Gold Weekly: Swiss gold exports surge

Market Analysis /
23 Sep 2019

Swiss gold exports surged to its highest levels since 2016, holding at a seven-year high last month driven by a rise in investors seeking haven assets. Recessionary fears on the back of trade war coupled with the suffering risk of a no-deal Brexit fueled demand for physical gold and exchange-traded funds backed by gold across the U.K. and Europe.

Gold exports from Switzerland into the United Kingdom reached their highest levels in seven years last month, spurred on by strong investor demand for gold-backed exchange-traded funds.

Exports of gold from Swiss refineries to the U.K. rose by 24 per cent in August to 112.5 tonnes, according to Swiss customs data while Inflows into gold-backed ETFs hit their highest levels since 2013 last month on risk aversion. The largest gold-backed ETF, the SPDR Gold Shares, is backed by gold stored in London. Gold prices have rallied by 17 per cent this year to trade at $1,5018 a troy ounce.

However, the Swiss Federal  Customs admistration graph doesn't correctly paint robust demand for physical gold, but the opposite. Traditional destinations for physical gold are China, the Middle East, and India. When gold flows from Switzerland to London, it means demand in those traditional markets is below average. However, the Swiss gold export data does align with enormous flows into ETF markets as SPDR Gold Trust warehouses physical gold inventory “loco” London at HSBC’s London vault. So, the real story behind the Swiss gold export flow is the enormous gold ETF inflows since June.

Source: BloombergMarkets

Using industry data compiled to September 5, 2019, it was a one-way street for gold flows as ETFs have now accumulated $16.5 billion of inflows since June. While selling did materialise last week after it was perceived the European Central Bank( ECB) and the Federal Reserve Board( Fed) failed to meet investors dovish expectations, it was only a dent in overall ETF holdings.



Gold is a quirky asset in that it is both a commodity and a macro asset as consumers buy it for its glittering appeal as jewellery, but it acts just like a currency. The “Yellow Metal” correlates to many assets and risk factors, but over time it is most closely tied to the underlying movement of the US dollar and real interest rates. In 2018, the Gold reaction function to the underlying changes of the US dollar was very pronounced, but in 2019 the decline in actual interest rates have been the key driver as the drop in real interest rates make holding gold cheaper.


After the Central Banks Scrum

The post FOMC and ECB selloff had the hallmarks of fast money-driven flows as core strategic long Gold positioning is thought to be involved at excellent levels and are believed to be under little threat at current market prices  Hence the quick price recovery after fast money traders received a no joy signal after trying to test $ 1480 level.

$1480 is believed to be a significant crossroads for fundamental and technical analysis.


The fact that gold is not trading lower after a less dovish Fed is a testament to gold's resilient demand as an alternative asset,” AxiTrader strategist Stephen Innes (Reuters, Sep 19)

For a trade (long Gold) supposedly hinged on a uber dovish central bank narrative, Gold has remained remarkably resilient on dips — garnering support from geopolitical risk in the Middle East and the lower for longer central bank interest rate narrative.

The long Gold trade continues to resonate with investors as it provides the ultimate hedge against recessionary fears which remain elevated. Moreover, as US-China trade tension persists, it will likely force the Fed's hands to cut interest rates later aggressively.

Source: BloombergMarkets

Gold outlook (September 23-28)

The prior two weeks saw sharp rotations and reversals across and within asset classes.

Realised volatility in US equities has fallen dramatically over the last two weeks to its lowest levels in a year, near the lowest on record in this cycle, and far from the extremely elevated levels at the beginning of the month. It is unusual for volatility to stay at such low levels, and we may see a pickup in the coming weeks, especially if the trade conflict escalates with the S&P 500 near new highs.

Indeed, it appears low-level discussion between US-China trade delegates ended poorly last week after the Chinese representatives went home early. It is signalling to investors that if there's a lack of progress at this level, what hope is there that Xi and Trump will put pen to paper any time soon.

Typically, in the week following major central bank meetings, the focus will shift to the economic data and particularly  US data  given that global growth and the slowdown in the manufacturing data are at the top of the Fed's concerns

Of course, with so much volatility in Gold markets, it is difficult to predict which way the market will pivot over the short term with any degree off accuracy but typically when trade war rhetoric flares, gold has remained in demand.


Read more market views from Team AxiTrader:

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