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