6 lira, just a week after touching 5 lira for the first time on record, according to FactSet. One dollar last bought 6.2832 lira, up more than 13%. Similarly, the lira was down some 12% against the euro EURTRY, +13.9855% , which fetched 7.1684 lira at last check.

"Here's what the investors need to know about the Turkish lira and its potential impact on markets:

"1. Emerging-market contagion?

The lira's dramatic slide against its main rivals was symptomatic of a broader theme in emerging markets. Countries that rely heavily on foreign - mostly dollar-denominated - funding have been struggling with a strengthening U.S. currency, which has been on an upswing since April. "

"On top of that, rising interest rates in the U.S., where the Federal Reserve is expected to raise interest rates for an eighth time since late 2015 in September, has exacerbated the strain on emerging markets, which use local currencies to pay down their dollar-backed debts.

"Turkey has led the pack of countries that maintain a high dollar-denominated debt burden. Argentina can also be counted among that contingent of troubled emerging-market economies, and analysts have long speculated that Ankara and Buenos Aires could become the first dominoes to fall in a wider emerging-markets unwind.

"Turkey's annual external financing needs, including both its current-account deficit and maturing debt, come to around $218 billion, according to the Institute of International Finance. That number could grow to $240 billion, representing 28% of GDP. More than half of that debt is dollar-denominated, according data from Eurizon SLJ Asset Management…

"According to a Financial Times report, the European Central Bank has grown increasingly concerned about Turkey's condition and a potential contagion of its problems, particularly with respect to its financial sector…

2. Turkey's economic and political climate

"Beyond the risk of contagion that emerging-market wobbles could have on developed markets throughout Europe, the lira slide also intensifies Turkey's domestic issues, such as its high inflation…

"The Central Bank of the Republic of Turkey has intervened at numerous points this year, with little success, to stave off the lira's drop and stabilize inflation…After the CBRT declined to lift interest rates at its last meeting in late July, market participants have been anxious about the waning independence of the central bank…

"On Friday, Erdogan called on Turkey's citizens once again to exchange their foreign-currency holdings and gold for lira.

"Technically, a weaker currency makes a country's goods more attractive on the global market, which is why President Donald Trump has frequently complained of currencies like the euro EURUSD, -1.0151% and China's yuanUSDCNY, +0.4061% weakening against the greenback, despite their slides being largely related to other factors such as worries about a trade war and monetary policy.

"But for Turkey, the euro-dollar exchange rate is also of importance, given Ankara's trade with the European Union, which is accounted for in U.S. dollars, as well as Turkey's imports, which are also accounted for in dollars.

"That means that if the euro is weaker Turkey gets paid less for its exports and its imports are more expensive. The euro has dropped 3.6% against the dollar in 2018 so far, according to FactSet.

3. Diplomatic relations

"Making matters worse are Turkey's diplomatic and trade spats with the U.S. Relations between Ankara and Washington have suffered on the back of the detention of U.S. evangelical pastor Andrew Brunson, with Turkey dismissing calls for his release. The U.S. has introduced sanctions over the issue, on top of the existing trade tariffs that already affected Turkey.

"Friday, Trump tweeted that existing aluminum and steel tariffs would be doubled in light of the weakening lira.

"Turkish relations with Germany, home to millions of Turkish immigrants, have also worsened over the past year, leading market participants to point out that such infighting between NATO allies was highly unusual." ("3 reasons the selloff in Turkey's lira matters for markets all over the world." Anneken Tappe, Market Watch, 08/10/18.)