Gold & Precious Metals

Gold Market Update after the Euro Debacle

Posted by Clive Maund

on Wednesday, 20 June 2012 14:31

The outcome of the Greek vote at the weekend was not favorable for the markets, or for Precious Metals in particular. This is because it did not precipitate an immediate worsening of the acute crisis in Europe, and thus did not create the pressure needed to bring forward the major QE that must eventually come in order to delay Europe’s eventual complete collapse. Why then have markets not caved in already? – because investors are “smoking the hopium pipe” and waiting for the Fed to pull a rabbit out of the hat at Wednesday’s FOMC meeting, by making positive noises to the effect that QE3 is ready to be rolled out. What is likely to happen instead is that they will come out with the same old line about “being ready to act when the SHTF” but other than that remain vague and non-commital. If this is what they do then markets are likely to throw a tantrum and sell off, and the charts are indicating that it could be hard.

The broad market is believed to be at a good point to short here, as its earlier oversold condition has been substantially unwound by the rally of the past week or two, which was fuelled by QE hopes related to the Greek vote and now the upcoming FOMC meeting. It has rallied into a falling 50-day moving average, which is usually a good point to short it, as even if a major downleg isn’t starting it would normally back and fill to give this average time to at least flatten out before a significant rally could start.

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How does all this square with our bullish stance toward gold in the recent past?

…read more and view 3 more charts HERE

The 88 Yr Old Legend – The Latest on Gold “riding up an ascending trendline”

Posted by Richard Russell - Dow Theory Letters

on Tuesday, 19 June 2012 18:31

Gold — has risen out of its “handle” and is above its 50-day MA. The next target is the red 200-day MA at 1690 — and then 1700. RSI and MACD for gold are both bullish. Note that gold’s 200-day MA is just below 1700. Note also that gold is now riding up an ascending trendline.

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Electronic platforms & automated, algorithmic trading are hiding the cause of Gold Pricemoves. Apparently…

EUROPE might be facing deflation, and Greece might go on firesale after this weekend’s vote. But €1.1 trillion doesn’t buy what it used to, writes Adrian Ash at BullionVault.

Last winter, the European Central Bank poured money onto the currency union’s commercial lenders, lending them cash to lend in turn to their domestic governments by buying government bonds. Now Spain’s 10-year bond yields are at a fresh Euro-era highof 6.73%. Italy’s borrowing costs are back where they were before the second chunk of El Tro in February.

The cheapest 3-year money in history – lent for just 1% per year – has proven itself worthless in short, and faster than even we expected here at BullionVault. Any wonder people keep Buying Gold?

The recent swoons and jumps in the Gold Price, however, have the market scratching its head. Both of this week’s pops came just as New York got to its desk, but with barely a ripple in the Gold Futures market – where US traders typically throw their weight around. So it seems most likely to be simply a heavy gold buyer, bidding up prices for a chunk of physical metal in the wholesale market.

Whoever it is, they’re spoilt for reasons to Buy Gold – Greek elections on Sunday, record-high Spanish bond yields, or a weakening US recovery. Take your pick. Massive money inflation, either before, during or after a major credit default, isn’t a risk you can discount to zero or nearby today.

Yet still the finance business demands cause and effect. The obsession with tick-by-tick reasoning – the relentless search for “This because that” – goes far beyond financial journalists. The classic example, cited in Daniel Kahneman’s recent Thinking: Fast & Slowby way of Nassim Taleb citing it in The Black Swan, was when a Bloomberg headline writerfirst blamed the capture of Saddam Hussein for a rise in US Treasury bond prices, and then, minutes later, rewrote the headline to blame the very same event for T-bonds falling when the price dropped.

“The two headlines look superficially like explanations of what happened in the market,” says Kahneman. “But a statement that can explain two contradictory outcomes explains nothing at all.”

And so in gold, some market participants saw this Tuesday’s $30 jump, says one bullion-bank salesman, coming from Fitch’s downgrade of Spanish banks. Others players we spoke to saw Wednesday’s rise – which then reversed – coming off the weak US retail sales data. Yet more traders saw both moves as just noise spat out by automated traders, those algorithms run wild on electronic platforms which mean even market-makers can’t see quite what is happening with physical flows.

“The Electronic Platforms, or ‘machines’ or ‘toys’,” says one, “already installed at clients’ desks and currently marketed by commercial banks for precious metals trading [mean] that market-makers are lacking a bit of view of what is happening on the spot [market in gold] from time to time.”

Moving a little flow away from the biggest banks might sound a “good thing” to some. But blaming the electronic machines and toys for nonsense moves in the Gold Price is becoming a popular pastime in the professional market, especially for traders caught the wrong side of what feels like volatility.

Truth is, however, the violence of Gold Price swings has been easing since last summer’s 3-year highs. And if London’s market-making bullion banks feel they can’t hang a story on what’s driving the price tick-by-tick, few journalists or private investors will spot the “true” cause either. So save your energy. Because what matters, as with any home for your savings, isn’t whatever breaking headline might or might not be driving other people (or machines) to buy, only to sell – and buy again – before the next newswire update. It’s the core reasons you do or don’t identify for your own decision to buy or sell.

With Gold Investing, we’d suggest, those reasons to consider start and end with the threat to your own savings from the ugly twins of default and devaluation. Still lurking round the corner, what odds would you put on them mugging your money in the next month, year or half-decade? Five years and $900 per ounce after the start of the financial crisis, it still looks a long way from finished yet. And hoping that you won’t need uninflatable, indestructible gold isn’t the same as not needing it.

Get the safest gold at the lowest prices using world #1 online, BullionVault…

Adrian Ash, 13 Jun ’12

 

Adrian Ash runs the research desk at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London’s top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites includingForbes and a regular guest on BBC national and international radio and television news. Adrian’s views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany’s Der Stern andFT Deutschland; Italy’s Il Sole 24 Ore, and many other respected finance publications.

Highlights from this week’s GFMS Gold Survey 2012 launch…

EARLIER this week, Thomson Reuters GFMS, the world’s foremost research firm focusing on precious metals, launched its Gold Survey 2012.
 
For those weighing up the pros and cons of making a gold investment this year there were both bullish and bearish signals.
 
Here are some highlights that caught BullionVault’s eyes (and ears) at this week’s launch presentation:
 
Bullish Signals
 
• Gold investment demand is expected to set a new record in 2012
 
GFMS expects gold investment demand to be the main driver of gold prices this year, as it was in 2011. Furthermore, the consultancy expects investment demand for gold to set a fresh all-time high of close to 2000 tonnes in gold bullion terms.
 
A key driver of gold investment, says GFMS, is likely to be ongoing loose monetary policies adopted by the world’s central banks.
 
“A corollary of all this monetary largesse,” says GFMS’s global head of metals analytics Philip Klapwijk, “is fears about resurgent inflation, and that becomes all the more likely if oil prices motor higher should tensions get any worse between Iran and the US.”
 
• Physical gold investment demand continued to be strong last year
 
Investment demand for physical gold saw “an excellent performance” last year, Klapwijk told the audience at the London launch of ‘Gold Survey 2012’.
 
Europe, China, Thailand and the Indian subcontinent all saw growth in physical gold bar investment (investors in North America, as Klapwijk pointed out, tend to prefer gold coins to gold bars).
 
On a global level, combined demand for coins and bars was 1543 tonnes – a 30% gain on 2010, and a new all-time record. Indeed, the majority of gold investment in 2011 took the form of physical investment, GFMS says.
 
The significance of this is that investments in physical gold tend to represents “stickier” investments than other forms of getting exposure to the metal (for example buying gold futures) – meaning it would probably take more for such investors to exit the positions they’ve built.
 
 That said, there is obviously a limit to most investors’ stickiness. A lot will depend on whether, as GFMS expects, the economic environment will continue to be supportive of gold investment, with negative real interest rates and fears of inflation prevailing in most parts of the world.
 
• Scrap supply appears to be flat
 
On a global level, scrap supply fell by around 50 tonnes 2011 – equivalent to almost two thirds of the year’s gold mining production growth. This was the second consecutive year-on-year fall for scrap supply.
 
Only Europe saw significant growth in scrap gold bullion supply last year (old jewelry, gold watches etc.), most likely the result of distressed selling prompted by the Eurozone crisis.
 
North America and Latin America meantime posted modest scrap supply growth. East Asia and the Indian subcontinent meantime saw scrap supply fall, as did the Middle East, where it dropped by over 100 tonnes.
 
Although GFMS says it expects scrap supply to rise this year, another traditional source of supply – central banks – is expected to be absent (see below). GFMS points out there was a “secular increase” in supply from scrap, producer hedging and official central bank sales between 1987 and 1999 – a factor which it reckons contributed to the lackluster gold price during that period. 
 
By contrast, supply from these sources has been flat since 2000, despite a sharp jump in scrap supplies at the onset of the financial crisis. This period in flat supply has broadly coincided with gold’s bull market.
 
• Central banks are expected to keep buying gold
 
GFMS expects central banks to remain net gold buyers this year, although there may be a slight dip on last year’s figure, with net official sector buying having risen 491% year-on-year in 2011.
 
The swing to net buying by central banks is a key factor behind the flat supply picture of recent years that was noted above. Signatories to the Central Bank Gold Agreement have made what GFMS calls “trivial sales” in recent years, while emerging market central banks have been buying gold in significant quantities.
 
Bearish Signals
 
• Gold mining supply is expected to continue growing this year
 
Worldwide gold mine production rose for the third year running in 2011. Last year saw an annual gain of 2.8%, or 78 tonnes.
 
New gold mining operations contributed 47 tonnes of supply, while Africa was the region that saw the strongest growth, increasing production by 51 tonnes (despite its largest player, South Africa, seeing a five tonne drop).
 
Gold mine production has entered a “new era”, Klapwijk told the London launch, with GFMS expecting a further 3% growth this year. 
 
• A lot of gold investment is required just to maintain current prices
 
Rising mine supply contributes to what GFMS terms the gold market “surplus” – the difference between combined mining and scrap supply and fabrication demand (jewelry plus industrial uses).
 
GFMS estimates that this leaves a “surplus” of gold supply equivalent to around 110 tonnes. Gold investment therefore needs to take up that slack.
 
At current prices “purchasers of bullion need to take gold to the tune of $130 billion out of the market for it to clear,” said Klapwijk this week. One attendee at the launch asked whether there might be a case for saying many western investors are now overinvested in gold.
 
Klapwijk agreed such a case could be argued, and that many wealth investors interested in gold have probably already built their positions. He also pointed out that institutions such as pension funds and sovereign wealth funds – where gold investment remains relatively rare – could still offer some scope for growth.
 
• Hedging activity by miners can now only be a source of supply
 
For much of the 1980s and 1990s, gold miners would hedge their price risk by selling future production forward to lock in the current price, adding to current supply and putting downwards pressure on the gold price.
 
This process went into reverse as the bull market got underway. With gold prices rising, producers began to de-hedge, buying back positions and thus contributing to gold demand.
 
Measured as the total outstanding forwards and loans, plus gold options positions weighted according to their sensitivity to movements in gold futures (i.e. an option’s delta), producers’ overall hedging position last year was equivalent to 157 tonnes of gold bullion. Last year was the first year in over a decade that net hedging was positive, the producers in aggregate adding six tonnes to their combined position.
 
By contrast, hedging positions were equivalent to around 3000 tonnes in 1999 and 2000. Most of the de-hedging – which contributed to the demand side – appears to have been done.
“[Producer hedging] cannot be a source of demand in future,” said Klapwijk.
 
“It can only be a source of supply. The question is: how much supply?”
 
Klapwijk noted, however, the most of the hedging seen last year appeared to be related to specific mining projects, adding that there seemed little appetite for strategic hedging against a fall in gold prices.
 
• Gold jewelry demand is expected to fall again
 
Gold jewelry fabrication demand fell 2.2% in 2011 – though given the rise in gold prices, the fact that the fall wasn’t larger led GFMS to describe this source of demand as “resilient”.
 
The bulk of fabrication demand was again accounted for by developing countries, where gold jewelry is often bought for investment as much as adornment purposes. 
 
Although most of the world’s regions saw a fall in gold jewelry fabrication in tonnage terms, there was a slight gain in Russia and more significant growth of around 40 tonnes in East Asia, which “boils down to China” said Klapwijk.
 
Despite this eastwards demand pull, though, GFMS expects gold jewelry consumption to fall again this year, citing high gold prices and a slowdown in global growth. Jewelry consumption however “is still expected to remain above 2009’s historically depressed level” says GFMS.
 
The Outlook for Gold Prices
 
Weighing up the above factors, and many more besides, GFMS forecasts an average gold price in 2012 of $1731 per ounce, with a range of $1530 to $1920. 
 
Klapwijk adds that “a push towards $2000 is definitely on the cards before the year is out, although a clear breach of that mark is arguably a more likely event for the first half of the year”.
 
Of course, short-term gains are not the primary reason most people make a gold investment, especially not those buying gold in physical bullion form. From developing nations in the East to the quantitatively eased economies of the West, people are turning to gold as a vehicle for defending the value of their wealth and an insurance hedge against tail risks. 
 
The dynamics behind most gold investment will continue to play out well beyond the end of this year.
 
Ben Traynor
 
Gold value calculator   |   Buy gold online at live prices
 
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
 
 
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


“Civilized people don’t buy gold.” – (Charles Munger, Berkshire Hathaway Inc.)

For a while this department was called the Gold and Silver Sector, giving recognition to the problems left over from the speculative surge to April 2011. With what seems to be the start of a new bull market, the appropriate title is used again.

Is it a new bull market?

As noted, the dismal slide in gold stocks accomplished one of the worst oversold conditions in a hundred years. Actually at 24 on the monthly RSI, it was the second worst with 1924 at 22 being the worst. Other examples at 25 to 27 occurred in 1942, 1948 and 2008, which is the full list.

Also noted in mid May was that once the condition registered the rally was virtually immediate. The low was 39 in mid May.

Let’s put this in perspective. GDX set a good momentum high at 64 in April 2011, but it was not in the order of the momentum high for silver. The next high for the GDX was at 66 in September with the same 70 on the RSI.

Our point has been that as the selloff on gold’s completed it would be equivalent to the overbought for silver a year ago. Some sort of symmetry.

Technical measures of the plunge suggest a new bull market. The rise out of the middle of May has had two constructive corrections. But, a large test of the lows and subsequent advance would confirm a new bull market.

Let’s look at the fundamentals–not of the supply/demand analysis, but in what influences profitability.

The world has likely started a cyclical recession, which means a cyclical bull market for gold’s real price. One proxy is our Gold/Commodities Index, or GCI. This rose to 499 with the crisis that ended in September and slumped to 419 in mid March. The test was successfully completed at 421 in early April and it has rallied to 464 this week.

This also needs a bigger test to conclude the possibility of a cyclical advance.

There could be some new developments in the tech sector, but the gold industry is the only sector with a track record of doing well when most of industry and commerce is suffering post-bubble pricing pressures. Such pressures show up as positive pricing for the gold sector.

Our advice in early April was to begin to accumulate into weakness.

Our advice to Mr. Munger is that civilized people should abhor an experiment in unlimited government funded by central bankers with unlimited ambition.

BOB HOYE, INSTITUTIONAL ADVISORS

E-MAIL bobhoye@institutionaladvisors.com

WEBSITE: www.institutionaladvisors.com