Two months ago the precious metals complex became extremely oversold and ripe for a rebound. Two months later and the overbought condition and bearish sentiment has been alleviated to some degree. Sadly for bulls, Gold barely rebounded while both Silver and gold miners performed worse. The broad precious metals sector appears to be in position for a breakdown that could be a knockout blow to gold bulls and gold bugs.

The weekly candle chart of Gold and Silver is shown below. Gold failed to clear $1160 in August and failed to close above $1150 last week. Gold is already down $33 this week and threatening to break lower from a triangle consolidation. Meanwhile, Silver has tried to surpass $15.50 but has failed a handful times. It is threatening to close at a new weekly low. The metals broke support in the summer and are threatening to break to new lows after retesting resistance (former support). This is textbook stuff.

The prognosis is the same for the miners. The daily bar charts for GDXJ and GDX are below. While the miners have held support, they have failed to generate anything during the rebound in Gold. Both GDXJ and GDX fell below their 50-day moving averages on Monday and have failed to recapture them. After Wednesday’s strength the miners failed again at their 50-day moving averages, leaving a bearish reversal and very little breathing room.

Another reason to be concerned is bearish sentiment has been unwound. From a bird’s eye view sentiment is certainly very bearish and that supports the inevitable sustained rebound. However, near term indicators such as put-call ratios, speculative positioning and discounts to net asset value do not indicate extremes. While there are a fair amount of speculative shorts in the metals, there are also some speculative longs left. In other words, there are still potential sellers out there who can drive the price lower. These longs need to liquidate before true capitulation can been reached.

In the days and weeks ahead, investors and traders need to be vigilant and focus on taking advantage of the volatility. The precious metals sector is threatening to break lower. Shorts should use stops while longs should remain patient and wait for this potential breakdown to run its course. Personally, I’m hoping to accumulate my favorite junior miners as Gold nears major support at $1000 and as sentiment and technical indicators reach extremes. As we navigate the end of this bear market, consider learning more about our premium service including our favorite junior miners which we expect to outperform into 2016.  

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

USDCAD Overnight Range 1.3257-1.3331    

The September quarter–end is over and the Loonie is in demand.  Actually, it’s the commodity bloc that is in demand as both AUDUSD and NZDUSD have rallied. This morning’s US Jobless Claims data was close enough to expectations so it had little impact

The Loonie gains are, in part, due to the unwinding of long dollar positions established on anticipation of USDCAD demand for portfolio rebalancing.  In addition, China PMI data was slightly better than expected which helped global growth sentiment. Relatively firm WTI prices and an improvement in Canadian GDP also supported the Loonie’s gains.

The gains may not last. Saudi Arabia may cut crude prices to Asia, in November, according to a Reuter’s story, in an effort to maintain market share.

The European and Asian sessions were fairly subdued.  China was closed for National day and will be closed on Friday as well. The Japan Tankan Survey was in line with expectations and the Nikkei rallied European PMI’s were ignored and EURUSD was stuck in a range.

USDCAD technical outlook

USDCAD technicals are bearish following the move below 1.3310 which is targeting further losses to the 1.3210-30 area. A move below this level sets up a deeper correction to 1.3180. A move above 1.3310 would suggest further 1.3250-1.3350 consolidation. The short term uptrend from June remains intact above 1.3190.

Today’s Range 1.3230-1.3310

Chart USDCAD hourly.                                                          Larger Chart

An important update on the supply of physical gold

One of our long-running themes here is that the truly historic and massive flows of gold from West to East is (someday) going to stop, for the simple reason that there will be no more physical bullion left to move. 

It’s just a basic supply vs. demand issue.  At current rates of flow, sooner or later the West will entirely run out of physical gold to sell to China and India.  Although long before that hard limit, we suspect that the remaining holders of gold in the West will cease their willingness to part with their gold. 

So the date at which “the West runs out of gold to sell” is somewhere between now and whenever the last willing Western seller parts with their last ounce.  As each day passes, we get closer and closer to that fateful moment. 

This report centers on preponderance of fascinating data revealing the extent of the West’s massive dis-hoarding of physical gold, for the first time, begins to allow us to start estimating the range of end-dates for the flow to the East.

Here’s the punchline: there’s an enormous and growing disconnect between the cash and physical markets for gold. This is exactly what we would expect to precede a major market-shaking event based on a physical gold shortage.

Stopping the Flows

There are only two outcomes that will stop the process of Western gold flowing East, one illegitimate and the other legitimate. 

1. It becomes illegal to sell gold.  This is the favored approach of central planners who prefer to force change by dictate rather than via free markets and free will.   Unfortunately, this strain of political intervention is dominant in the West, particularly in the US and EU.
2. The price of gold dramatically rises. A large increase in the price of gold will (paradoxically) cause greater demand for gold in the West and (sensibly) less demand in the East. This is what should legitimately happen given current supply and demand dynamics. But it may not. 

There’s always a 3^rd option, we suppose: economically carpet-bombing China and India’s financial systems to scare/force some gold back out. Consider such an approach along the ‘economic hitman’ lines of thinking. 

This would be done, for example, by having outside interests sell the Rupee furiously, driving down its value and forcing the Indian monetary authorities to defend it by using up foreign reserves to buy the Rupee. Then wait for India to run out of foreign reserves and then casually ‘suggest’ that its government use gold sales to continue defending its currency.  India’s leaders would have to find ways to somehow ‘coax’ gold from its citizens.  I think we can all imagine the sorts of draconian rules and penalties that desperate governments would deploy in such a situation.

As a side note, I believe this is the same process that was used to ‘coax’ a lot of gold out of the GLD trust since 2012. After enough bear raids on the price of gold, which began somewhat suspiciously almost exactly on the date that QE3 was announced, Western gold ‘investors’ lost interest in the yellow metal, sold their GLD shares in droves, and hundreds of tons of gold were liberated from that stockpile.

What is truly odd from a chart perspective: this hammering down of gold started just after it had broken to the upside out of a textbook perfect triangle, when it looked seemingly ready to head off to higher values:

But in the days immediately following the QE3 announcement, gold shed $100, then barely recovered, and just wandered lower until it was violently slammed from $1550 to $1350 over one night (of course) in April 2013.

Now this was highly fortuitous for the ever-lucky Federal Reseve. After launching the largest money printing campaign in US history, the Fed did not need gold heading any higher, possibly providing a signal that would cast doubt on the wisdom or possible effectiveness of its easy-money policies. Policies, mind you, that the years since have proven to do little more than enrich the banker class and the 0.1%, as well as lard the system with extraordinary levels of new indebtedness and liquidity.

The Fed Indeed Cares About Gold

Gold, when unfettered, has a habit of sending signals that the Fed really doesn’t like. Therefore the Fed is at the top of everyone’s suspect list when it comes to wondering who might be behind the suspicious gold slams. Whether the Fed does it directly is rather doubtful; but they have a lot of useful proxies out there in their cartel network.

To reveal the extent to which gold sits front and center in the Fed’s mind, and how they think of it, here’s an excerpt from a 1993 FOMC meeting’s full transcript. Note that the full meeting notes from Fed meetings are only released years after the fact. The most recent ones available are only from 2009. Listen to what this FOMC voting member had to say about gold:

At the last meeting I was very concerned about what commodity prices were doing. And as you know, they got lucky again and told us that the rate of inflation was higher than we thought it was.

Now, I know there’s nothing to it but they did get lucky. I’ve had plenty of econometric studies tell me how lucky commodity prices can get. I told you at the time that the reason I had not been upset before the March FOMC meeting was that the price of gold was well behaved.

But I said that the price of gold was moving. The price of gold at that time had moved up from 328 to 344, and I don’t know what I was so excited about! I guess it was that I thought the price of gold was going on up. Now, if the price of gold goes up, long bond rates will not be involved.

People can talk about gold’s price being due to what the Chinese are buying; that’s the silliest nonsense that ever was. The price of gold is largely determined by what people who do not have trust in fiat money system want to use for an escape out of any currency, and they want to gain security through owning gold.

A monetary policy step at this time is a win/win. I don’t know what is going to happen for sure. I hope Mike is correct that the rate of inflation will move back down to 2.6 percent for the remaining 8 months of this calendar year. If we make a move and Mike is correct, we could take credit for having accomplished this and the price of gold will soon be down to the 328 level and we can lower the fed funds rate at that point in time and declare victory.

(Source – Fed)

There it is, in black and white from an FOMC member’s own mouth spelling out the primary reason why I hold gold: I lack faith in our fiat money system. He nailed it.  Or rather, I have very great faith that the people managing the money system will print too much and ultimately destroy it. Same thing, said differently.

And of course the people at the Fed are acutely aware of gold’s role as a barometer of people’s faith in ‘fiat money.’ Of course they track it very carefully, discuss it, and worry about it when it is sending ‘the wrong signals.’ I would, too, if in their shoes.

The Federal Reserve Note (a.k.a. the US dollar) is literally nothing more than an idea.  It has no intrinsic value. America’s money supply is just digital ones and zeros careening about the planet, accompanied by a much smaller amount of actual paper currency. The last thing an idea needs is to be exposed as fraudulent. Trust is everything for a currency — when that dies, the currency dies.

The other thing you can note from these FOMC minutes is that gold pops up 19 times in the conversation. The Fed members are are actively and deliberately discussing its price, role in setting interest rates, and the psychological impact of a rising or falling gold price.

Later in that same meeting Mr. Greenspan says:

My inclination for today–and I’m frankly most curious to get other people’s views–would be to go to a tilt toward tightness and to watch the psychology as best we can. By the latter I mean to watch what is happening to the bond market, the exchange markets, and the price of gold…

I have one other issue I’d like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here. If we are dealing with psychology, then the thermometers one uses to measure it have an effect. I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market.

There’s an interesting question here because if the gold price broke in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology. Now, we don’t have the legal right to sell gold but I’m just frankly curious about what people’s views are on situations of this nature because something unusual is involved in policy here. We’re not just going through the standard policy where the money supply is expanding, the economy is expanding, and the Fed tightens. This is a wholly different thing. 

The recap of all this is that the Fed watches the price of gold carefully, frets over whether the price of gold is ‘sending the right signals’ to market participants, and pays attention to gold’s impact on market psychology (with an eye to controlling it).

In short, the Fed keeps a close eye on the “golden thermometer”.

Back to the supply story for gold.  Not long after gold began its downward price movement in 2012, the GLD trust began coughing up a lot of gold, eventually shedding more than 500 tonnes; a truly massive amount.

(Source)

In my mind, the absolute slamming of gold in 2013 was done by a few select entities and represents one of the clearest cases of price manipulation on the recent record.  While we can debate the reasons ‘why’ gold was manipulated lower or ‘who’ did it, to me, there’s no question about how it was done. Or that it was done. 

Massive amounts of paper gold were dumped into a thin overnight market with the specific intent of driving down the price of gold.

It’s an open and shut case of price manipulation. Textbook perfect. 

Even if these bear raids were performed by self-interested parties that made money while doing it, you can be sure the Fed was smiling thankfully in the background and that the SEC wasn’t going to spend one minute looking into whether any securities laws were broken (especially those related to price manipulation). Gold’s falling “thermometer” was exactly what the central planners wanted the world to see.

Down and Out

The paper markets for gold are centered in the US, while the physical market for gold is centered in London (but increasingly Shanghai).  It’s safe to say that the paper markets set the spot price, while the physical movement of gold originates in London.

What’s increasingly obvious is the growing disconnect between the paper and physical markets. This is exactly what we’d expect to see if the paper markets were pushing in one direction (down) while physical gold was heading in a different direction (out).

The tension between these ‘down and out’ movements is building and, according to a senior manager of one of the largest gold refineries in the world located in Switzerland, the current price of gold “has no correlation to the physical market.”

He notes a lot of on-going tightness in the physical market. Unsurprisingly, gold is moving from West to East with vaults in London supplying much of the physical metal that’s being refined into fresh kilo bars and sent off to China and India.

But given the astonishing amount of physical demand, why has the price of gold been heading steadily lower over the past several years? 

The aforementioned Swiss refiner is equally perplexed:

If I am honest, the only thing I could share now with you would be that I’m perplexed about the discrepancy between the prices and the situation of the physical market. This is something I still do not understand and is a riddle for me every day. For all people who are interested in precious metals, the physical side of this business should be given more emphasis.

(Source – Transcript)

There’s no mystery as to demand going up in China and India as the price went down. Interested buyers will buy more at a lower price.

But its a big mystery as to why Western “investors” seem more interested in selling gold than buying it right now.

Evidence of Physical Tightness

Besides the first-hand experience of the Swiss refiner, there have been numerous stories in the main stream press also pointing to tightness in the London physical gold market as well as relentless demand from China and India being the driver of that condition:

Gold demand from China and India picks up

Sep 2, 2015

London’s gold market is showing tentative signs of increased demand for bullion from consumers in emerging markets, after the price of the precious metal fell to its lowest level in five years in July.

The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants

“[The rise] does indicate there is physical tightness in the market for gold for immediate delivery,” said Jon Butler, analyst at Mitsubishi.

The move comes as Indian gold demand picked up in July, with shipments of gold from Switzerland to India more than trebling. Most of that gold is likely to originally come from London before it is melted down into kilobars by Swiss refineries, according to analysts.

In the first half of this year, total recorded exports of gold from the UK were 50 per cent higher than the first half of 2014, on a monthly average basis, according to Rhona O’Connell, head of metals for GFMS at Thomson Reuters. More than 90 per cent was headed for a combination of China, Hong Kong and Switzerland.

London remains the world’s biggest centre for trading and storing gold.

(Source)

Shipments and exports are up very strongly and nearly all of that gold is headed to just two countries; China and India. 

India Precious Metals Import Explosive – August Gold 126t, Silver 1,400t

Sept 10, 2015

In the month of August 2015, India imported 126 tonnes of gold and 1,400 tonnes of silver, according to data from Infodrive India. Gold import into India is rising after a steep fall due to government import restrictions implemented in 2013.

Year-to-date India has imported 654 tonnes of gold, which is 66 % up year on year. 6,782 tonnes in silver bars have crossed the Indian border so far this year, up 96 % y/y.

Gold import is set to reach an annualized 980 tonnes, which would be up 26 % relative to 2014 and would be the second highest figure on (my) record – my record goes back to 2008.

Silver import is on track to reach an annualized 10,172 tonnes, up 44 % y/y! This would be a staggering 37 % of world mining.

(Source)

With China and India’s combined appetite for gold being higher than total world mining output, it only stands to reason that somebody has to be parting with their physical gold and those entities appear to be substantially located in the US and UK.

When There’s No More To Sell, There’s No More To Buy

All the above evidence of a tightening physical market for gold is just the tip of the iceberg.

In Part 2: Why Gold Is Headed Higher & May Be Unavailable At Any Price we look at the frightening inventory declines in bullion storage that the LBMA and the COMEX have experienced over the past year.

We then lay out how this deliberate suppression of gold prices by the central planners is destined to end: with MUCH higher prices for gold, and much less availability. In fact, there is high likelihood we will experience a point at which it may be nearly impossible for the average investor to acquire physical gold, as there will be no sellers willing to part with it.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)