Saturday, March 13, 2010

Jeff Christian Explains Soros On The Financial Sense Newshour

In an interview for the third segment of the Financial Sense Newshour podcast [.mp3 file], starting in the middle of the file, Jeffrey Christian of the CPM Group took some time to explain what George Soros meant by his gold-is-the-ultimate-bubble remark. According to Christian, Soros meant that a bubble economy results in bubbles springing up in several asset classes. "Ultimate" means the end of the road, the final asset bubble.

To put it in another way: once gold goes into a bubble, the bubble economy is coming to an end. After that point, there's little option except to tighten up and clamp down on money creation. Gold entering a bubble means that serious inflation is arriving, and the inflation has to be cleaned out of the system or else it becomes hyperinflation. A gold bubble, therefore, is the end game for central back policy of monetary expansion as economic stimulus.

Christian also brought up an important point regarding gold being in a bubble as of right now: if it were, then the likes of John Paulson, Paul Tudor Jones and Soros himself would not be buying in to it. How common-sensical is it to assume that three legendary hedge-fund managers would be buying at the top of a bubble like the proverbial waiter giving out stock tips? Especially given that the first of the three became legendary by betting on the collapse of the housing market when it was toppy?

Myself, I think that gold's in a nascent bubble - close to the beginning of the real thing. I also think it's going to be a doozy, but I'm getting ahead of myself.

Friday, March 12, 2010

Gold Takes Unexpected Tumble In Morning Session

Things were going well for gold at the time regular trading opened, but a decline prompted (unexpectedly) by good February retail-sales figures dragged out for more than an hour and a half; it subtracted close to thirteen dollars an ounce from the spot price.

Said drop started right at 8:30 AM, and continued in three stages. Although the initial stage was quick, and took eight dollars off the price, the others weren't. The final climax took place right after 10 AM, when less cheery economic data were released. Gold was driven down more than four dollars an ounce in the next ten minutes; its low of $1,104.60 marked the end of the decline. A relief rally turned into a double bottom, and the price churned in a trading range between $1,108 and $1,110 before pulling back. As of 11:33 AM ET, spot gold was at $1,106.30 for a drop of $3.30 on the day. The Kitco Gold Index assigned a large $9.80 drop to predominant selling, and a gain of $6.50 to a weakening greenback.

The U.S. Dollar Index is still losing ground, although not by much since the opening of regular trading. After drifting upwards to 80, and staying in a trading range, the Index drifted back downwards starting at about 10:20. As of 11:37 AM, it was at 79.81.

"The hits just keep on coming." What better phrase for another disappointing day? Gold may recover from its latest slamdown, though; the afternoon's trading will tell.


Update: So far, it hasn't; in fact, the decline is continuing. After muddling about in a trading range until 11:30 AM ET, gold went on a half-hour slide that took it from $1,110 to a little above $1,100. The latter served as a support level, but gold didn't recover from the latest spill all that much.

To be more specific, gold bottomed at $1,101 at noon. An upward reaction turned into a spike when gold slid back downwards. The low of the day - $1,097.70 - was reached as of 12:45 PM. Gold recovered from that low to above $1,100, but only to the $1,102 level. As of 1:57 PM ET, the spot price was at $1,100.40 for a drop of $9.20 on the day. The Kitco Gold Index knocked off $15.25 for predominant selling and added $6.05 for U.S. dollar weakness to account for the drop. The predominant-selling category has become unusually large.

In fact, the greenback had little to do with the decline; it may be caused by the further unwinding of the Euro safe haven trade. [You don't have to be a European to play; long gold and short Euros would do it for a North American.] Since a modest decline that halted at 11:25, the Index has been churning around a centre around 70.82-.83. As of 1:58, it was at 79.83.

Both the $1,100 support level and normal late-afternoon quieting suggest that gold won't do much from here. Even days like this one have to quit.


Update 2: In the last three-and-a-half hours, the gold market did come to a rest. There was little change during the rest of the afternoon; the $1,100 support level held.

Gold was actually in a trading range since 1 PM, bordered by $1,103 on the upside and $1,100 on the downside. As the session ended, a gentle driftdown still kept gold within the range. At the end of the week, spot gold was at $1,101.50 for a drop of $8.10 on the day. The Kitco Gold Index chalked up $14.90's worth of drop to predominant selling, and $6.80's worth of gain to a weakening U.S. dollar.

The weekly change was a fairly steep drop of $33.40, or 2.94%, from last week's close of $1,134.90. This week was not a good one for gold.

Nor has it been for the U.S. Dollar Index. The rest of the afternoon session was quiet for it too, with the Index fluctuating within a trading range bracketed by 79.8 and 79.845.

The daily chart for it, though, does show some volatility (chart from Stockcharts.com):



Downward volatility, to be exact. As it turned out, the rally to around the 80.5 level was a relief rally. Thanks to the Euro recovering, the U.S. dollar was dragged down in an unusually large move.

The chart is beginning to look potentially bearish for the near term, despite the run the greenback has had. If the decline continues all the way down to 79.5, the Index will have backtracked from its entire collection of gains from early February. Such a drop could be attributed to the Eurocrisis finally easing, but it would also mean that the entire third leg of the still-present bull run would have been eliminated. There are too few clues for me to go out on a limb here, but I suggest watching the 79.5 level.

The unwinding of Eurocrisis trades is the only explanation that ties this week's greenback disappointment with the more acute disappointment in gold:



Yesterday's spiky decline, as we now know, was not the end of the near-term decline. As already noted, $1,100 did hold; the extent of the drop, though, does have a foreboding cast. So does the cross-over of the MACD lines at the bottom. [They're in bullish formation when the black line's above the red.] Thankfully for gold, the last MACD-bull period saw the price end up above where it was at the beginning. That was not the case of the last bull phase in early-mid January.

To be frank, the best hope for gold right now is the Eurocrisis-unwind explanation for its drop. That unwinding has to end sometime, and may have ended already. There's bargain hunting providing support for gold, but that support may fade if the bargain hunters get the idea that gold will go significantly lower.

This week's Committment Of Traders report, as graphed here, shows an expansion of commercial longs as of last Tuesday. Speculative longs were virtually unchanged. Tuesday was the day that this week's decline got rolling, so the COT report shows an unusual picture of commercial longs in gold (if unhedged) getting poleaxed. Speculative shorts were virtually unchanged, and commercial shorts filled the gap by expanding.

The COT for the U.S. Dollar Index, as graphed here, shows speculative longs continuing to get out. As of Tuesday, the Index was straining to get above the 80.5 level. Those who did get out, got out when the getting was good. Interestingly, speculative-short positions also shrunk in the week ending last Tuesday. Significantly, and perhaps sadly, commercial longs increased 44%. Commercial shorts increased slightly.

A Reuters report, as webbed by the Globe And Mail, does attribute this week's $30+ drop to easing of fears about the Eurozone. Also:
Speculation of further money tightening by China and economic uncertainty amid sovereign debt worries out of Europe prompted heavy [futures] liquidation this week.

Gold's losses this week in the wake of a lower dollar indicate the inverse relationship between the metal and the U.S. currency is broken for now, but traders said that could reverse soon.
A trader is quoted as saying that both falling at the same time is unusual. The money exiting gold and the greenback might be going in to the U.S. stock market.

This week's action was discouraging and, for many, surprising. I have to admit to being caught off guard by the declines at least once. For next week, the number 1100 is going to be an important one. Should gold break below that number and stay there, it's not going to be a pretty sight...except for gold shorters.

Macro Man Explains Recent Decline In Gold

And makes an interesting point that pertains to this morning's decline:
Gold (GLD), which until very recently had shrugged off dollar strength (or at least euro weakness) amdist stories of Chinese reserve buying, performed noticably poorly yesterday. Not only did it break the uptrend line off of the year's low, but it also has breached the 55-day moving average, which suggests that some of the momentum crowd may start bailing soon. And if gold loses its luster, the risks must surely rise that equities will, at least temporarily, find that their recent shine gets tarnished.
In other words, gold looks bad on a momentum basis right now. Momentum traders bailing is a likely factor for the drop earlier this morning.

He also suggests that the gold market might be discounting a less accomodative monetary policy by the People's Bank of China, not to mention an upvaluation of the renminbi.

Four Reason Why Gold Should Rise In The Future

Those reasons were given by Donald Doyle, CEO of Blanchard, and they're elaborated upon in a MineWeb article. The four reasons are: increasing central-bank demand for gold, particularly from Russia and Venezuela; the continuation of the near-zero interest rate policy, which lowers the opportunity cost of holding gold; China revaluing the yuan, which would lower the value of their U.S. Treasury holdings and prompt a desire to diversify (perhaps ahead of time); and, continued trouble in Euroland and associated sovereign risk.


They're more headline-oriented than the usual ones given, which include the declining-supply factor that seems to have gone underground for the moment. Blanchard is a major gold dealer.

Debunking The Risk-Appetite Explanation

Joe Wiesenthal has pointed out in the Business Insider that stocks are rallying but gold isn't, indicating that the inverse-dollar trade that used to hold is now deteriorating.
Last year, when the dollar/stocks inverse trade was on to full effect, this was the case. Gold rallied when stocks would rally. Gold would sell off on days when stocks would sell off, and the dollar would be strong.

But that's been deteriorating for awhile, and one loser has been gold. Stocks are riding an impressive streak, but the precious metal has been going nowhere fast.
He concludes by saying that the current rally is a risk rally, and gold has no real reason to rise during one of those. Risk-takers focused on equities aren't inclined to seek out safe havens when the economy recovers.

Numismatic Coin Expert Discusses "Value Compression" In Collectible Gold Coins

After noting the prevalence of value compression between different grades, Doug Winter attributes it to new grading procedure. Grading has become so meticulous that there's little visible-eye difference between, say, an AU-50 and AU-55. That's why the grade curve for same-kind gold coins has narrowed.


In other words, there's no speculative froth in the rare gold coin market. Speculators are most likely to seize upon specific grades, while regular collectors are less likely to. Sadly, that compression also indicates a lack of demand from passionate collectors right now; they seize upon grades too.

All in all, it's a picture of a quiet coin market - with one exception. Bullion buyers buy as close to spot as possible. Their presence in the coin markets would add to the value compression. That source of demand seems to have picked up relative to collector demand.

Consumer Sentiment Unexpectedly Down A Little

The latest number from University of Michigan's index for U.S. consumer sentiment, as of (early) March, was released; it was lower than expected. It dropped from February's 73.6 to 72.5, despite an expectation for it to be unchanged. The number knocked down the U.S. stock market, but had little effect on the U.S. Dollar Index.

It did, however, have some effect on gold. Amplifying a decline that was kicked off by an unexpectedly strong U.S. retail sales, gold ended up dropping to $1,105.50 as of 10:10 AM ET.

Oddly, both good and bad economic news pushed down gold this morning. Perhaps this dichotomy has something to do with recent weakenss in the market, despite last night's recovery.

Mark Hulbert Picks Through Justifications For Gold-Timer Surprise At Decline

After saying that examining rationales after a surprise drop provides added insight into sentiment, he discloses that the most common explanation is unanticipated strength in the U.S. dollar:
The most common excuse that gold bugs have used to explain why they didn't anticipate gold's recent weakness: Strength in the dollar. And I'm sure they're right that dollar strength does translate into gold weakness.
After then saying that he's not buying it, Hulbert mentions that gold-timer sentiment is still at high levels. From a contrarian standpoint, it suggests that gold is in for an extended decline.
The gold timers tracked by the Hulbert Financial Digest have steadfastly refused to build up any cash in the wake of gold's recent slide, which hints at stubbornly-held bullishness.

According to contrarians, the corrections that are most likely to be relatively minor affairs are those accompanied by market timers rushing for the exits. That's not what we're seeing right now.

Although I'm not in the same class, because I'm not registered as an investment advisor, I have made my own bloopers at the commentary level - so I have no high horse to deploy regarding this item. Hulbert, of course, is speaking up for the customers.

Indian Buyers Pulled Back; Futher Declines Were Hoped For

That's according to the Economic Times:
There is not much activity today. I did deals totalling 200 kgs at $1,107-1,110 (an ounce) yesterday evening. They were all wedding buyers," said a dealer with a state-run bank in Mumbai.
Despite the waiting, sentiment was improved by a stronger rupee.


Later, as gold prices firmed up, that improved sentiment helped bring in buyers from "stockists and jewellers driven by higher European [advances]."

South African Gold Production Falls 5.8% In 2009

That drop put the country in fourth place in gold production. Unlike in Australia and mainland China, South Africa's gold production dropped last year:
South Africa was the world's largest gold producer for most of the last century up until 2006.

Gold production last year stood at 204,922.8 kg, which was an improvement on the 14.5 percent decline in output that occurred in 2008 mostly as a result of power cuts that crippled mines, the Chamber said in a statement.

Lat year's decrease is a figure that gibes with the peak-gold hypothesis.

Gold Rises Overnight, Helped By Rising Euro And PRC Inaction

Despite the bulge in mainland China inflation, the People's Bank of China has done nothing as yet to curb it. According to a New York Times article, it's believed that the February jump-up was seasonal; the 12-month rate is still below the government's 3% target rate.
Economists said this week’s data suggested that no shift in policy was in store, but they predicted higher interest rates as China tried to hold down inflation.

While inflationary pressures are clearly building, “current inflation is still modest,” a Citibank economist in Beijing, Ken Peng, said. “Right now, we are still O.K. This is not going to cause any panic among policy makers.”

A Standard Chartered Bank economist in Shanghai, Jinny Yan, said the data did not suggest that the Chinese economy was overheating, despite pockets of speculation, especially in the property market.
The lending frenzy in January abated in February, with loans in the latter month being half of what the former month's were. Also mentioned in the report was an announcement by Prime Minister Wen Jiabao, in which he stated that the lending target for 2010 will be only 78% of 2009's.

The handicapping so far says that the People's Bank of China won't raise the reserve requirement this month. Gold took a little heart from that forbearance, and more from a rise in the Euro; the latter was influenced by a report of a record rise in Euroland industrial production in January. The drop in the greenback had more influence on gold's rise than the official easygoingness about the latest PRC inflation figure.

When evening trading opened, gold traded in a range centered at $1,110. After dipping down to the $1,108 level at 9 PM ET, the metal rallied up to the $1,113 level by the end of the night. It stayed near that level until about 3:30 AM when the industrial-production news boosted the Euro. Gold then sailed up to $1,120.40 before pulling back to the $1,115 level; it later pulled up a bit. As of 8:12 AM ET, spot gold was at $1,116.90 for a gain of $7.30 on the day. The Kitco Gold Index divided the day's gain into $0.60 due to predominant buying and $6.70 due to a weakening greenback.

The U.S. Dollar Index, after a decline that started slowly last night, sunk well below 80 early this morning. It started off last night in a range just below 80.3. An attempt at a rally as of 9 PM got the Index up to 80.325, but it fizzled and turned into a slow decline. After leveling off at 80.2, it fluctuated around that level with increasingly volatility until a swift decline started at 3 AM. That drop took the Index all the way down to 79.67 before it stopped at 5:25 AM. Since then, the Index fluctuated in a range bordered by 79.85 and 79.75 before pulling up a little. As of 8:21 AM ET, it was at 79.86.

A Wall Street Journal Online article attributes the overnight rise in gold to the advance in the Euro.
The euro is trading above $1.37 against the dollar, a figure that was important resistance, said Standard Bank analyst Walter de Wet.

"It has triggered fresh money," Mr. de Wet said, adding gold isn't likely to trade much above $1,130 to $1,140an ounce in the next week due to poor physical demand. In addition, holdings in the largest gold exchange traded fund, SPDR Gold Shares, rose last week but then fell back Wednesday.
Lack of official response to the latest PRC inflation figures was also brought up.

The technical picture was brought in by a Reuters article webbed by the Globe and Mail:
From a technical perspective, gold has key support at $1,115 and $1,104, analysts said, as well as the psychologically important $1,100 level at which it bounced on Thursday.

However, the technical picture overall remains neutral, they added. “Only a close back above $1,131 would inspire renewed calls for higher prices,” said ScotiaMocatta in a note.
The article also mentions the anticipation over February U.S. retail sales fugure. That figure has come in at a 0.3% gain, which put sales up 3.9% as compared with a year ago. It was above expectations, which were for no change. The news pushed the U.S. Dollar Index up to near 80 before it pulled back a little; as of 8:46, it was at 79.91. Gold was dragged down below $1,115 on the news. After fluctuating directionlessly when regular trading opened, the metal sunk more than seven dollars an ounce before recovering a little. As of 8:50 AM, spot gold was at $1,113.40; it still had a gain on the day, of $3.80, but more than all of that gain was attributed to the weakening dollar by the Kitco Gold Index.

Evidently, the good retail-sales news was sized up as bad for gold. Both it and the Euroland industrial-production news benefitted the respective currencies. It's likely that other good U.S. economic news will be seen as good for the greenback and bad for gold, until inflation accompanies it.

Thursday, March 11, 2010

Gold Trundles Along

Regular trading opened on an optimistic note, which was wrecked by a drop to just above $1,100 between 8:30 and 8:45 AM ET. After dawdling at a little above $1,101, the metal made two runs upwards that weren't sustained. The first peaked at $1,105.50 at about 9:30; the end brought gold all the way down to $1,100.50. The second propelled gold above $1,108.50; at the end, the metal dropped down to $1,104.50. The latter rise was a little more than a spike, as gold drifted around $1,106-7 before falling back to $1,103. As of 11:42 AM ET, spot gold was at $1,104.90 for a drop of $3.30 on the day. The Kitco Gold Index attributed a $4.00 loss caused by predominant selling and a $0.70 gain due to a weakening greenback.

The U.S. Dollar Index has weakened, with 80.5 becoming a memory. After bolting up at 8:30, it pulled down after making another run at 8:38. That run took the Index a little above 80.5, but a further attempt at rallying only resulted in an upwards slog. After dropping back a little, the Index rallied to make a double top. Then, staring at just before 10:00, it dropped sharply and continued to drop more slowly. By 10:42, it was below 80.3. A rally starting at 11:00 only reached 80.41, and the Index descended further in a choppy fashion. As of 11:43 AM ET, it was at 80.35.

An inverse influence has reappeared; the decline of the dollar is helping gold at its current low level. There's a chance of another plummet today, but not that big of one. The afternoon will tell.


Update: There hasn't. The usual window for such drops has now passed, implying that there won't be one unless a special news announcement slams down the gold market.

In fact, gold has recovered slightly. Since the drop to $1,103 as of 11:10, the price has been slowly and raggedly climbing up. As of 1:27 PM ET, spot gold actually shows a gain on the day. It was at $1,108.80 for a rise of $0.60. The Kitco Gold Index still has a drop due to predominant selling, of $0.70, but the gain for a weakening greenback has increased to $1.30.

The U.S. Dollar Index traded directionlessly since the original post, but the preponderent direction has been down. It was in a trading range between 80.38 and 80.3; as of 1:33 PM, it was at 80.33.

Some relief has crept into the market. The usual bargain hunters haven't been out in full force, but today's action does suggest that the $1,100 support level still triggers the phenomenon. It looks like the worst is over, unless the People's Bank of China throws a spanner in the works overnight.


Update 2: The quiet that often prevails in the mid-late afternoon session held today. After a spill between 1:50 and 2:15, gold crept up to finish with a slight gain.

That spill pulled it out of a trading range bordered by $1,107.50 on the downside and $1,109 on the upside. Gold lost more than three dollars an ounce in that time. Subsequently, though, the price climbed with little interruption for the rest of the day. At the close, spot gold was at $1,109.60 for a gain of $1.40 on the day. Despite that overall gain, the Kitco Gold Index subtracted 45 cents due to predominant selling. $1.85 was added due to greenback weakness. The predominant buying/selling category didn't get into positive territory, suggesting that gold was still reacting from recent record highs in the Euro and pound.

The U.S. Dollar Index hasn't been doing all that well lately. After spending some time in a trading range early this afternoon between 80.32 and 80.37, the Index took a fall to a little below 80.3 and stayed in a narrow trading range bracketed by 80.27 and 80.3. It didn't drop all that much today, but it did drop. The most likely reason is the calming-down in Euroland. To the extent that the recent declines were prompted by unwinding of safe-haven trades, so was gold's. In gold's case it was amplified by declines hitting stops and relatively greater skittishness in that marketplace.

The daily Stockcharts.com chart of the U.S. Dollar Index shows that the pullback wasn't all that much:



The Index might as well be still in a trading range, even though the Eurocrisis that gave it its final rallying push is fading. What's noticeable is the difference between the performance of the Index recently, now that the MACD lines at the bottom of the chart are in bearish formation, and the last time the MACD lines were in the bear zone. [In a bearish formation, the black line is below the red line.] The last time, there was a noticable decline. This time, there's hardly been any at all; just a drooping trading range.

On the other hand, the RSI indicator at the top was sinking on balance even as the Index made a new nine-month high. That signals trouble ahead for the Index.

It's a real mixed picture, one that requires a real interpretive bent to yield a clear message. Longer term, and this may carry the balance for many technicians, the dollar is still in an uptrend. Unless the Index sinks all the way down to 79.0, calling for an outright short-term downtrend would be hasty. It might not even sink below 80.

On the other hand, getting and staying above 81 would be a signal that the bull move is continuing.

Moving to gold, today's price action looks a lot like February 5th's on the daily chart:



That day marked the climax bottom of the four-week downtrend that began on January 12th. Thankfully, the declines over the last three days were not as severe as the single-day decline on February 4th. The similarity of the two suggests that gold's met a fairly solid support level at $1,100. It may be tested tomorrow, but it's holding up for now. From the vantage point of this chart, which uses the nearest-futures price, $1,110 is serving as support too.

What's worrisome about the chart is the extent of the decline so far. It looks like two-thirds of a regular head and shoulders pattern, the kind that signals a further decline below the neckline. If that pattern completes, with neckline at $1,100, we may see a decline back to $1,050 or so. Of course, there's no guarantee that it will. Doing so would take some shocker that would throw the gold market for a real loop after a further rise that tops out below $1,140. Since the pattern isn't even complete, even with the head, I'm being hypothetical. It can be pegged as an early warning, or perhaps as me seeing things.

A Reuters report warns that monetary tightening by the People's Bank of China may weigh down the gold market:
* Strong economic and inflation data out of China fuels speculation of monetary tightening - Bruce Dunn at Auramet.

* Equities uncertainty prompts gold investors to take wait-and-see approach - Adam Klopfenstein at Lind-Waldock.
Also noted, though was the indication of support at $1,100.

I wish I could come out and say that the gold market is going to turn up tomorrow, but the downward gyrations have been too unexpected for me to blithely ignore them. A perhaps-coincidental similarity between now and Feb. 5th isn't enough for me to stick my neck out, particularly since I got mine bruised yesterday. However, we seem to be close to the end of the current decline...even though the People's Bank of China has yet to be heard from.

ETF Analyst Says ETF Gold Is In Strong Hands

Nicholas Brooks, head of research and investment strategy at ETF Securities, is buying into a necessary plank of what I called the "New Era story" for the coming gold bubble: gold being seen as an alternate currency. It ties in with the sovereign-risk theme that is lending some support to the price of the metal.

He had this to say about gold-ETF demand:
Brooks maintains that the gold ETF market is rather less prone to the speculative vaguaries of things such as currency fluctuations than other parts of the gold market.
"We find that the flows are quite stable. In other words during periods when the gold price has dropped sharply we have rarely seen very large outflows - at the same time when the gold prices is rallying at a very aggressive rate we don't tend to see a surge in inflows into the gold ETFs - a lot of the flows into the physically backed gold ETFs are strategic in nature.

And, while he admits it is too early in the cycle to know exactly how long-term these flows are, he does say that "most of our investors are large institutions and pension funds and fund managers and private wealth as well and again the pension fund of course will have a very long time horizon."
In other words, the stronger hands, intending to hold for longer-term reasons, are investing in ETFs.


There is some evidence that the SPDR Gold Trust's holding are positively correlated with the gold price, but not by much. The changes reported are net changes, so momentum and arbitrage plays are mixed in with strategic investment.

New Digital Currency Launched in UAE

It's called gBullion, and it has the same features as GoldMoney and the now-suspended eGold.
All transactions are made in system digital currency - gB, wherein 1 gB is equal to 1 gold gram. After the purchase gold bars (of 99, 5% or higher purity) are stored in the specialized secure Vault while corresponding quantity of gold grams (gB) is transferred to electronic gBullion client account....

Unlike GoldMoney, gBullion is held up primarily as a system to use gold as money.

The Hardcore Goldbug Case: An Example

One of the reasons why goldbugs are staying bullish despite gold's recent troubles is they're not pure technicians. When the technical indicators are confounded, they shift to the fundamental argument. In a nutshell, the case for gold as a long-term investment is based upon the bloated amount of paper money out there and huge government deficits; those deficits will likely be monetized, at least in part

A colourful example comes from Adam Brochert of Gold Versus Paper; he lays the case out in detail. Part of it is based on gold as reproach and threat to the fractional-reserve system as overseen/managed by paper-currency-issuing central banks. The deflationary tendency of a creaky fractional-reserve system, which we've experienced, is offsetting the inflationary tendencies inherent in fiat money; both together create uncertainly and panic. Gold is rising as a result, and will continue to rise due to the flawed nature of the current fiat-money standard. He's the fellow who coined the term "paper bugs" to describe fiat-money supporters.


A similar path is treaded by Bill Sardi over at LewRockwell.com. He claims that the gold market is being manipulated downwards, and the basis for his claim is that gold isn't rising with the U.S. money supply. His case for gold rising is the metal spreading as an alternative investment as newly-created money induces inflation.

Indian Buyers Hold Off, Wait For Lower Prices

Indian gold buying is still soft, as buyers believe that prices will fall further. The rupee has weakened, adding to the abatement.
"I did about 70-100 kgs yesterday evening at $1,105-1,120 (an ounce), but people are moving away now as they expect a fall below $1,100," said a dealer with a state-run bullion dealing bank.
Another dealer said that the orders are piling up at $1,095-$1,100. Evidently, the bargain buying there is a moving floor. Right now, it's moving downwards.

Gold Stay Steady Last Night But Doesn't Recover

The inflation news out of mainland China wasn't good, even if it's somewhat exotic right now to see an economy overheat. The CPI leapt from a 1.5% 12-month increase to 2.7% for February. It isn't that high as 12-month rates go, but the rate of change is fairly worrisome. There's now a widely-held expectation that the People's Bank of China is going to do something about it.

Inflation-watchers might be interested in this item: real rates in the mainland are now negative.

Since there was no good explanation for the plummet in gold yesterday morning, there's the possibility of the catalyst being this item and the PBoC's reaction to it. However, it might be my hindsight bias kicking in.

Gold didn't do all that much in overnight trading, even in response to that item. The now-established $1,105-$1,110 range held through the entire session, even if it was tested at times. One of the tests was to the upside, when Sydney and Hong Kong trading were open. The metal got above $1,110 as of 8:30 PM ET and stayed there for about an hour, but sunk back into the range. A brief test of the low around 7:30 AM, which got gold down to $1,103.80. The bottom ended up holding, for now. As of 8:08 AM ET, spot gold was at $1,105.60 for a drop of $2.60 on the day. The Kitco Gold Index attributed a $2.80 decline to predominant selling and a $0.20 gain to the U.S. dollar weakening.

Despite an attempt to get above 80.5, the U.S. Dollar Index wound up backing away from it. An early-evening rally got the Index up to 80.52 by 8 PM ET, which led to a trading range between the aforementioned 80.52 and 80.45. It broke on the downside, but descended only slightly below the low end. A two-stage rally starting at 1:15 AM got the Index up to 80.57 by 2:45 AM. That rally turned into a decline that ended at the 80.35 level by 5:30. Since then, the Index was wobbling slightly upwards. As of 8:16 AM ET, the Index was at 80.41.

A Wall Street Journal report said that the Chinese inflation datum had an influence, and that the technical picture for gold has deteriorated:
"Right now, gold is vulnerable for a break below $1,100/oz," said Eugen Weinberg, an analyst at Commerzbank. "Traders are cautious due to the proximity to $1,100/oz."

Gold is also lower in euro terms, after hitting a record high in the currency earlier in the week.

Citi analyst David Thurtell said that, "the sharp easing of the Greece crisis has removed some of the need to hold gold as a 'currency' alternative."
The rest of the article mentioned that the SPDR Gold Trust ETF (GLD) lost 0.6 tons yesterday.

An article from Bloomberg, as webbed by Business Week, attributed yesterday's sell-off to an unwinding of the Eurocrisis trade, in addition to mentioning the China inflation story:
“Speculation of tightening monetary policies could add additional pressure,” James Moore, an analyst at TheBullionDesk.com in London, said in a report. Precious metals are “consolidating” and “we expect the euro and the European Union-related news to provide short-term direction.”
Some trepidation is expressed in a quote from an analyst in Dubai:
“Demand is certainly visible in the $1,101-$1,105 range and that is probably helping the metal from an immediate crash,” Pradeep Unni, an analyst at Richcomm Global Services in Dubai, said in a report. “Investment demand is clearly on a slippery note.”

Regular trading has opened, and the range has been broken to the downside. Prior to 8:30 AM, gold moved up to above $1,109 but it shed more than eight dollars an ounce between 8:30 and 8:45. The greenback wasn't to blame; it got driven down to 80.25 at 8:30 before recovering later. The catalyst was the new jobless claim report, which saw a drop but not as much as expected.

As of 9 AM ET, spot gold recovered slightly to make $1,103.30. The Kitco Gold Index apportioned the $5.00 decline into $0.95 for strengthening of the U.S. dollar and $4.05 due to predominant selling. The U.S. dollar index recovered to the 80.5 level; as of 9:02 AM, it was slightly above.

No wonder there was trepidation expressed. The decline has gone farther than many expected, and it hasn't ended yet. The next shoe to drop is the People's Bank of China reaction to the inflation number.

Wednesday, March 10, 2010

Gold Pushed Down By Wholesale-Inventory Report, Unexplained Plummet

Despite U.S. business sales having gone up for the tenth straight month, wholesale inventories still shrunk. The sales figure for January was a 1.3% annualized gain, while inventories dropped 0.2%. The picture given by both suggests continued caution, which doesn't bode well for the unemployment numbers.

At the time of the release, gold was being knocked down; the decline ended just after 10:05 at $1,119. Prior to that release, which was handicapped by the gold market, the metal was already drifting down quietly in three downward humps. Subsequent to the last drop, gold was marking time at the $1,121 level. As of 10:42 AM ET, gold's gain was miniscule after evaporating entirely. The spot price was at $1122.90 for a gain of $0.70 on the day. The Kitco Gold Index assigned +$0.10 to predominant buying and +$0.60 to a weakening greenback.

Yes, the U.S. Dollar Index declined too after rallying all that way to 80.68. The top was reached at 8:40; since then, the dollar has descended in a raggedy pattern to just above 80.5 before recovering a little. As of 10:44 AM ET, the Index was at 80.54.

So far, the recovery has turned into a slog. Gold's performance could have been worse, but it could have been better too. There's a chance that today's action will be largely directionless.


Update: I have to admit to eating a little crow on that one. Out of nowhere, and after a rally got the metal up to above $1,127, gold was poleaxed starting at 11:05. This plummet wasn't sudden - it lasted for more than an hour before abating - but it was steep. At its end, as of 12:15 PM ET, about twenty-five dollars had been knocked off the price. The bottom came in at $1,102.10.

Since then, gold's snapped up a little and has been trading in a much lower range bordered by $1,105 on the downside and $1,110 on the upside. It remains to be seen whether gold can recover from this plummet by tomorrow, but the recent bullish reversal pattern now looks like it's become the third fake-out. As of 1:05 PM ET, spot gold was at $1,108.60 for a loss of $13.60. Kitco's Gold Index attributed $15.00's worth of loss to predominant selling; had there been none, there would have been a gain of $1.40 due to U.S. dollar weakening.

No, the greenback did not cause the rout. The U.S. Dollar Index sunk after that rally mentioned in the original post, which filed to get as high as the last one. A fairly quick decline in the Index took it down to 80.308 by 11 AM; that decline established 80.5 once again as a resistance level. A three-step rally couldn't get above it. As of 1:31 PM ET, the Index was making another run at 80.5; it was at exactly 80.50.

Returning to gold, this Wall Street Journal report has this to say about what did cause the plummet:


Analysts cited a variety of possible catalysts for the initial decline, rather than a single smoking gun. This included a reversal in several outside markets [such as crude oil], continued reaction to comments from a Chinese official Tuesday suggesting that the country's future gold purchases might be limited, plus rising Treasury yields.

The head of one precious-metals trading desk characterized gold's sell-off as "excessive" as the sell stops were hit, with many participants selling to exit positions in which they previously bought.
In other words, this decline was more "natural" than some others during interday trading. Gold hit an air pocket.

The question now is, will gold recover during the rest of the afternoon? It seems unlikely as of now, but gold is in a bargain range. I note in passing that stop-loss protection can be considered as weakening the hand that holds the investment.


Update 2: The rest of the afternoon was quiet; the losses earlier in the day were not recovered.
Instead, gold spent the rest of the day in the same trading range mentioned above: between $1,105 and $1,110. There was an attempt to break through on the upside as of 2:15 PM ET; for the next forty-five minutes, $1,110 became a support level. However, gold fell through and resumed the same old trading range. As of the close of regular trading, spot gold was at $1,108.20 for a drop of $14.00 on the day. According to the Kitco Gold Index, gold would have dropped $16.20 ex-greenback due to predominant selling. U.S. dollar weakness added $2.00 to the price.

The greenback did wind up declining over the rest of the day. After an attempt to get above 80.5, the Index fell back to below 80.4 in a quick decline that ended at 2:20 PM. It rallied to just above 80.5 again, but the rally didn't last. Instead, the Index descended yet again to below the 80.4 level and slowly sloped downwards after recovering to 80.435. As of the end of regular trading, it was at 80.41.

The daily chart, from Stockcharts.com, shows that the greenback is stuck, with a decline in volatility that's unusual:



The narrow trading range the Index is in is still in recovery-rally territory, from the time when it dropped to just below 80. The other shoe, if there is one, has taken some time to drop. It may not, as the greenback is still in bullish mode technically speaking.

The relative quiescence of the dollar-index market was not matched by gold, to say the least.



The day's drop marks the second reverse head-and-shoulders pattern that has come to naught. I'm beginning to wonder if technical analysts are considered the gullible sheep in the commodity pits. Yesterday, it looked as if the declines had abated; today's action indicated otherwise. I should amplify a point I made offhand above: traders who trade with stop-loss orders are weak hands, in the common use of the term. There seems to be a lot of stop-loss use in the gold market by longs; they do add to short-term volatility on the downside.

I mention this because it ties in with the business-media explanation of what went on today. There was no single event that triggered it, and the hitting of stop-loss orders did amplify the decline. Tragically, the proliferation of stops has made for a more treacherous market. There was no shorters' spree that explains the extent of the decline.

This Reuters report, as webbed by the Globe and Mail, describes the catalyst as profit-taking and/or longs liquidating:
After rising almost $20 last week, gold has already dropped by $27 this week as traders take profits. Speculators had been increasing their net long position in gold for four straight weeks but they may now be trimming those positions, putting selling pressure on the yellow metal, traders said....

“We saw some liquidation on futures again, with more than 1 million ounces being sold,” said Christophe Jacot, vice-president of FX and precious metals at EFG Bank.
The article does hint that the liquidation might have been prompted by better news coming out of Greece, which would encourage short-term traders betting on crisis to cash out. The greenback has been pulled down a little by the resultant recovery in the Euro. However, no such liquidation event was evident in the U.S. dollar market unless the liquidation trend hit negative feedback instead of inducing positive feedback. Perhaps close stops are less used in the greenback markets; perhaps there are more bulls there.

To sum up, it was a day that was both surprising and bad for the gold market. The "market god" administered a harsh lesson today, which few will like. However, gold's now in bargain range and investment demand may come in at these levels. Tomorrow may be a day when gold licks its wounds.

Calming The Nerves

In the midst of a list of points about gold, centered around a "massive" reverse head-and-shoulders pattern that was completed in September of '09, Stewart Thomson works in some advice that will calm nerves if followed. In his words,
5. Theme “numero uno” for me continues to be: Hold the amount of gold you can be comfortable with should price either decline to $700 or rise to $1400. If you bail on current holdings if gold moved towards $700 or started buying crazily as it rallied towards $1400, you likely are positioned very very badly, here and now. Your gold holdings become a crapshoot, rather than an ultra solid investment in the world’s lowest risk market.

6. If gold were to leap $50 in the next second, you should have an overall feeling of comfort regarding your core positioning, and the same should be true should it receive a $50 spanking. How you feel has a lot to do with how you act. Really work hard at getting your holdings into your “comfort zone”. You can then “let that gold flying fish” get away if price spurts suddenly, and if it tanks suddenly you don’t wonder about hitting the sell button. It takes more work and patience than many think to get to that “sweet spot” but it’s a CRITICAL task if you want to do not just well in the market, but have a balanced life....

It's good advice, particularly for those caught in the neither-fish-nor-fowl trap. A trader's attitude is appropriate for traders, who trade frequently and are often content with small clips. An experienced trader often keeps a capital cushion as a backstop against nasty surprises.

On the other hand, an investor (or long-term speculator) is in for a long pull that's centered around a certain event taking place. It's often hoped for advance discounting, but an investor doesn't count on that. An experienced investor has two reactions to a price drop after buying in: first, rechecking the fundamentals; second, if they're still okay, executing another leg in or regretting the bigger bargain. Yes, averaging down is not taboo in investor circles provided that the fundamentals are paid attention to. Nor is selling at a loss if the fundamentals unexpectedly deteriorate.

Value investors are typically bad timers on a short-term basis. They also don't care, as they tend to win in the end.

The trouble with gold is that it's exciting, and its fundamentals are more diffuse than the ones for a regular industrial stock. Excitement leads to a trader's attitude amongst people who really should take an investor's attitude. I know myself; it's hard to shake off.

Oh, Those Hedge Funds

A snippet from the Wall Street Journal's "Heard On The Street" feature discusses SEC senior policy advisor Rick Bookstaber's attempt to put a nefarious spin on hedge fund gold buying.
Big, publicly disclosed bull bets on gold taken by notable hedgies such as George Soros and John Paulson may be meant to lure less-sophisticated investors into a bubble, Bookstaber wrote in a personal opinion piece published Tuesday on the Web site of Roubini Global Economics.

The WSJ's reaction? My gosh...they talk their book!

Indian Gold Demand Drains Away

Evidently, gold prices haven't sunk to where Indian gold dealers would consider gold to be at bargain levels (as yet, anyway.) After a spate of deals last session, the Indian gold market was quiet.
"I struck deals at around $1,110-1,112 (an ounce) yesterday (Tuesday) evening, but now there are a few stray deals," said Pinakin Vyas, assistant vice-president, treasury with IndusInd Bank in Mumbai.
The Indian rupee has backtracked a little, making a price below $1,110 attractive now.

Gold Rises Slightly In Overnight Session

With no upsetting news to rock the gold market last night, gold held steady in overnight trading. It managed to tack on a little gain early this morning despite an early-morning surge in the greenback. The metal spent almost all of the entire night (ET) in the afternoon-established $1,120-$1,125 range, bumping against the top just before midnight. After a successful crawl above it, the metal sunk back down into it in the midst of a decline that started at about 1:30 AM and ended at about 3:15. At that point, the decline reversed and gold went back up above $1,125 to stay until about 8:00. A new range between $1,125 and $1,130 was established; gold slowly rose within its confines before fluctuating around the $1,126-7 level. It then dipped and challenging the new floor; that dip was prompted by a rise in the U.S. dollar. As of 8:07 AM, spot gold was at $1,124.70 for a gain of $2.50 on the day. The Kitco Gold Index put an 80-cent drop to a strengthening greenback and a $3.30 gain to predominant buying.

The U.S. Dollar Index has successfully surmounted 80.5, but also has had trouble rising well above it. Last night, the Index dawdled in a trading range with rising bottom whose ceiling was 80.6. Then, starting at about 1:30 AM, it rose at a fast clip; the rally ended at 80.859 at about 3:30 AM ET. However, the top of that rally turned into a spike; within an hour, the index was below 80.7. A relief rally brought it into a trading range between just above 80.7 and 80.75, which was broken on the downside in a swift drop that took it to 80.554 as of about 7:20. Since then, the Index rose back to 80.66 before pulling back. As of 8:19 AM ET, it was at 80.63.

The morning Reuters report, webbed by the Globe and Mail, said that the overnight rise was based on continued concerns in the Eurozone and a build on yesterday's technical rally.
Fitch Ratings said on Tuesday it still has a negative outlook on Portugal's credit rating, which heightened concern that peripheral euro zone economies may face debt problems similar to those of Greece.

“All the worries about the fiscal situation, and how that is managed, are being read as positive for gold,” said Credit Agricole analyst Robin Bhar.

“That should become a long-standing issue, as people are concerned about how governments in the euro zone are handling the whole fiscal situation.”
That item also benefitted the U.S. dollar, though, which has muted the rise of gold in greenback terms.

The same point is made in the morning Wall Street Journal Online report, which also notes that the metal remains at a near-record highs in Euro terms. A quoted analyst found a light side to the announcement that mainland China government isn't enthusiastic about buying gold at these prices:
"The clarification of China's position may dispel a popular but, to our view, erroneous hope that China will emerge as a major gold buyer," said HSBC analyst James Steel. But he said the comments shouldn't have a lasting bearish affect because a Chinese official also said the country will continue regular purchases of U.S. Treasuries—this should support a low interest rate and loose monetary environment in the U.S., an environment that supports holding commodities.
Also mentioned in the report is gold-market activity being unusually light. Perhaps the market is waiting for direction right now.

Good news on the base-metals front was the attributed cause for the slight rally according to the morning Bloomberg report, as webbed by Business Week.
“Gold’s getting a small lift from base metals,” said Jia Wei, an analyst at Jiangsu Suwu Futures Brokerage Co. The precious metal is “hovering in the $1,100 to $1,200 range as investors vacillate between liking and avoiding risk.”
Also mentioned in the report is SPDR Gold Trust (GLD) holdings being unchanged yesterday. The figure's still 1,116.12 tons.

As regular trading gets underway, gold has declined back into the old $1,120-$1,125 range as the U.S. Dollar Index continues to rally. The dip in the former was mild, as opening declines go: little more than three dollars an ounce. As of 9:01 AM ET, spot gold was at $1,124.80, for a gain of $2.60 on the day. The decline due to U.S. dollar strength was shrunk to -$0.45 by the Kitco Gold Index and the gain due to predominant buying also shrunk a little to $3.05. The U.S. Dollar Index has pulled back from a morning rally that took it up to 80.68; as of 9:02, it was at 80.60.

So far, the gold market has been directionless; any cues have come from fluctuations in the U.S. Dollar. PRC exports and imports have both grown at a faster-than-expected rate, leading to a shrinking of the trade surplus, but the gold market doesn't seem to care. Today might well be a quiet day.

Tuesday, March 9, 2010

After Morning Spill, Gold Recovers

The beginning of regular trading was an awful time for gold, but real resilience showed up later in the morning. Starting at 8:15 AM ET, gold plummeted about 10 dollars an ounce to $1,107.60 before quickly pulling back up to above $1,112 by 8:50. That recovery rally was the start of a new and larger one, with two pauses, that lasted until 10:10 AM and $1,118. The range that prevailed since 5:30 AM, between $1,115 and $1,120, was restored until just after 11:30. If the 8:15-8:45 plummet was prompted by enthusiastic shorters, said shorters have some wounds to lick unless they got out quickly.

After an hour's worth of pause, the rally resumed. As of 11:52 AM ET, spot gold was at $1,122.60 for a loss of only $1.10 on the day. The Kitco Gold Index had a plus for predominant buying, in the amount of $1.70; a $2.80 decline was attributed to U.S. dollar strengthening.

The U.S. Dollar Index managed to make it above 80.8 between 8:30 and 8:50, but it pulled back to 80.6 by 10:10. Since then, the Index has recovered to below the 80.7 level. The porousness of its resistance levels is still evident, but rallies are still capped off by spikes. The peak for the Index was 80.847 at about 8:40. As of 11:56 AM, though, it was at 80.62.

The rise of the greenback above the 80.5 ceiling only added to gold's recent woes, which have been fading. The afternoon part of the session will see if that recovery to the $1,120-$1,125 level will be surmounted.


Update: The rally continued until gold hit a smidgen above $1,125, almost exactly at noon ET; it then backed off. Apparently, today's declines are being shrugged off as a spate of scare. Gold's performance since 8:45 AM has the earmarks of a classic technical rebound from oversoldness.

However, there's now real resistance at $1,125; the metal failed to surmount it, and drifted down to somewhat above the $1,120 level. It looks like the $1,120-$1,125 trading range of last night has been re-established. After hitting $1,125, gold dawdled in the $1,122-$1,124 range until 12:50, when it briefly poked through the lower bound. It later pulled back up to $1,122, but the wind had clearly left its sails. As of 1:46 PM ET, the spot price was at $1,120.60 for a drop of $3.10 on the day. The Kitco Gold Index had predominant selling, instead of buying, taking $1.45 off the price. Greenback strength was fingered as taking $1.45 off.

The U.S. dollar is still up on the day, with 80.5 now serving as resistance, but it has come down since early this morning. After pulling up to 80.7 as of 11:20, the U.S. Dollar Index has declined as resistance just above 80.6 was broken through. The decline accelerated once that resistance was broached. Evidently, Grecian Prime Minister Papandreou's earlier warning cry about the Eurocrisis spreading if Greece gets worse is being shrugged off.

Despite that sink, 80.5 is still blokcing any further fall. That's the level slightly above where the Index bounced off as of 1:13 PM before it recovered. As of 1:48 PM, it was at 80.54.

At least, the decline of yesterday isn't going to be built on much today thanks to that diminishing-fear rally. It may be optimistic of me to say so, but gold still has a shot at erasing today's loss at the close.


Update 2: It didn't, but it was close. At the end of the day, spot gold closed at $1,122.20 for a loss of $1.50.

After slumping down in the early afternoon, the metal drifted along in a trading range bracketed by $1,120 and just above $1,122 from 1:30 PM ET to 3:25. Then, it dipped down to $1,118 before climbing back up for the rest of the day. The loss of $1.50 was apportioned by the Kitco Gold Index into -$0.20 due to predominant selling and -$1.30 due to the greenback strengthening.

80.5 did hold up as a resistance level for the U.S. Dollar Index, which was 80.58 as of 5:25 PM. After slowly rising to 80.62, reached at 3:25 PM, the Index drifted downwards to below 80.55 and stayed at that level until near the end of the session.

The performance of the greenback did make a hash of my earlier comments about the strength of the 80.5 resistance level, as its chart (from Stockcharts.com) shows:



On the other hand, the close above 80.5 wasn't much over. The Index is still stuck near the 80.5 level, but the action of the last week looks mildly bullish. As a matter of interest, I note that the 300-day moving average [the blue line] is no longer turning down. Both that and the fact that the 50-day moving average [the red line] is above it, are considered bullish by technicians. So, I should add, is the fact that the Index has basically gone nowhere even though the MACD lines at the bottom of the chart are in a bearish configuration. The RSI line at the top bottomed at the 50 level, which is also bullish.

So, even if 80.5 once again becomes a resistance level, the charts suggest that the greenback will rally once it gets over its current funk. It's not necessary for a crisis to be the driver; a continued U.S. recovery might do the trick. In that eventuality, the rise will be slower but there's likely to be one - to the detriment of exporters. A rise in the greenback would make imports cheaper, though, which would lead to price cuts and an inducement to spend more. Sad to say, but a rising greenback may be good for the GDP overall. That confluence would put a headwind in front of gold, also because a drop in import prices would lower reported CPI figures somewhat.

The month-long uptrend for gold was shaken this morning, but its daily graph shows that it's not shaky:



The low that bottoms today's candlestick figure, perhaps by coincidence, touched the 50-day moving average. The bounce-off can be cited by technicians as evidence that the average is now acting as a support level for gold, which would make gold's trend still bullish in the short term. At the open/close level, the $1,120 support level did hold although it was porous. If gold rallies tomorrow and stays up, the chart will look like a near-textbook case of an uptrend on this kind of chart. The higher low will have bottomed out from an earlier high. Of course, the real low would have bottomed out at a significantly lower level.

I'm begging the question, of course: will it rise tomorrow? The kneecapping this morning came as a real surprise; I can't say there won't be more coming. I can't even point to any near-term fundamental driver that would push gold well above these levels. At this point, it's an open question whether gold will rally tomorrow and keep moving up in confirmation of the recent uptrend. The tale will be told in the telling, not in the foretelling (at least, not from any here.) The recovery was encouraging, but a lot of it was due to real or anticipated bargain hunting. That succor doesn't last when the price goes up.

A Wall Street Journal Online article has this to say about the recovery from the spill: the U.S. dollar, pushed up with the yen by bearish comments about the soundness of Euro-denominated debt, sunk as risk appetite returned to the markets; hence, gold rose along with crude oil. At least one trader said that both bargain-hunting and short covering influenced the recovery:
Frank Lesh, broker and futures analyst with FuturePath Trading, said some traders used the pullback in gold prices over the last few days as a buying opportunity.

"It doesn't look like anybody is chasing the price [on strength], but they are willing to come in on the dips," he said.

Additionally, there was short covering, said Lesh and others.

Tomorrow is going to be an interesting day. The state of the market suggests a short-term bottom, but that may be upset by another disappointing or alarming news item. It's still too early for me to say outright that the bottom of this phase is in.

'09 Gold Demand, Supply Looks Gloomy For Gold

Julian Murdoch of Hard Assets Investor has pored over the 2009 World Gold Council report for gold, and has some sobering news. Gold demand for 2009 has fallen by 11% in terms of ounces, while gold supply has risen by 11%. He notes that the most significant increase in supply was from recycled gold, and that ETF demand has cooled off after a very hot 1Q '09. Given the surplus for '09, it's easy to conclude that gold will go down in '10. That's what the supply-demand fundamentals suggest.
At this point, there's little question that ample gold supply exists to meet current demand, but most of the flexibility will come from scrap, which is hugely price sensitive. In its announcement, ABARE argued gold would average $1080/oz for 2010—before crashing down to $900 again on oversupply. That's a far cry from HSBC's suggestion that gold could go as high as $5,000/oz in five years.

Me? I tend to follow supply and demand, and right now, the market's coming off four straight quarters of oversupply. Given that, it's actually quite impressive the metal managed to rally $200 since last March. But I'm not inclined to think $5,000/oz—or even a more modest $1,500/oz—is anywhere in the cards until we see real demand start outstripping real supply.

Myself, I believe that gold holding its own despite the supply-demand imbalance is due to gold being in a nascent bubble, which will be kicked off by a return of inflation. Should gold mark time in '10, despite net surpluses, that performance will add to the impression that there's a New Era for gold. It will also ramp up investment demand.

I note in passing that "bubble logic" often has circular reasoning as its heart.

Michael Kinsley Smells Inflation Ahead

He's not impressed with the goldbugs, and is far from becoming a gold investor, but Michael Kinsley is not sneering at the rise of the goldbugs. In an Atlantic Monthly piece, he admits that he suspects inflation will jump up in the near future.

The reason is the huge national debt, and the temptation to use inflation to whittle down its real value. He's somewhat apologetic about his reasoning, but his argument is a pragmatic one. Using inflation to whittle down the national debt, at least in the abstract, is easier than spending cuts and/or tax increases. Unlike the typical goldbug, he portrays President Obama as caught between a rock and a hard place.


It's interesting to see the goldbug argument, stripped of political cynicism and/or anger, appear in a mainstream publication. Those who'd rather not bring radical and/or alienative politics into the inflation question will find that Kinsley lays out the case for higher inflation in a palatable way.

While I'm on the subject, Donal Roche makes a similar argument in the Irish Independent, although he comes to the subject from a pro-gold stance. He advocates what's turned into a kind of compromise position for gold: 5-10% (in this case, 5%) of assets in gold as a just-in-case allocation.

European Monetary Fund Planned To Launch In June

Much sooner than I expected, a European Monetary fund is slated to get up and running in June. The period of study has evidently been compressed due to, er, exigent circumstances.

Despite the headline that announces it, "European Monetary Fund to Launch by June," the bulk of the article suggests that it's still in the talking stage and sketches out the difficulties such a fund will have when it approached launch stage.

Its fate will be an interesting test to see if Euroland is indeed "Bureauland."

CDSs On U.S. Treasuries Written With Payment In Gold

Jesse of Jesse’s CafĂ© AmĂ©ricain has written an analysis of a story first webbed by the Huffington Post, about U.S. Treasury CDSs being created that demand payment in gold. Most of his post consists of wondering who the counterparties are, and what system risks are. He does point out the possibility that the bullion banks, such a J.P. Morgan, are currently short more gold contracts that can possibly be delivered.
The US has more gold than any other individual country, and still values it cheaply at a sub-fifty dollar historical price on its books. If a counterparty fails, it will fail, and a settlement will be arranged. The issue of course, is if some encumbrance of the gold in the US has already been accomplished through unfortunate leases to bullion banks who will not be able to return it.

Indeed this horse may already be ‘out of the barn’ as some evidence indicates that a few banks like JPM are already short more gold and silver than they can possibly deliver under the conditions of the contract without selective default to paper if demanded by their counter-parties.

Myself, I don't understand why payment in gold for U.S. Treasury CDSs, in and of itself, would be causing such a stir. It's a logical decision, given the fact that the U.S. dollar might as well be through if the U.S. Treasury does default. There's a continuity between those and the old Bretton Woods system. Nevertheless, it's raised some feathers.

Australian Gold Production Increases 13% In Fourth Quarter Of 2009

Gold production in Australia is increasing at a faster rate, according to this brief article in TopNews:
According to the latest report by the Mining consultants Surbiton Associates, the output of total gold in Australia grew by 13% in the quarter ending December comparing to the previous quarter. Also the demand of gold was reported increased in the quarter reflecting the increase in gold prices.
For the full year, production increased by 3% as compared with 2008. If the peak-gold'ers are right, then these production increases will be followed by big drops some time later.

PRC Gold Figures For 1999 Come In

Gold production for mainland China did break 300 metic tons for 2009, easily:
China produced 313.98 metric tons (MT) of gold in 2009, up 11.34% year-on-year and marking the first time the country's annual output has exceeded 300MT, according to statistics released by the Ministry of Industry and Information Technology (MIIT) on March 5.

Given that gold mining's becoming a major industry, and given its growth, PRC officials' concentration on buying domestically-produced gold for reserves is understandable.

Indian Bargain-Hunting Evaporates Temprarily As Lower Prices Sought

According to the Economic Times, new Indian bargain hunting has not kicked in because the decline has buyers waiting for further drops.
"We had [a lot] of orders between $1,125-1,132 (an ounce), which got filled yesterday, there is nothing today though," said a dealer with a state-run bullion dealing bank.
An unnamed dealer at another institution is quoted as saying that he has orders at around $1,115.

Gold Contines Slide; China, U.S. Dollar Throws Damper

It's no secret that PRC officials would like to diversify out of the U.S. dollar, and that desire led many in the gold world to hope that gold would be a major part of the new reserves composition. That hope was thrown a wet blanket overnight, as the Head of State Administration of Foreign Exchange, Yi Gang, said that gold isn't planned to be a major destination for redeployed funds.
The price has "had handsome gains in recent years,” Yi said. But, “if we look at the past 30 years, it had big ups and downs.” China has lifted its holding of gold by 454 tons to 1,054 since 2003, leaving it with the world's fifth-biggest holding. After India, China is the biggest consumer of gold and, according to Mr Yi, increasing its reserves of gold will "push up prices" and "hurt Chinese gold consumers."
He also noted that there is no push to abandon the U.S. dollar or U.S. Treasury securities.
China has invested [hundreds of] billions of [its reserves] in US government bonds, making it the country's largest creditor, and Mr Yi insisted today the investment is "very important" and that "China is a responsible investor, and we don’t want to politicise the issue.”
There have been calls for the PRC to divest in retaliation for U.S. military sales to Taiwan, particularly from the PRC military. This statement can be read as a fend-off of those demands.

Whatever the implications for geopolitics, though, it had an impact on gold - but that impact wasn't very harsh. The metal did slump in Hong Kong trading overnight, but not by that much. It did, however, add to the downward pressure to the metal. Later, it was pushed out of a range established overnight and into a new lower one.

The $1,120-$1,125 range established in yesterday's afternoon trading held for the rest of yesterday. The announcements above did put gold to the lower end of the range in Hong Kong trading, but didn't crack it. That crack didn't come until London trading opened; it was prompted by the U.S. dollar rallying. Another test of the $1,120 level took place at about 5 AM, reversed, and then turned into a drop that pushed the price briefly to $1,114.30 before recovering above $1,115. Since then, gold's been trading in a new $1,115-$1,120 range. As of 8:09 AM ET, spot gold was at $1,117.50 for a drop of $6.20 on the day. The Kitco Gold Index has $2.00' worth of decline attributed to predominant selling and $4.20's worth due to strengthening of the greenback.

The U.S. Dollar Index managed to break though its resistance level of 80.5, first by settling into a trading range with a higher ceiling: 80.55. Then, at about 2 AM, the Index rallied to 80.6 before pulling back to 80.46. Subsequently, a little before 4 AM, the Index rallied to well above 80.65, spent some time fluctuating with a floor of 80.6, and rallied again. Its peak, reached after 7 AM, was 80.798. Since then, it's fluctuated in a range bordered by 80.8 on the upside and 80.7 on the downside. As of 8:19 AM ET, the Index was at 80.77. So far, anyways, the 80.5 level has proven to be more porous than I had assumed earlier. Today's trading will show whether or not it was bested at the day level rather than at the interday level.

The morning's Reuters report, as webbed by the Globe and Mail, says that the U.S. dollar's rise was primarily responsible for gold's fall - but bargain-hunting has intervened to partially mitigate that decline. Gold actually set another new record in Euro terms at its highs. The influence of the PRC announcement was described as restrained:
UBS analyst Edel Tully said in a note that given the price-negative undertones of Mr. Yi's comments, the gold market's reaction to the news had been muted.

“While we would expect more near-term downside for gold once the news sinks in, it is unlikely to entirely quash market expectations that China will indeed move to increase its reserve capacity for gold,” she said.
The article also mentions that the greenback's rise was caused in large part by Grecian Prime Minister Papandreou warning of a new financial meltdown if the Grecian crisis worsened. Negotiating ploy it may have been, but it was still taken seriously by the currency market.

The same factors were described as weighing on the gold market in a Wall Street Journal Online article, with Yi Gang's annoucement being the focal point. Two analysts differed on its significance:
"It's completely unsurprising," said Stephen Briggs, an analyst at RBS Global Banking & Markets. "It is obvious that for China to have a material amount of gold in reserves, it would disrupt the gold market. It's not viable." The idea that China gradually makes gold purchases from domestic producers is "more sensible," Mr. Briggs said.

The comments will, however, weigh on sentiment, said Andy Smith at Bache Commodities.

"I would expect through the day, if the dollar continues to strengthen, gold will be under pressure," he said, noting it "downgrades expectations" that China will be a big market gold buyer.
Like the Reuters report, this one described the effect as muted.

Regular trading opened with traders taking both items in hand and pushing gold down. The newer range of $1,115-$1,120 was broken; like the last one, to the downside. Starting at 8:15 AM ET, gold was shoved down about ten dollars an ounce; the low, reached around 8:45, was $1,107.60. Since that bottom, a relief rally has pushed the metal up a little. As of 8:59 AM ET, the spot price was $1,111.30. The Kitco Gold Index divided the $12.40 loss into $7.90 for predominant selling and $4.50 for greenback strengthening.

The U.S. Dollar Index continued rallying, making it to 80.845 at 8:39 before sliding back. As of 8:57 AM, it was at 80.78.

Given the magnitude of the drop, it's an open question whether or not the recent reverse head-and-shoulders pattern that pushed gold up to $1,140 is a third busted bullish formation. The day's trading will show if gold can recover, or not.

Monday, March 8, 2010

Gold Gets Slammed Down

Perhaps the predominance of buying in recent days built up into an air pocket. Perhaps it was hesitation in the gold market itself. Whatever the reason, one of those slamdowns hit gold this morning. There was no major rebound in the U.S. dollar to explain it, nor any news item of note that would affect gold. The stock market hasn't plummeted, suggesting that a decline in the oft-cited risk appetite wasn't the reason. Perhaps the slamdown was overdue.

Prior to 9:40 AM ET, gold muddled along a trading range bordered by $1,133 and $1,136. Then, until about 10:05, gold shed about twelve dollars an ounce. Subsequent to that decline, a small relief rally turned into a declining channel that has kept gold below the $1,125 support level. In its later stage, at about 11:30 AM, gold hit its daily low of $1,117.70. The metal may rally above that level, but there's no sign of that now. As of 11:36 AM ET, spot gold was at $1,121.40 for a loss of $13.00 since Friday's close. The Kitco Gold Index has $12.30 of the drop due to predominant selling and only $0.70 due to U.S. dollar strength.

The U.S. Dollar Index has rallied after breaking support at 80.25. After descending to 80.15 as of 9:33, it began ascending at a nice two-stage clip ebfore stalling a little. As of 11:49 AM, it was at 80.49.

There's some difference of opinion regarding the drop, but this Bloomberg article webbed by Business Week attributes it to the recent rise in the euro, making gold relatively unattractive as the Eurocrisis fades.

“If the Greek situation calms down, people may not be as interested in owning hard assets,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “Gold is losing its momentum.”
It could be that gold went too far, too fast in Euro terms and was due for a reaction.

Whatever the reason, the plummet's put a crimp in the current gold-market recovery. The rest of the day will reveal if there's more coming.


Update: The day's low of $1,117.70 actually came at 11:30 AM ET; that low looked like a final wipeout. Since then, gold has ascended in a rising channel, which came to a halt at the $1,025 level. As of 1:36 PM ET, spot gold was at $1,023.30 for a drop of $10.80 since Friday's close. The Kitco Gold Index apportioned the loss into $1,040 due to predominat selling and $0.40 due to U.S. dollar strengthening.

Part of the reason for the recovery was a small decline in the U.S. Dollar Index. After reaching 80.53 at about 12:03 PM, the Index sunk back to the 80.4 level before drifting upwards again. As of 1:41 PM, it was at 80.44.

So far, it looks like the day's damage has been done - even if the $1,125-$1,130 level is providing resistance instead of offering support. The danger of a futher rout, though, seems to have passed.


Update 2: Thing were quiet, relatively, for the rest of the day. Gold spent the afternoon in a trading range bordered by $1,120 and $1,125.

The price tried to poke above that ceiling twice in the early afternoon, but both efforts came to naught. From 1:30 PM ET to 3:15, the metal was in a much narrower range, $1,122-$1,124; it broke through on the downside, and spent some time between $1,120 and $1,122 before climbing back up. As of the close, spot gold was at $1,123.70 for a loss of $10.70 on the day. The Kitco Gold Index divvied up the loss into $10.50 due to predominant selling and $0.20 due to U.S. dollar strengthening.

The U.S. Dollar Index was quite quiet for the rest of the afternoon, which it spent bobbing in a trading range between 80.4 and 80.45. At the close, it was at 80.44.

Its daily chart, from Stockcharts.com, shows that th entire day's action was fairly quiet too:



Of note is the fact that 80.5 is now serving as a resistance level. That was the case in mid-February, before the Eurocrisis erupted. Now that Greece seems to be pulling out of its morass, the greenback has gone to about where it was. The Index has basically gone nowhere in a month.

That's unusual given the volatility it's experienced since the financial crisis erupted. The last period of stand-pattedness, which lasted for several months, came at a turning point. The dollar hit its multi-year low in early-mid March of 2008, and from that point remained in a trading range until it took off at the beginning of August. Between March and July, it did rally somewhat but the rally was laboured and intermittent.

That period was not like this one is. First of all, the band has been narrower this past month. Secondly, the Index already rallied at a fair clip. Thirdly, the catalyst that sent the Index shooting upwards was a financial crisis; this time 'round, a crisis that should have benefitted the greenback (and did) hasn't all that much effect all told. The Index seems stuck.

I can't see any catalyst that would push it either way as of now. A more serious crisis involving Portugal or Spain would push it upwards, but there's no warning sign of any such malignancy in the Eurozone - just the deficit-to-GDP figures for those two countries. The Eurozone authorities won't be caught napping the next time 'round. Another catalyst upwards, counterintuitive as it may be, would be continued recovery in the United States if said recovery increases foreign confidence in U.S. securities to the extent that demand for the greenback rises with it. Of course, resumed prosperity could push the greenback down because of a surge in imports. Other than that possibility, I can't think of any reason why the Index would be pushed down. As with Spain and Portugal, the deficit elephant in the U.S.'s room is just standing there.

The chart for gold captures the decline for the day, but puts it in perspective:



Since a month ago, gold's traced out two higher highs and one higher low. Desite today's dsappointing drop, the chart shows gold still on track towards making another higher low. Indian buying isn't a deus ex machina, any more than Chinese buying or even central-bank buying is, but today's price will trip the bargain switch in Indian markets becaus of the strengthened rupee. As a matter of theoretical neatness, a closing bottom at $1,120 would show a still-intact short-term uptrend. Today's low was a few dollars below that, but the close wasn't.

It was disappointing to see how much gold was swacked by relief that the Eurocrisis has passed for now, but that reaction is the flipside of crisis buying. Gold trades are beng unwound for the same reason that U.S. dollar-long trades are.

A Reuters report webbed by the Globe and Mail chalked the decline up to "technical selling and liquidation by investors of positions added last week to cushion currency volatility from the Greek debt crisis." The technical part pertains to gold's failure to hold the fort at $1,130.
“There is profit-taking after the sharp increase over the past few weeks in gold, and a bit of unwinding of the excessive fear trade linked to Greece and Europe,” said Zachary Oxman, managing director at California-based TrendMax Futures....

“It ran out of steam on currencies, and in a thin market with bullish comments about growth around, gold is feeling a bit heavy,” said Simon Weeks, head of precious metals at the Bank of Nova Scotia.
In other words, gold got ahead of itself. People got too bullish too soon, a picture confirmed by a rise in speculative long futures positions last week.

Also mentioned in the article is a fact that's been lost in the crisis watch: yields are higher in Euro-denominated debt than in U.S. dollar debt of similar quality. That's putting a bit of pressure on the greenback to the benefit of the Euro.

It would be a little reckless of me to say that the decline will halt tomorrow, but there's at least one reservoir of demand that will soften any continuation of the decline. Indian buying may not swing the gate, but it will have an influence. The U.S. dollar is no longer on the tear that it was despite a crisis that should have put it on one, and would have had we been in '08. Perhaps the greenback safety trade is becoming stale.

Other than a surprise announcement from the People's Bank of China ratcheting up its tightening by more than what the gold market's become inured to, or an unlikely surprise rate hike by the Federal Reserve, I can't think of any driver that would push gold down a lot. The unwinding of the gold-Euro safety trade has to end sometime; it may have already ended. Gold may still fall, but the near-term bull trend that's lasted a month hasn't been impugned.

Of course, the above doesn't mean that gold's going to challenge $1,160 anytime soon...

Przemyslaw Radomski Sees Sideways Movement For Gold Stocks

After analyzing the chart of the Amex Gold BUGS Index and the Mining Vectors Gold Miners ETF, along with a ratio chart of the latter in terms of the S&P 500 Index, Przemyslaw Radomski concludes that the charts show no discernible trend one way or the other. He concludes by forecasting sideways movement for gold stocks being likely.

He also has something to say about juniors, as approximated by the TSX Venture Index. A ratio chart of it in terms of gold shows sideways movement after a nice run in December. He says things have calmed down, but the picture is still too cloudy to recommend going (or going back) into them.

Despite Gold Not Sinking, Indian Demand Rises

The reason why is advance buying in anticipation of the wedding season and a slight decline in rupee terms:
"Good demand was there at USD 1,135-1,137 (an ounce) as the rupee is acting in favour. We did about 50-70 kgs since morning," said a dealer with a state-run bank in Mumbai.

The Indian rupee was trading close to near two month highs as strong domestic shares and a sharp fall in the dollar versus major currencies supported sentiment. A strong rupee makes the dollar-quoted asset cheaper.

Since part of it is seasonal, the demand is likely to wane as the season ends.

Indian Gold Buyers Turning To Hedging On Futures Market

As the price of gold has declined, gold dealers are taking advantage of futures contracts to lock in prices, according to an Economic Times report:
Physical delivery of gold in settlement of contracts, a key indicator of genuine hedging, rose to 2.7 tonnes in February, compared with 0.348 tonnes a year ago, data from the MCX, India's largest commodity exchange for bullion, showed.
That added demand is leading to a fragmented futures market becoming more organized. The newly-created Indian Commodity Exchange, according to its CEO, had 90% of its gold futures contract open interest from hedgers.

Analysts See Gold-Copper Exploration Stocks Shining In '10

That's according to a Reuters report, which quotes three analysts that see copper-gold properties as the ones that'll be hot - particularly, large deposits that can interest the majors. The main analyst quoted in the story, Wendell Zerb of Canaccord, doesn't expect the 92% performance for gold juniors as a whole to repeat itself this year.
"We like the overall environment for the junior mining space," said Canaccord Adams analyst Wendell Zerb. "But we see 2010 as being more mixed, mostly because you typically don't just have everything go straight up -- you do have periods of volatility."...

"There has been a lot of interest in advanced copper assets and there also interest in gold-copper assets," said Zerb, who touts the prospects of Exeter Resource (XRC.TO) and Copper Mountain (CUM.TO).
Another analyst points to the '09 plummet in exploration spending as likely to be reversed as metal markets recover:
"We expect to see a rebound in exploration spending in 2010 and more interest on the part of producing companies to look very closely at high quality juniors," said Dundee Securities analyst Ron Stewart.
Stewart's own angle is watching for possible takeovers; he expects M&A activity to rise this year. So does another analyst:
"We didn't see an overwhelming amount of M&A transactions last year. But now that everyone is a little bit more comforted with the economic environment, companies will start looking at their growth profile," said Curic

I have to admit that it's hard to unveil the wet blanket when others are aware that yesterday's performance isn't likely to be repeated today. The case against copper prices staying up, in a nutshell, is rising inventory levels accompanying rising prices. Charts of both are on this Kitco page. Although London Metal Exchange inventories have dipped recently, they're still at five-year highs. The inventory picture is actually a bit muddied, as LME inventories had peaked when copper was around $1.40, but high inventories are typically associated with either price declines or trading ranges.

Peter Brimelow Straw Poll Shows Technically-Based Optimism

Peter Brimelow has compiled a round-up of recent professional gold-watchers' opinions, and they sound bullish. The ones quoted rest their case of the charts looking good right now, with The Prvateer watching for sovereign-debt crises as a fundamental driver for the metal:
From very high up on the gold-world intellectual food chain, The Privateer's semi-monthly essay this weekend takes the view that a generalized slide in confidence in government debt instruments, and in the agencies that rate them, is underway.

"For U.S. investors, the financial condition of California is much more risky than the financial condition of Greece. And the latest attack by the U.S. ratings agencies is the decision by Moody's on March 4 to downgrade Deutsche Bank in Germany because of a 'lack of transparency regarding the bank's capital market activities.'"

"How pathetic is that, given the Fed's continuing refusal to come clean on their U.S. bank bailout activities?"

Brimelow's column ends with the Market Vane Bullish Consensus number for gold: 77%, up from 70% as of the low almost a month ago. 77% is high enough to give a contrarian pause, but the 70% figure accompanied a major low point. That fact makes a simple contrarian take on the figure problematical.

Of course, gold skeptics can chalk it up to 'stubbornness'...