Gold Bullish Sentiment Bumping Up To Extremes

After discussing Euro sentiment, which is near an all-time low by the indicator he uses, "Babak" turns to several gold indicators and finds one of them at an extreme: the Daily Sentiment Index, from trade-futures.com. It clocked in at 98%: virtual unanimity.

The others, though, don't show extremes although they're all solidly bullish. It looks like some caution is still around, including amongst investors in gold stocks.


On a related subject, George Soros has reduced his exposure to GLD. The blogger who points it out argues that Soros likely made a mistake.

Inflation Ranpant In The UK

David Stevenson notes that inflation is already rolling upwards in the U.K.: the new-style CPI is up 3.7%, while the old-style Retail Priice Index is up 5.3% (5.4% ex-mortgage payments.) He makes fun of Bank of England governor Mervyn King for dismissing its significance, but King's words bear noting to see if his narrative gets exported across the pond:

Looking to the future, says King, all the spare capacity in the economy – unused resources that could be cranked into action if demand picks up – will bring CPI down again. So there are no interest-rate rises on the agenda....

"The pace and the extent of the prospective fall in inflation are highly uncertain", it says. Inflation should fall back to target within a year only if there are no "further price level surprises". Indeed, "there's a risk inflation may be raised by further commodity price increases or other price level surprises"....

Prices have already risen much higher than Mr King was forecasting. If people start to get back into an inflationary mindset, cost of living increases could really get out of hand. What's more - as we've pointed out before - inflation is the friend of the debtor, who can repay his loans out of devalued cash. And there's no bigger borrower in Britain than the government. So a bit more inflation would, arguably, be quite handy for it.

There's already a call amongst certain monetary outposts for a higher inflation rate, most notably from the head of research of the San Francisco branch of the Fed. The soon-to-be former head of that branch, Janet Yellen, is going to become deputy Chair of the Fed's Board of Governors.

I have a sneaky suspicion that one of the main reasons for the extended period of the near-zero Fed funds rate, along with the bulk of the QE firepower being directed at the MBS market, is because the Fed is trying to hold off the coming option ARM reset bulge that's slated to peak next year. If I'm right, then the Fed's hands are effectively tied. Should inflation ramp up in the U.S., we'll likely hear Ben Bernanke saying much the same thing as Mervyn King is now.

Or, for that matter, Janet Yellen, or both. Certainly, U.S. Treasury officials have an interest in talking down inflation expectations because they want borrowing rates to be as low as possible. For reasons of their own, the bulk of the Fed governors may share that desire.

The Coins Keep Getting Bigger

The record is held by the Royal Canadian Mint, which some time ago issued a Maple Leaf coin with a legal-tender value of $1 million; it contains 100 kg of gold. The Russian central bank, though, is getting in to the high end of the bullion coin market by issuing a 5 kg coin to commemorate its 150th anniversary; it carries a face value of 50,000 rubles. The largest one previously from the same source was 3 kg.

With a 53 cm (21-inch) diameter and 3 cm (1.2 inches) thickness, the monster Maple Leaf is about the size of an extra-large pizza. That 'pizza', though, would take two strong men to move it some distance: 50 kg (110 pounds) apiece. One strong-legged man could hoist it up, but he wouldn't get very far with it unless he was very strong.

Have a gander at the million-loonie coin:

Abu Dhabi Gold Vending Machine A Hit

According to a piece in The National of India, the now-famous gold vending machine in the Emirates Palace lobby sold out of gold in a day.

Four kinds of gold bars (in varying weights) and six kinds of coin were gone so fast that they had to restock before more tourists (and residents) besieged the machine. They had stumbled upon a trend that has been in place for thousands of years. In the West, gold is seen as an investment. In the East, it is much more. It helps you assert your status in society and usually translates into gold jewellery that adorns the necks, fingers and wrists of blushing brides. Especially in India.

[And they say gold has no intrinsic value.]

A few years ago, my mother bought her first gold bar – one given to her at a discount by her bank for being a loyal customer – and she was hooked. Every month, I get a rundown of the gold market from her. She has become an amateur investor in a commodity whose price has soared in the past few weeks, thanks to shaky European politics.

I hesitate to talk askance at the author's enthusiasm, but there are hints in his mother's behavior of something that cynical market players will pick up on.

Indian Retail Gold Demand Still Low

According to a Reuters India report, Indian demand for gold is still low because prices are too high.

India's price-sensitive customers, who drive the global gold demand, stayed away from gold buying festival of Akshaya Tritiya on Sunday, an indication demand may remain subdued through the rest of the year if global prices continue to stay firm.

International gold edged up on Tuesday but held around $20 below a lifetime high struck last week, while another increase in holdings in the world's largest gold-backed ETF showed investors were keeping faith with the metal.

A quote from a dealer held up hope that demand will come back if prices fall further.


Another piece on the subject, webbed by BullionVault.com, contrasts the fall-off in demand during the Akshaya Tritiya festival with the rise in demand for gold ETFs.

Overall, it seems demand for gold at Akshaya Tritiya across the country was around 20-25 tonnes down on last year's 45-tonne sales, because of the high and volatile prices. Traders say many Indians are responding by buying smaller quantities to maintain the same expenditure, or recycling old jewelry. Those who can afford to spend more may wait for prices to stabilize before they Buy Gold.

After all, it was considered an auspicious day to buy gold...but how much gold isn't specified.

Gold Tumbles Below $1,210 Overnight

There's been some relief for the Euro after it sunk to a four-year low yesterday. A decline in pessimism also pushed up European stocks and sunk German government bonds as their safe-haven appeal diminished. A similar decline in the safety trade pushed down the greenback and pummeled gold in the European stretch of overnight trading. Needless to say, gold is no longer overbought.

When the overnight session began, gold stayed steady. Pulling up slightly in the evening, it hovered around $1,225 until edging slightly upwards after midnight ET. As of just before 2 AM, it had hit $1,227.60. The tumble didn't start until a little after 2:00. Initially pushing gold down five dollars an ounce, after which a relief rally took off half that decline, the drop continued a little after 3:00. When it was finished, within a half-hour, gold was around $1,213. Hovering around $1,215 after another relief rally, the metal dropped a third time just before 5 AM, reaching $1,205.80 before pulling back up to the $1,210 level. As of 8:06, the spot price was $1,210.80 for a drop of $13.30 on the day. The Kitco Gold Index attributed -$15.80 to predominant selling and +$2.50 to weakness in the greenback.

The U.S. Dollar Index didn't tumble in the same timeframe that gold did, but it did decline after failing to break through 86.5. It tried to do so three times in the overnight session as its evening rise was blocked; the last two attempts saw it reach 86.55 before falling. The last attempt gave way to a decline starting at 1:30 AM, which carried it down to 86.1 before a relief rally set in. After that rally, the Index drifted lower again; it dipped below 86 around 8:00 AM. As of 8:14, it was at 85.99.

A Wall Street Journal report ascribes the tumble to profit-taking.

[M]arket observers say the price is likely to remain well supported due to continued concerns about the debt woes among many European countries....

"Expect a slightly bearish day on [momentary] easing fear" about the Greek debt crisis and a bit of profit taking, said commodity Strategist Filip Petersson of SEB Commodity research. "This is driving investors over to more risky assets like equities," he added.

"The recent [debt] crisis has changed the game a little bit. This is a fiscal crisis. Investors don't really believe that governments have incentive to hold down inflation at time of rising debt," metals analyst Peter Dixon said.

Mr. Dixon expects gold to remain well supported above $1,200 an ounce until uncertainty about the current debt crisis in Europe clears.

The article mentions, though, that the ECB is going to sterilize the euro-zone bonds from troubled governments it bought last week. Also brought up is further EU talks to bring national budgets under control.

A Reuters article takes up the increasing risk appetite theme.

Concerns that the fiscal problems of debt-laden Greece would occur elsewhere in the euro zone drove gold to a record $1,248.95 an ounce last week and knocked other assets. That situation has since reversed, analysts said.

"Gold was definitely in overbought territory, because people were afraid," said Commerzbank analyst Eugen Weinberg. "Fears were fueled by problems surrounding the Greece crisis. (But) at the moment risk appetite is coming back to the market a little."

"The dollar is weaker, and the gold price as well, because they were both seen as safe havens and until recently profited from this status. With the return of risk appetite, it's logical that they are both under pressure."

Despite the weakness yesterday, the holding of the SPDR Gold Shares Trust increased 3.05 tonnes yesterday to 1,217.11 tonnes.

The morning Bloomberg report, as webbed by Business Week, tied the drop in gold to a rise in European equities.

Gold “could be at risk to a correction as risk appetite begins to improve,” James Moore, an analyst at TheBullionDesk.com in London, said in a report. Still, the increase in ETF holdings and bar and coin demand suggests “investors are still looking to diversify from fiat currencies and as a result we expect dips in gold and silver to be viewed as buying opportunities.”

Also mentioned in the report is an analyst saying that demand in Asia is draining away, due to high prices; Dennis Gartman is quoted as saying that the long-gold trade has become too crowded to make him confortable.

The April PPI data for the U.S. economy were released, and they showed a 0.1% drop due to food and energy costs dropping; the core rate was up 0.2%. April housing starts were up 5.8% to an 18-month high, but building permits fell 11.5%. Both sets of data were good for gold, which rose a few dollars after their release subsequent to dropping a couple just before regular trading opened. As of 8:53, the spot price was $1,211.80 for a change of -$12.30 on the day. The Kitco Gold Index assigned -$14.40's worth of change to predominant selling and +$2.10's worth to a weakening greenback. The U.S. Dollar Index had mounted a recovery that took it up to 86.16 by 8:34, after getting a boost from the data, but that recovery tailed off. As of 8:56, it was back to 86.00.

Gold may mount a recovery effort after its early morning drop, but the declines are continuing in timeframes that normally saw advances. It looks like the metal's previous overboughtedness has caught up with it.

Gold Recovers From Early-Morning Spill, Turns Down Again

When regular trading began, gold had come off an early-morning decline which climaxed just after 8:00 AM ET at $1,123.00. The opening of regular trading at 8:20 saw a rise, initially laboured but solid. After getting up above $1,236 as of 10:00, the metal stalled and then pulled back to $1,230. Ending its drop a little below that level, it then pushed back up to $1,135 before falling again. As of 11:43 AM ET, the spot price was $1,230.00 for a loss of $1.80 on the day. The Kitco Gold Index attributed +$1.60 to predominant buying and -$3.40 to a strengthening greenback.

The U.S. Dollar Index, after slumping between 8:30 and 9:40, recovered to pull up to above 86.5 again. That slump took it down to just above 86.0, after which the Index turned up with about the same speed at which it had dropped. As of 11:38, it had pulled back to 86.49 subsequent to peaking at a little below 86.6.

So far, gold's been steady with its overall directionlessness holding up. That may change as the pit shift nears its end; its performance in early afternoon will show.


Update: The pullback that began at 11:30 AM ET, when gold was at $1,234, pulled the metal down to a new daily low by noon. At the end of that drop, before the price partially recovered, gold had sunk more than twelve dollars an ounce to $1,221.60.

The recovery was fairly rapid, if not long-lasting; by 12:10, the metal jumped to above $1,229. Dropping down again, it turned up once reaching $1,224. Subsequently, it fluctuated around $1,127 as the pit shift came to a close. As of 1:30 PM, the spot price was $1,127.80 for a drop of $3.60 on the day. The Kitco Gold Index split the loss into -$1.30 due to predominant selling and -$2.30 due to strength in the greenback.

The U.S. Dollar Index managed a rally just before noon, to 86.7, before pulling back to the 86.55 level. The top of the rally was made just after noon, and the hovering took place until a little after 1:00. Sinking below 86.5 afterwards, the Index was at 86.44 as of 1:46.

Despite that spill around noon, the overall directionlessness was still in place. Gold is likely to close around $1,230.


Update 2: Wrong I was with that guess, as the weakness in late morning returned instead of abating. Instead, gold closed close to $1,225.

The drift around $1,227 continued until 2:45 PM ET. Shortly afterwards, the metal went on a rolling but fairly steady decline that didn't end until a new daily low of $1,218.20 was made around 4:00. From that low, a relief rally first nudged the price up to $1,222 and then pushed it up to its closing value of $1,224.10; the loss since Friday's close was $7.30. The Kitco Gold Index attributed -$9.20 to predominant selling and +$1.90 to a weakening greenbak.

The U.S. Dollar Index, as indicated by the Kitco Gold Index, fell from the 86.55 level it has paused at around 1:00. The decline was fairly steady until it decelerated near the 86.15 level around 4:15. The rest of the day saw it gently descend to 86.1 before slowly recovering to drift above 86.15. As of 5:30 PM , it was at 86.16.

Its daily chart, from Stockcharts.com, shows it reaching, interday, a level that it hasn't seen since March of '09:



Today's candlestick shows a far less encouraging pattern, though: a one-day reversal. This pattern shows up when an important interday high is made, but the asset in question closes down on the day. Some versions require a outright exhaustion gap, which did not occur today for the Index. Nevertheless its fifteen-month interday high combined with its lower close today makes for a pretty good fit. The Index is also quite overbought, as shown by the above-70 RSI level seen at the top of its chart. Arguably, today's action is close enough to a one-day reversal to act like one.

That pattern foreshadows a short-term decline, and maybe one that'll last longer. Given its overboughtedness, and the continuing rally with no new crisis driver to accompany it, I believe that the Index is not going to shrug that reversal off. Unless a new driver appears, like the Portugese or Spanish government getting into a mess of its own, the Index is going to go into at least a short-term decline. I'm not calling an end to its bull market, but I am suggesting to watch out below. Its intermediate-term uptrend will not be called into question unless it goes down to 83 or below interday.

Any short-term decline in the Index is not likely to bode well for gold, whose own daily chart shows its decline extending for a third day in a row:



Although a falling greenback would cushion a decline in gold somewhat, the recent concurrency on the way up is likely to be repeated on the way down. Unlike the U.S. Dollar Index, gold's RSI is no longer in overbought territory. Its rally was less manic in U.S. dollar terms, although in Euro terms it was in the throes of a buying frenzy. Gold did make four digits in Euros, but it has since fallen back. That rise is reminiscent of the time gold first climbed into four digits in U.S. dollars back in late February of '08. Whether rightly or wrongly, a crossover into a new 1000+ record tends to motivate selling. Given that the same Eurocrisis driver is presently absent for gold as well, the concurrence between it and the greenback might well be felt by both going down.

In addition, we're in mid-May; it looks like sell-in-May rule is kicking in. Although the February-March period has seen the seasonal high in '08 and last year, with May being a rather good month, that's because May saw the end of all-out corrections in the gold price. This time, February saw an end-of-correction low and March a higher intermediate low. Unlike in February-March of one and two years ago, there was no froth this year. The froth came this month, with gold getting overbought for the first time since the end of its last rally at the beginning of December.

In '07 and '06, May did see a seasonal top after some good gains were made. Any May whose start was part of a good run in the last nine years did see a seasonal peak. If this month proves to be the exception, if gold continues to ascend in the summer, then I'll be tempted to say that it's crossed over into the bubble threshold - that it's entered the third and final stage of its long-term bull market.

To sum up, gold right now is a risky buy. The seasonality pattern suggest strongly that another correction is coming over the summer, which would make for a substantial dip for anyone wishing to buy. The Eurocrisis is currently dormant, and the buying frenzy in Europe seems to be ebbing. From the long-term perspective, such a correction would be healthy: corrections tend to drain manias before they become all-out frenzies. If such a correction does visit, and gold stays dormant afterwards, then the next long-term driver will be the big one: resurgent inflation.

Again, I concede the possibility of being wrong. If I am, and gold continues its upsurge during the summer, then we're off to the races. Another possibiility is one last burst of bullishness confounding a post-May drop starting now, but turning into one late in the month. As May turns into June, the picture will become clearer.