AUGUST 23, 2016, 12:45 PM: Gold moved lower early during yesterday’s session, but came back up later on and finally gold ended the session only less than $3 lower. Can we view such a reversal as a bullish sign? Not necessarily – a reversal should be confirmed by high volume and yesterday’s session wasn’t. Consequently, one needs to look at other parts of the precious metals sector for confirmations.

The above action, however, provides bearish signals, not bullish ones. Let’s start with the USD Index chart (article published 

Larger Chart

Gold had a very good reason not to decline more – the USD Index moved higher a bit and then gave the gains away. The important thing, however, is that the support line remains intact – consequently, the outlook remains bullish.

Larger Chart

As we wrote earlier, gold reversed, but the volume that accompanied the reversal was relatively small, which suggests that it wasn’t really a “reversal”, even though the price action may suggest so.

At the first sight it may appear that technical phenomena like reversals, or breakouts etc. are just more or less random names for more or less random price movements without anything that justifies changing the outlook based on any of them. In reality, these are simple terms that refer to phenomena that are indeed happening in the market and that were found to be usually followed by some kind of action. If enough of the reliable factors are seen, the outlook may indeed change.

In case of reversals, the thing that the single candlestick on the chart represents is the situation, in which one side (bulls or bears) attempted to push the price in one direction and got almost or mostly overwhelmed by the other side. If both forces equal each other, the price will not change in terms of daily closing prices (or weekly closing prices, which was more or less the case with gold last week). Now, if the price had been falling previously and we saw this kind of action, it means that the selling pressure was no longer significant enough to trigger further declines and at the same time, the buyers were stronger than previously. The implications would be bullish. Conversely, if the price had been rallying previously and we saw the mentioned kind of action, it means that the buying pressure was no longer significant enough to trigger further upswings and at the same time, the sellers were stronger than previously. The implications would be bearish.

The key thing here is for the above to make sense, there really has to be some kind of “fierce battle” between buyers and sellers. If there was none, we couldn’t speak of one side overwhelming the other and thus about bullish or bearish implications. How can we tell, whether one side really overwhelmed the other? By looking at the volume. High volume confirms the above as it suggests that there were high numbers of both buyers and sellers who participated in that session and low volume suggests that there are little implications of this session (in terms of viewing the reversal as important).

With the above in mind, let’s take a look at yesterday’s volume. It was relatively low. Consequently, it doesn’t appear that yesterday was the session when the sellers and buyers were fighting hard to push the price of gold in a given direction with buyers fighting back strongly – significant volume would suggest the above, and instead we saw a move lower and a corrective upswing shortly thereafter. Instead of being bullish, yesterday’s session was rather inconsequential by itself.

In the case of silver, however, we saw a decline on volume that we hadn’t seen in weeks. Consequently, while gold’s reversal wasn’t confirmed, silver’s decline was. The implications are bearish.

The volume wasn’t as huge in the case of mining stocks, but it wasn’t very low either and the size of the move is quite visible. Gold stocks continue to underperform gold and this is a sign that lower prices are likely to follow shortly (not necessarily today).

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager

related: Gold: All Eyes On Jackson Hole

We know why Britons voted to leave the EU and what the UK’s options outside the EU are. Now, let’s analyze how Brexit could affect the gold market. We covered this topic in the latest edition of the Market Overview, as well as the daily updates of the Gold NewsMonitor, but today we will examine how the shiny metal performed during the past disintegrations of economic unions.

There are many examples of break-ups or exits from monetary unions (since 1945, more than sixty distinct countries or territories left a currency union), but these cases are not especially relevant for us, as Britain is not in the Eurozone. History also witnessed several break-ups of economic and political unions, like the collapse of the Austria-Hungary, Yugoslavia, the Soviet Union and Czechoslovakia. The Austro-Hungarian Empire ended in the very specific context of the First World War, when the gold market looked very differently, so we will confine ourselves to the last three cases.

As one can see in the chart below, gold was in the downward trend in the beginning of the 1990s, despite the turmoil in the Soviet Union, violent break-up of Yugoslavia and peaceful dissolution of the Czechoslovakia. There were big rallies in 1989 and 1990, but they were associated with the weakness of the U.S. dollar and American stocks (in 1990-1991, there was a recession in the U.S.). But these rises were temporary and gold quickly returned to the long-term downward trend. This behavior suggests that the price of gold does not react significantly to the political or economic break-ups. However, investors have to be cautious in drawing conclusions from this comparison. While Yugoslavia and Czechoslovakia were not globally significant unions, Brexit means an element of disintegration of the European Union, which would increase the risk of a full break-up of the biggest economic and political bloc in the world. The Soviet Empire was a major geopolitical player, but its dissolution actually diminished risk connected with the Cold War and increased the position of the Western world. Brexit, on the contrary, would increase uncertainty and diminish the role of West. This is why Brexit would be a real precedent even for the global economy and the gold market.

Chart 1: Gold prices during post-communist break-ups in the 1990s.

Now, let’s focus on the previous exits from the European Union, as the Brexit – contrary to some popular claims – would not be the first withdrawal from the European Union.  Indeed, in 1962, Algeria gained its independence from France and left the European Economic Community, the EU’s predecessor. However, since the gold market was not free at the time, we cannot examine the impact of this breakup for the yellow metal.

The next withdrawal from the EU happened in the 1980s, when Greenland, a part of Denmark, left the EU. It was an interesting case, as Greenland held a referendum in 1982, but the exit was formalized only in 1985 by the Greenland Treaty. We shall add that the only controversial issue was fishing, and eventually the country did not fully exit from the EU, but adopted Overseas Country and Territory status, instead (it means that it remains subject to the EU treaties). If negotiations with Greenland (which is economically and politically less important that the UK) lasted three years, imagine how long Brexit might take (it could be great news for gold if the process increases anxiety and uncertainty, but it can be bearish for gold if the additional time makes investors think that there will be no Brexit after all or the final result will be close to Bremain anyway)!

As one can see in the chart below, the Greenland’s exit from the EU did not trigger a boost in the gold prices. Actually, the shiny metal entered into bear market in 1983. There was a rally in the summer of 1982, but it was caused by the recession in the U.S., the cuts in the Fed’s fund rate, and the fall in the U.S. interest rates.

Chart 2: Gold prices (yellow line, left axis) and the U.S. nominal interest rates (red line, right axis, in %, 10-year Treasury Constant Maturity rate) from January 1982 to February 1985.

The third withdrawal from the EU occurred in 2012, when Saint-Barthélemy, a small Caribbean island, left the EU and became one of the EU’s Overseas Countries and Territories. It would not come as a surprise that this small change did not shock the world and the gold market.

The review of the past withdrawals from the EU shows that the Brexit could be really unique. So far, only dependent territories exited from the EU, and since they were certainly not as economically and politically important as UK, they are not the best to guide how the UK departure might look. And the famous Article 50 of the Treaty on European Union, which set out the rules for exit, has not been tested yet. Hence, Brexit would be a whole new ball game, which should have much greater influence on the gold market.

Thank you.

Arkadiusz Sieron

Sunshine Profits

Strengths

• The best performing precious metal for the week was gold, holding in with a 1 basis point drop.  According to the World Gold Council, global gold demand in the second quarter increased 15 percent due to a 141 percent rise in investment demand. The Royal Mint also commented on a “surge” in demand, specifically when the Bank of England cut rates – during that week the Mint saw a 25-percent increase in transactions on its bullion website, reports BBC. The Mint’s “signature gold” has also allowed buyers to purchase fractions of gold bars, causing sales to jump 140 percent.
• Japan is the “star performer” among smaller gold consumers, reports Bloomberg, with four straight quarters of positive net investment into bars and coins. Demand expanded to 5.8 metric tonnes in the second quarter. The World Gold Council cites distrust of Abenomics, negative interest rates and a rising yen for the investment boost. In China, vehicle sales in July gained the most in 17 months, sending palladium to touch a one-year high. Speculation is that supply won’t be enough to meet demand, reports Bloomberg, as the metal is used in the making of car parts.
• Gold prices jumped this week as investors reevaluated the likelihood that the Fed will raise rates this year, reports Investing.com. The Labor Department said nonfarm business sector labor productivity fell 0.5 percent in the second quarter (extending the longest decline since 1979). According to BMO Private Bank, economists surveyed expected a 0.4 percent gain for the three months ended June.

Weaknesses

• The worst performing precious metal for the week was platinum losing 2.03 percent, on what may have been profit taking following the very strong rally in the platinum group metal prices over the last two weeks.
• According to BCA Research, the U.S. labor market strength is a “conundrum.” Last week’s jobs report came in strong and although U.S. real GDP is up only 1.2 percent year-over-year, employment has grown by a stronger 1.9 percent year-over-year, the group points out. It is uncommon for GDP growth to be weaker than employment growth, and such a gap is “unsustainable as businesses will experience continued erosion in profit margins.”
• Following the U.K.’s vote to leave the European Union, gold prices soared to the highest level since 2014. The higher price is one reason that China, the world’s biggest producer and consumer of gold, cut purchases in July, reports Bloomberg. The People’s Bank of China increased its gold holdings by the smallest amount since it began disclosing purchases about a year ago.

Opportunities

• David Haughton of CIBC says the gold rally we’ve experienced so far this year is sustainable. He points to three key factors: 1) Comparing this rally to five others over the past 40 years shows gold equities are still 40-50 percent off the previous high, while historical cycles reached around 20 percent of old highs in the same time frame. 2) Most companies are now demonstrating fiscal discipline that could support outperformance ahead. 3) Investors are mostly underweight gold equities and macro factors appear supportive.

• In its Gold Sector Review report, Credit Suisse points to several demand trend updates for the second quarter of 2016. The group explains that mine supply was flat year-over-year, as production from new streams was offset by declines in existing assets. They forecast mine supply to fall 7 percent by 2018 versus the 2015 level driven primarily by declining grades and a lack of new projects coming on-stream due to industry capex cuts since 2013.
• In the Financial Times this week, investment expert and precious metals analyst Diego Parrilla writes that the gains seen this year in gold are just the beginning of a new gold bull market. “My view that there is a perfect storm for gold is based on three closely interrelated dynamics, whereby central banks and global markets are both testing the limits of monetary policy and credit markets as well as the boundaries of fiat currencies.”

Threats

• Andrew Garthwaite of Credit Suisse published his opinion on gold and gold mining stocks Friday, pointing to three tactical concerns he has with the metal: 1) Gold moves inversely with real bond yields, and he thinks real rates will rise. 2) Gold moves inversely with banks, and he thinks financials will outperform if bond yields rise. 3) Gold is overvalued base on his model.
• With the probability of three rate hikes from the Fed through to the end of 2017, Picet Wealth Management believes that gold may have met its match after a stellar start to the year, reports Bloomberg. “With the dollar in a long-term uptrend, bullion isn’t likely to break the $1,430 an ounce level,” said Luc Luyet, a currencies strategist at the Picet.
• With a rally in gold prices so far this year, purchases in India (the world’s second-biggest consumer) will be reduced, reports Bloomberg, trimming import prospects amid high inventories. Historically, the second half of the year is normally better for gold demand from Indian brides, but so far this year a “rally of 25 percent in the first six months has hit the buffers,” continues Bloomberg, with higher costs deterring jewelry buyers.

http://usfunds.com/

related: How to Profit from the Current Gold Bull Market