Higher Gold Prices Coming to an Anxiety Filled Market

HTDT Gold Senior Precious Metal Analyst--Alan Mandel

Uncertainty about the timing of Federal Reserve tightening, a declining dollar, rising interest rates in the U.S. and turmoil in Egypt propelled gold more than 7% in 8 trading sessions to a 4 month high. Silver fared much better with an incredible 22% rise over the same time period. This market action has been catastrophic for the short sellers.  Among other things, the rise demonstrates capitulation; it’s too dangerous to short the market. My contention is still for higher gold and silver prices, although my near term outlook is just a bit cautious. Markets that go straight up are dangerous. The outcome is never constructive. “Profit taking” would be helpful from those who get out with the thought of buying back in with metals at lower prices. The gold and silver markets need a pause. I don’t think there will be a steep decline but a pull-back of 3 or 4 per cent would actually be beneficial. However, there are still so many naysayers and doubters (contrary indicators) that the markets could still move higher before volatility comes back temporarily; especially during the summer doldrums when traders and bankers are on extended holiday.

An argument in favor of near term higher prices comes from a change in sentiment at JP Morgan. The bank’s precious metals team now sees a number of reasons to be long gold and silver. They note unprecedented physical demand combined with seasonal positives. The question I have is, given that none of these are “new” facts, why the change of heart now, especially as JPM is also buying? They point to Paulson & Company’s liquidation of half of their gold exposure in Exchange Traded Products (ETPs.)  As per JPM’s press release, “This may be delivering an exclamation mark to define the end of the 10-month, 25% fall in gold and 50% fall in gold equities…” They also mention the World Gold Council’s report that physical gold demand remains strong, questioning the weakness in the paper (ETPs and gold equity markets) a fact we already knew for months.

To witness physical demand, just look at the COMEX futures contracts for gold and silver. The spot month prices are actually higher that the future months, a characteristic known as “backwardation.” Future months are usually higher reflecting storage costs. When the spot month is higher than the future months, the term backwardation is used to demonstrate strong physical off take; investors and traders are settling their contracts in physical gold and silver rather than liquidating contracts for cash settlement. The physical metal comes out of COMEX designated warehouses such as JPM which shows a very small inventory of only 100,000 ounces. If the exchange can’t deliver gold or silver to traders, a “force majeure” may be declared in an emergency when no gold or silver is available for delivery. There is a small chance that scenario might occur sending metals prices skyrocketing. Nevertheless, there is strong worldwide enthusiasm for gold and silver with China set to overtake India as the top gold consumer this year. The evidence keeps piling up that liquidation from ETPs and gold funds found their way to central banks and private investors.

Earlier I mention rising interest rates in the U.S are an important driver of gold and silver prices. The steep and rapid back up in long term interest rates has rarely been seen. Long term interest rates have broken out of a 30 year historic down trend. Elsewhere, there have been “unusual” price movements such as the temporary 5% move in Chinese equity prices last week. These clues lead me to believe that economies around the world are slowing and that rising interest rates will put a further damper on economic growth and consumer spending. Rising interest rates in the U.S. will also put a damper on the housing market, a main driver of growth recently. Home mortgages will become more expense and fewer people will qualify for loans. In addition, financing for automobiles and other capital expenditures will become more expensive. Further, with slowing construction, manufacturing and services sectors the tax revenue base will decline straining social services and unfunded liabilities like Social Security and pension funds.

Since gold and silver prices are outperforming equities and bonds in this rising interest environment, it could signal a worst case scenario for the global economy. Inflation hasn’t show up in economic numbers yet although the goods and services people pay for everyday are rising; such staples as food, petrol, medical costs, and education continue to increase month after month.

The fall could be the decisive turning point for the global economy as investors flee equity and bond markets and awaken to the prospect of crimped growth due to unforeseen spiking interest rates. Gold and silver will continue as a hedge against global economic turmoil, and rising inflation.

Source: JPM Rress Release

Gold and Silver’s Stunning Reversal of Fortune

HTDT Gold Senior Precious Metal Analyst--Alan Mandel

So far, my predictions for sharply higher gold and silver prices are coming to fruition. That’s in contrast to warnings from the likes of Bank of Montreal, Goldman Sachs, Credit Suisse and other investment banks calling for gold to break under $1,100.  In my July 22^nd Gold Journal article I wrote about the gut wrenching down move in metals and that it was painful for some and anticipated a test of $1,300 before much higher prices. That test seems to have been successful. Gold closed at $1,282 on August 6^th and on August 8^th went back over $1,300 on its way to a four day win streak of over 4% basis December COMEX close. Silver fared better, with an 11% rise over the same time period. This time the gut wrenching move was felt by the shorts (sort sellers), who were washed out betting on still lower prices. But, the investment community still doesn’t believe the gold rally. Reuters on August 10^th reported that “the fundamentals (for gold) are still negative.” Put simply, the bears got clobbered because they misinterpreted very bullish signals, think the Fed will taper and that future economic developments will be rosy.

However, some in the investment community share my notion that there won’t be any significant tapering. John Embry, Chief Investment Strategist for Sprott Gold and Precious Metals, told King World News, “Interest rates (in the U.S.) have risen dramatically so any tapering will simply throw (petrol) on the fire and torch the banking system which is up to its eyeballs in interest rate derivatives.” Although it’s important to keep one’s eye on the dollar, interest rates and the overall banking system, there are other important areas providing strength to gold and silver.

 

 

 

 

For one thing, China is emerging as an incredibly strong buyer of gold. Noted market forecaster Steven Leeb says China will import 1,200 metric tons of gold this year on doubts about both a U.S. recovery and a stronger dollar. The Wall Street Journal reports that Chinese buyers flocked to jewelry stores in the 2^nd quarter to send China’s gold purchases to a new high. That was after consumers saw gold drop 23% in U.S. markets during April to June and decided to buy on the perceived bargain prices.  According to figures released August 12^th by the China Gold Association, China’s gold demand more than doubled to 385.5 metric tons in the 2^nd quarter alone, 20% higher than the figure set in the first quarter. The Chinese have a strong affinity for gold; strong Chinese retail demand helped set a floor on gold prices during an 8% plunge in April.  Sellers of gold products like Fook Jewellery Group, Ltd saw a 78% jump in sales according to the company’s web site.

Although some say there are indication that slowdowns may have run their course in China, the Eurozone and the United States, I think that signs of economic strength will prove to be temporary. Stock markets around the world are jittery, anticipating that a better outlook means major central banks, such as the U. S. Federal Reserve, will begin scaling back support that has driven the sharp rallies in equity markets over the past few years. But scaling back support does not mean ending asset purchases. U.S. economic growth is anemic and Japan’s economy grew at a slower-than-expected rate in April – June. Japan only grew 2.6% down from 3.8% in the first quarter despite massive liquidity injections. The same will hold true for the U.S. Despite years of quantitative easing the economy is still not robust. Plus, the reality of higher interest rates and crude oil prices rising over $100 per barrel forecast more sluggishness with rising inflation and a weaker dollar; an environment in which gold prices could rise sharply as previously forecast. This could place the Fed in a quagmire, too, with limited means of intervention at its disposal.

So, I see what amounts to a highly favorable situation for gold. Stimulus is seen as a benefit to gold but tapering could lead to unintended consequences leaving the banking system vulnerable to a black swan event – something unanticipated like rising interest rates with inflation could put central bankers in a bind, and they would be hard pressed to put out any clues concerning their intentions. I believe that the notion gold could once again test $1,300 or fall further has largely been negated, though if world economies prove more resilient than I think without drastically higher interest rates volatility will remain. 

Sources:
www.wsj.com
www.reuters.com
www.kingworldnews.com
www.marketwatch.com

Gold to Hit $2,000 as Monetary Velocity Picks Up

Alan J. Mandel--HTDT senior precious metal analyst

There is so much liquidity in the U.S. monetary system even if the Federal Reserve tapers its $85 billion per month bond-purchase program it won’t make a difference.  There is a big misconception that as soon as the Fed stops its bond purchasing program the excess liquidity will dry up and real interest rates will rise. First of all, I don’t think the Fed can afford to taper anytime soon. Even though the Fed keeps throwing petrol on the fire, the U.S. economy does not feel the heat. Growth according to the latest GDP figures are soft and unemployment lackluster after years of quantitative easing.  I’m expecting inflationary pressures to be correlated to monetary velocity and despite short-term volatility, expect gold to hit $2,000 in the long term and possibly higher. Money velocity accelerates with increased money supply coming from bond purchases and can increase prices with heightened economic activity.

In the near term, I expect gold to remain fairly stagnant, testing the $1,300 level during the summer doldrums when many market participants in the U.S. and Europe are on holiday. Although prices can move lower during the summer months as volatility remains high, it is important to keep an eye on the long term price action. It’s only a matter of time before prices push higher.  But since inflation hasn’t shown up in the economy, investors aren’t paying attention to the excess liquidity. According the Consumer Price Index (CPI) and Producer Price Index (PPI) inflation has been nonexistent. That’s because banks and corporations are hoarding cash.  Once they feel a bit more optimistic about the improving economy and are ready to spend and hit the gas, inflation will be driven up as they compete for available goods, services and skilled workers. One positive sign that the economy may be picking up was indicated in the release of the July Institute for Supply Management (ISM) Non-manufacturing Index August 5^th. It showed the pace of growth in the U. S. services sector accelerated to a five month high; it rose from 56 from 52.2 in June. New orders also jumped but the employment index component fell.

 

 

In the U.S., even without troublesome CPI numbers, U.S. Treasury yields have begun to creep up. The common wisdom is that if real interest rates in the U.S. start to rise, it makes the opportunity cost to hold gold greater because gold has no yield. But the World Gold Council said that higher U.S. real interest rates aren’t an automatic weight on gold prices. Real rates around the world will not necessarily follow what the U.S. does. Plus economic activity for the most part remains soft.  A situation could unfold where there are rising interest rates and inflation with slow growth as I mentioned in a previous column.

Gold may have no yield, but that doesn’t mean it has no return. Sometimes gold is given a zero percent long-term return estimate when the metal is used to show its role as a core portfolio asset. But the World Gold Council’s research shows that gold’s average monthly return since 1975 is 0.6%, or an annualized yield of 7.5% nominal return. Gold is not without risk but tends to perform best when there is a low real interest rate environment, defined by WGC as zero percent, which is what the Fed needs to maintain, with monthly average returns averaging 1.5%.   

Finally, one can’t forecast gold prices without also considering the U.S. dollar. With regard to purchasing power, the dollar depreciated in real terms for the past 40 years. This usually happens little by little. In the short term, until the fall, I think the dollar could strengthen, but in the long term, the large scale fiscal and corporate deficits, the bigger balance sheet of the Fed (which was done to try and reinvigorate the U.S. economy), will have a toll on the dollar strength. Going forward in the medium to long term, we may see an environment where many emerging-market currencies and some of the developed market currencies start to play a more important role on the world stage. Dollar weakness usually translates into gold price strength.

So for now, watch for signs of stagflation to push up gold prices - rising interest rates, inflation and slow growth particularly in the U.S., China, Japan and the EU as stimulatory measures fail to reinvigorate those economies but increase the supply, therefore, the velocity of money.

 Reference: www.kitco.com
                   www.kingworldnews.com

The Volatility Before Big Gains in Gold--July 29th

Alan J. Mandel--HTDT senior precious metal analyst

Gold Extends 3-week Gain

Gold erased early losses to end the week of July 26 higher. This extends gold’s gain to 3-weeks. The appetite for gold and silver coins is at historically high levels.  Some dealers call it a buying frenzy. The reason? There is a growing divergence between the paper (futures, etfs, etc.) gold market and the actual market for physical gold.  Nevertheless, pundits abound as some of the major investment banks continue to label the rally short covering, basically calling it a fluke. They seem not to realize that every bull market undergoes periodic corrections. Corrections are healthy and occur when markets over extend themselves either to the upside or downside. It’s not a straight line. The bull bucks and weaves and tries to throw riders off so only the strongest hands stay in for the long haul. As I stated last week in the Gold Journal, I’m not a short term timer. Volatility is apparent at the onset of any bull run.  Those continually trying to gauge just when a turn-around happens will face a bumpy ride with extended troughs.

Overall, it’s difficult to get carried away at the moment even with a 3-week run, but recovering $1,300 on the upside was a milestone. Prices posted a combined 9 percent rise over the last 3 weeks. In the prior two weeks, $1,300 was tested twice before swiftly and comfortably breaking through.

Contributing to the gain was a dollar under pressure. A weaker dollar makes dollar-priced gold less expensive for holders of other currencies. Rising unemployment in the EU and sub-par growth in both Great Britain and the EU means that borrowing costs will remain extraordinarily low as long as inflation is not a threat. Pending home sales in the US slipped in June causing concern that a main driver of the US economy is faltering. If US Gross Domestic Product and the non-farms payroll reports later this week indicate weakness, low interest rate could continue to sustain a rally in gold and even be the impetus for a movement away from equities into gold.

So why do so many analysts at Bank of Montreal, Citibank and Goldman Saks continue to have a sour outlook on gold? Three weeks ago there were projections of $1,200, $1,100 even $1,000 for an ounce of gold. They feel the European and U.S. problems will abate, and China will resume greater upward momentum in GDP. I think not. It is to be seen how China will navigate through its economic slowdown.  In Europe, bank investors and depositors will take on greater responsibilities in the event of a bank failure before governments step in with taxpayer money. This could lead to a Cyprus style situation and depositors may want gold as a hedge against failure and as a store of value.    The world financial system may be healing slowly but bad signs like the aforementioned abound so we’ll watch as the economic signs unfold for guidance this week. I think the global economies are weaker than government statistics reveal which will prolong stimulus and possibly herald inflation.

Regardless of the reasons, individuals, industry and central banks snapped up gold in June and July. Demand for gold and silver Eagle coins in the U.S. are at extraordinary levels.  "Demand right now is unprecedented. We are buying all the coin (blanks) they can make," Richard Peterson, U.S. Mint's acting director, said in an interview inside the Mint's production facility in West Point, New York, referring to the Mint's suppliers. Central banks boosted their holdings in June, too. Gold buyers included Russia, Ukraine, and Greece. Continued central bank bargain hunting should help support prices after its steep fall, too.
                                                                                                                
Recently India, the world’s largest gold consumer and a huge potential driver of price, imposed an import tax of 8% on gold to defend the declining rupee, but that has only encouraged smuggling.  “We have always maintained that there is a very innate demand for gold in India,” Said P.S. Somasunderam, managing director of the World Gold Council’s India office. “Trying to manage this demand, which is so diversified, by restricting supply will lead to undesirable consequences (smuggling.)”

Other factors which could contribute to rising gold values are decreasing stock values, towering debts of companies and governments and Japan’s easy money policies to stimulate both growth and inflation.  On the fundamental side, as mentioned last week, large speculators and hedge funds increased their bets to the long side.

Whereas $1,300 was resistance a few weeks ago, now it is support and could be tested over the summer doldrums during August when many large players are on holiday. A successful test of $1,300 would put gold on track for still higher prices.  I expect currency wars, declining stock markets and an assault on the dollar to heat up during the fall as the U.S. economy falters further, the European bank situation deteriorates and China tests measures to stimulate the economy.  

Reference: www.kitco.com
                    www.kingworldnews.com

Evening Gold Commentary-Jul 31st, 2013

Evening Gold Commentary-Jul 25^th, 2013

 

1: Market Review

 

 

 
 



2: Fundamental

 

1 Second quarter GDP growth topped expectations but partly due to first quarter GDP being revised down with annual revisions. GDP gained an annualized 1.7 percent, following a 1.1 percent rise in the first quarter. The prior estimate for the first quarter was 1.8 percent. Analysts had projected a 1.1 percent advance for second quarter GDP.--Bloomberg

2 Today's FOMC statement did not issue a reduction in quantitative easing but it left the door open for coming months. Policy rates were left unchanged, including the fed funds target rate of zero to 0.25 percent. The Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.--Bloomberg

3 Home prices in the first half posted their largest gain since the housing boom peaked seven years ago, but there are signs the trend could slow.--WSJ

4 Officials in Washington opened new fronts in an examination of banks’ dealings in commodities, signaling intensifying scrutiny.--WSJ

5 U.S. stocks erased an earlier rally after the Federal Reserve refrained from indicating when it will reduce the pace of stimulus and data showed the economy grew more than projected in the second quarter.-- Nikolaj Gammeltoft & Nick Taborek(Bloomberg)

6 Treasuries rose, reversing earlier losses, and the dollar declined after the Federal Reserve refrained from indicating when it will reduce the pace of stimulus. Stocks erased gains in the final hour of trading.-- Nikolaj Gammeltoft & Michael P. Regan

3: Technical Analysis

 

Today, the COMEX August Gold Future experienced a sharp dive in the morning but rallied in the afternoon after the announcement of the Fed, ending at $1325.10, or decreased by 0.07%. The MA5 and MA10 have a trend to form a “dead cross” which is a bad news the market. Candlestick has an extremely thin red body, with long upper and lower. The volume was much less than yesterday’s volume.

First support level: $1300                   Strong support level: $1180

First resistance level: $1350               Strong resistance level: $1380

MACD: DIFF and DEA are both positive, which is a bullish signal. However, investor should be aware that the value of MACD is shrinking, which means we need more signals to be long.

Bollinger bands: The candlesticks have a trend to break the upper BB. It will be an extreme situation. The main factor is the sharp rally in the previous days.

4: Opinions and Expectations

 

1 Lawrence Summers likely wouldn’t beat a rapid retreat from the easy-money policies pursued by Ben Bernanke if he get the top job at the Fed.--WSJ

2 Goldman Sachs Group Inc. (GS) President Gary Cohn said his firm continues to do business with SAC Capital Advisors LP, the hedge fund that was indicted on charges of insider trading last week.-- Michael J. Moore(Bloomberg)

3 India will contain gold imports below 845 metric tons this year as Asia’s third-biggest economy takes steps to curb a record current-account deficit and defend the currency, Finance Minister Palaniappan Chidambaram said.-- Siddhartha Singh & Swansy Afonso(Bloomberg)

4 Village Main Reef Ltd. (VIL), a South African gold producer, fell in Johannesburg trading and headed for its lowest close in more than a month after suspending funding for a mine it has operated since June 2012.-- Andre Janse van Vuuren(Bloomberg)

 

5 Banks are selling the least structured notes tied to commodities in nine years as investors shun the securities amid a slowdown in China’s economy and the prospect of the U.S. Federal Reserve winding down stimulus.-- Alastair Marsh(Bloomberg)

 

6 It’s impossible for China to replace, if they imported over 800 tons of gold last year, and let’s say you couldn’t really buy it, the number they would have to buy is something like 48,000 tons of silver to replace that (gold equivalent). We only mine 25,000 tons a year, and there’s only 10,000 tons of that available for investment. And it looks to me like they (India and China) are buying it all right now. So I think if this data is true we have the most phenomenal story for silver that you could possibly imagine. We will just nail those paper sellers to the wall here.—Eric Sprott (http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/6/28_Eric_Sprott_-_Stunning_Indian_Buying_To_Crush_Silver_Shorts.html)

7 Yellen Is The Most Bullish For Gold & Silver—Peter Schiff (http://peterschiffblog.blogspot.com/)

 

8 "The physical market is starting to drive the price of the metal, rather than what we have seen the past several months where paper selling drove gold and silver prices to abnormally low levels. The bottom line, Eric, is that in a year or two when we look back at today, we will marvel at how cheap the prices of physical gold and physical silver plummeted to."—James Turk (http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/8_Turk_-_Something_Shocking_Has_Occurred_In_The_Gold_Market.html)

 

5: Tomorrow’s Focus

 

Jobless Claims

 

Released On 8/1/2013 8:30:00 AM For wk7/27, 2013

 

 Prior                     Consensus                          Consensus Range

New Claims – Level                         343 K                    345 K                                     340 K to 350 K

 

 

ISM Mfg Index

 

Released On 8/1/2013 10:00:00 AM For Jul, 2013

 

 Prior                     Consensus                          Consensus Range

ISM Mfg Index - Level                    50.9                        53.1                                        52.1  to 53.5 

 

 

6: Important Charts

 

COMEX GOLD August

 

Key Economic Data

 

 

 

 

Evening Gold Commentary-Jul 25th, 2013

Evening Gold Commentary-Jul 25^th, 2013

 

1: Market Review

2: Fundamental

 

1 Durable Goods Orders data released: Durables orders sharply beat expectations at the headline level but it was almost entirely due to aircraft orders at Boeing. Elsewhere, durables orders were mixed, ending net at flat for June. New factory orders for durables in June surged 4.2 percent, following an upward revised 5.2 percent (originally 3.7 percent) for May.—Bloomberg

2 Jobless Claims data released: Initial jobless claims rose 7,000 in the July 20 week to 343,000 with the 4-week average down slightly to 345,250. The trend for the data is flat, pointing to no discernible improvement underway in the jobs market.—Bloomberg

3 Facebook easily beat profit and sales expectations, sending its shares up 17% after hours. The company swung to a profit as revenue rose 53%, boosted by a surge in mobile and local ad sales.—WSJ

4 The race to become the next Federal Reserve chief looks increasingly like a contest between Lawrence Summers and Janet Yellen.—WSJ

5 Americans are buying more new homes despite higher mortgage rates. The pace of new-home sales rose 8.3% in June from a month earlier and was up 38% from a year ago, the biggest year-over-year increase since the recovery began. Builders had 161,000 new homes for sale at the end of June, enough to supply the market for 3.9 months at the current sales pace.--WSJ

6 Goldcorp Inc. (G), the biggest gold producer by market value, wrote down the value of assets by $1.96 billion and is slowing some project spending because of lower metal prices.-- Liezel Hill(Bloomberg)

3: Technical Analysis

 

Today, the COMEX August Gold Future contract fluctuated gained a moderate increase after 3:00PM EST Time, ending at $1333.50, or increased by 0.97%. The MAs are forming a bullish position because MA 30 broke MA10 downward and MA5, MA10 and MA30 are forming a clear bullish arrangement. Candlestick has a small green body, with super short upper shadow and moderate lower shadow. The volume was slight less than yesterday’s volume.

First support level: $1280                   Strong support level: $1180

First resistance level: $1350               Strong resistance level: $1380

MACD: DIFF and MACD are both moving upward, which is a bullish signal. However, investor should be aware that the value of MACD is shrinking, which means we need more signals to be long.

KDJ: K and D are both above 80, which mean the market is too hot and investor should consider to cut their long position.

Bollinger bands: The candlesticks have a trend to break the upper BB. It will be an extreme situation. The main factor is the sharp rally in the previous days.

4: Opinions and Expectations

 

1 Gold jewelry exports from India, the world’s biggest consumer last year, are poised to surge as the central bank seeks to curtail domestic bullion use and boost shipments to defend a weakening currency, a trade group said.-- Swansy Afonso(Bloomberg)

2 There is NOT That Amount of Silver: There is only a certain percent of the silver market which can go into savings because a lot goes into industrial. But here is the ‘piece de resistance,’ they said (India) imported 720 tons in April (annualize 8,000 tons). In May it went to 900 tons, annualized call it 11,000 (tons). We’re going from 1,900 tons (of silver Indians were purchasing) to 11,000 tons, in a 25,000 ton market. That’s impossible. There’s not that amount of silver available for investment.—Eric Sprott (http://ericsprott.blogspot.com/)

3 Sell Equities And Buy Physical Gold Now While Prices Are Low!: Marc Faber appears on CNBC where he says you should sell equities and buy gold! The price of gold is low and he believes stocks are overvalued.—Marc Faber (http://marcfabersblog.blogspot.com/2013/07/sell-equities-and-buy-physical-gold-now.html)

4 The Dark Side of QE: "Interest rates are rising because of QE. We have reached a tipping point, meaning that QE can no longer keep interest rates from rising. The market is now focusing on the dark-side of QE, which is the inflationary consequences of all this money printing. Rising interest rates with QE ongoing means that we have reached the stage where the Fed has now lost control. This result was inevitable because market forces always beat central planners and its groupies in the end. Only the timing of this event could not be predicted."—James Turk (http://jamesturkblog.blogspot.com/2013/07/the-dark-side-of-qe.html)

 

5: Tomorrow’s Focus

The Reuter's/University of Michigan's consumer sentiment index.

                    Prior                      Consensus                          Consensus Range

Sentiment Index - Level                                83.9                        84.0                                        83.2  to 85.5 

 

6: Important Charts

 

COMEX GOLD August

 

Key Economic Data