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My notes 27-07-2015

Gold prices dropping

  1. The expectations have led investors to gradually sell gold - a perceived safe haven investment in times of crisis - to invest elsewhere. investment in the US dollar and bonds is clearly more appealing

 

Understand this -  gold is a store of wealth for investors, but generates no returns from regular interest payments or dividend income. Investors have been happy to park their money in gold over the past six years while returns from other safe haven assets have remained low and the economic backdrop has remained volatile. But, with borrowing costs set to rise, commodities, such as gold, are losing favour with investors, as higher returns can start to be generated elsewhere.

 

The value of the US dollar typically follows an inverse relationship with commodities. When the dollar strengthens against other major currencies, the prices of commodities - such as gold - typcially drop. When the dollar weakens, commodities generally move higher.The main reason for this is because most commodities are freely traded in international markets and prices are quoted in US dollars.

Foreign buyers will purchase commodities with dollars, so, when the value of the dollar drops, they will have more buying power, and demand increases. Similarly, when the value of the dollar rises, they have less buying power and commodities become more expensive, muting demand and sending commodity prices lower.

 

Greek crisis

For thousands of years people have turned to gold to store their wealth in times of crisis. But patchwork resolution of the Greek crisis seems to have has eased concerns that the struggling state will leave Europe.

Greek banks are reopening this morning after a third bailout package was agreed and extended a €6.25bn bridging loan for the cash-starved country.

 

As fears over the collapse of the Eurozone recede, investors are once again more comfortable holding riskier assets that earn better returns. So, government bonds issued by Spain, Italy and Portugal that earn higher rates of interest will do well while gold will suffer.

 

China slowdown

The slowdown in the Chinese economy, the world s largest consumer of commodities, has also caused the gold price to fall steadily since 2011.

China has increased its reserves of gold bullion by 60pc since 2009. However, on Friday the People’s Bank of China revealed it has been buying far less gold than expected. China updated its gold bullion reserves for the first time since 2009 last week, showing that while reserves had increased, the 57pc gain to 1,658 metric tonnes was smaller than the 3,500 tonnes analysts had been expecting.

 

From <http://www.telegraph.co.uk/finance/11750522/Why-is-the-gold-price-falling-and-where-it-is-going-next.html>

From <http://www.bbc.com/news/business-33590480>

 

ran nuclear deal

Joint comprehensive plan of action

Under the JCPOA, the number of centrifuges has been reduced by more than two thirds and enrichment will be restricted to a single facility at Natanz. The remaining centrifuges will be mothballed and the Fordow enrichment facility will be converted into a nuclear, physics, technology, research centre where no fissile material can be introduced.

 

From its existing stockpile of nearly 10 MT of partially enriched uranium, Iran will retain only 300 kg of uranium enriched to a level of 3.6 per cent; the rest will be shipped out. The Arak heavy water reactor will be redesigned and Iran will not undertake any reprocessing activity.

 

 While the duration of the agreement is 10 years, the International Atomic Energy Agency verification provisions will remain in effect for an additional five years.

 

Restrictions on designing and the production of new centrifuges will remain in force for 20 years while monitoring of uranium mining and milling will continue for 25 years and verification covers the supply chain of nuclear related components.

 

While defence related sites like Parchin have been kept out of the nuclear related facilities, there is a provision for seeking inspections if treaty violating activity is suspected.

 

 In case of a dispute, a 24-day time frame is provided for adjudication by a joint commission to be set up under the JCPOA. Nuclear-related imports are permitted but will be channelled through a designated procurement channel.

 

In return, all nuclear related sanctions will be lifted. This will gradually permit nearly $100 billion of blocked funds to be released and, more significantly, permit Iranian banks and financial institutions to resume their international engagement. A number of institutions and individuals will be taken off the sanctions list.

 

 

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