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The Most Bearish News For Gold Prices Yet – But Silver Bull Right on Track

The Most Bearish News For Gold Prices Yet - But Silver Bull Right on Track

The Most Bearish News For Gold Prices Yet – But Silver Bull Right on Track

Gold prices fell, paring a second straight monthly gain, on bets that an improving U.S. economy will support the case for the Federal Reserve to curb its stimulus. Gold prices also fell after U.K. lawmakers rejected a motion for military action against Syria, reducing demand for precious metals as a haven asset. Gold bullion climbed 6.3% in August, the second straight gain, and the longest rally since September. This rally in gold prices has been triggered by a number of supportive events.

Gold prices saw a second straight month of gains, “which is bullish from a momentum and technical perspective, especially as equities came under pressure this month,” said Mark O’Byrne, executive director at GoldCore in Dublin. “We are now entering the seasonal sweet spot for gold prices as September and November are two of gold’s strongest months as seen in the data going back to 1975,” according to O’Byrne.

Events that supported a rise in Gold Prices:

Geopolitical uncertainty in the Middle-East (particularly in Syria and Egypt), currency weakness and instability in most of the emerging markets, and growing uncertainty about Fed tapering beginning in September have all resulted in strong physical gold demand and a pause in gold ETF liquidation. The worsening geopolitical situation in the Middle East has resulted in a rise in crude oil prices which in turn provided a boost to gold prices, via a rising demand for gold bullion as a safe investment hedge amid rising uncertainty surrounding a possible US-led military strike. Meanwhile, a sharply weakening currency renewed gold demand from India early August. Foreign investors had earlier borrowed dollars at ultra low rates to invest in the fast growing emerging markets, especially Asian. Now a rise in interest rates in the U.S., in anticipation of the Fed tapering its $85 billion in monthly bond buying program has compelled these investors to liquidate their investments made in the emerging markets with cheap money and convert them back to U.S. dollars. This has triggered a huge demand for US Dollars to flow out while the nation also witnesses a heavy outflow of foreign exchange via gold and crude oil imports – the two top reasons for the massive current account deficit that India currently faces.

Gold prices have rebounded since reaching a 34-month low of $1,179.40 in June as the rout attracted consumers of coins, bars and jewelry. Silver prices surged 20% in August, marking it the biggest rise since April 2011. Assets in ETPs backed by the metal reached a record 20,080.9 tons last Thursday and are up 6.2% this year. Also from Bloomberg

 “Many believe that the Fed will announce changes to its stimulus policy in September,” Peter Hug, the global trading director of Kitco Metals Inc., in Montreal, said in a report. “Notions of an imminent U.S. military attack on Syria have receded significantly in the past 48 hours, putting pressure on gold.”

The consequences for global gold prices with negligible to zero physical demand from India:

India may not see the rapid economic growth that it has got used to in the past few years if the rupee continues to decline. The rupee had hit an all-time low of 69.80 versus the U.S. dollar last week. The combination of excessively fast rising gold prices due to a sharply deteriorating currency added with massively hiked taxes of 10% on gold imports is making it all the more difficult for consumers in India to buy physical gold. In fact gold is getting disposed off at the new all time high gold prices and bullion markets are flooded with sellers rather that by buyers as always seen in India.

Premium Disappears as Gold Futures Rise above Spot Gold Prices

Everybody has become a seller; there is no buyer. The price rise of five per cent in just one session has persuaded investors to offload gold without any interested buyers,” said Bhargav Vaidya, an analyst with B N Vaidya & Associates.  While the premiums on gold bullion have vanished and replaced by discounts in India, declining premiums for gold bullion on the Shanghai Gold Exchange also indicate lower demand.

India plans to convert Holy offerings into much needed dollars through gold:

The most bearish plan for gold prices yet comes from none other than the world’s largest buyer of the yellow metal – India. The Reserve Bank of India, which has been making gold imports more difficult through a series of restrictions, is discussing with banks on how to convince temple trusts from Tirupati to Shirdi  to deposit their hoard of idle jewelry that could be converted into bullion, said two bankers familiar with the matter.

From the Times of India – 

With all efforts to arrest the rupee’s slide coming to a naught, policymakers now plan to knock on the doors of temples – from Tirupati to Shirdi- seeking a boon to feed Indians’ fetish for gold without importing it. They refused to be identified because of the sensitive nature of the issue. The Tirupati temple in Andhra Pradesh, Shirdi Sai Baba temple in Maharashtra, Siddhivinayak at Mumbai and Padmanabhaswamy temple in Thiruvananthapuram are among the richest in India with huge reserves of gold and precious metals. In fact, the roofs of many temples, such as the Nataraja temple in Chidambaram, Tamil Nadu, and Tirupati are covered with gold. RBI is counting on banks handling the accounts of these temple trusts to convince them to convert their huge gold deposits into cash, the bankers said.

No certainty of any deal

But there is no certainty of any deal with the temple trusts, given the diverse nature of these trusts and the local politics involved. “The idea is that a designated bank may buy gold from a temple trust and the ornaments will be converted into bullion. These may be bought by RBI by selling rupees,” said one of the bankers quoted above. RBI did not respond to an email seeking comment.

Gold imports worth $53.6 billion last year are blamed for the rupee’s slide, accounting for 61% of the current account deficit in fiscal 2013. Although the government and RBI acknowledged that high inflation provoked investors to chase gold, both have of late been trying to discourage imports of the precious metal. The rupee lost nearly a quarter of its value this year, but has since recovered. “The finance minister and RBI governor should jointly — and immediately — approach the trustees of Tirumala Tirupati Devasthanams (TTD),” said Jamal Mecklai, chief executive of Mecklai Financial. “Three of these (trustees) are state government appointees, and given the current political dispensation this is a distinct advantage. They should, of course, offer prayers. That will be an opportunity for the hugely rich trusts to make additional amounts of money.”

Tirupati is among the world’s richest temples with an estimated gold hoard of about 1,000 tonnes, nearly double of India’s estimated imports this year. The country, as a whole, is estimated to have a gold stock of 18,000-30,000 tonnes. The temple trusts, however, do not seem inclined towards such a plan, at least for now. “There are no plans to do such a thing. There have no discussions with RBI,” said a spokesman at TTD. Some banks run gold deposit schemes where individuals deposit the yellow metal for 3-7 years.

If India succeeds in this envisaged plan of mobilizing the idle and massive gold reserves from the Indian temples, there would be almost zero import requirements for the next few years. Gold prices are bound to feel the tremors globally, if not collapse, with the world’s largest gold buyer suddenly halting its huge gold imports and getting self sufficient for quite sometime to come.  With this and the other ongoing global trends as explained earlier and below, a continued bull run in gold prices seems difficult – if not impossible.

Silver Demand rising to record levels:

The Royal Canadian Mint Maple Leaf sales year-to-date is on track to beat both 2012 and 2011 records. Chris Carkner, managing director of sales for bullion, refinery and exchange-traded products at the Royal Canadian Mint, recently told Kitco “Year-to-date, after the second quarter, we’ve had record volume for silver Maple Leafs, the greatest we’ve had in the over 25 years that we’ve produced them.” In the first 6 months of the year, Gold Maple sales were 664,000 oz compared to 302,000 oz in 1H 2012 and 502,100, 1H 2011.  Silver Maples increased to 12.1 million up from 8 million, 1H 2012 and 11.4 million in 1H 2011. Silver Maple sales are on track to reach 24 million oz in 2013 which will beat the sales of 18.1 million in 2012 and possibly the 2011 record of 23.1 million. Together, Silver Maple and Silver Eagle sales will hit between 68-71 million oz in 2013.  This is an amazing figure as it represents 9% of total world silver production of 787 million ounces in 2012.  Also, we must remember this 9% investment demand is just from these two Official Mints. If we consider the sales of additional commemorative silver coins as well as sales from the other official mints, total figures for 2013 will more than likely top 2011’s total of 118.2 million oz (2013 World Silver Survey) by at least 10 million oz.

Gold also falls out of favor at the U.S. Mint, whereas Silver demand retains track:

At the U.S. Mint for the month, American Eagle Silver coins sales maintained a scorching record pace while American Eagle Gold coins sales whimpered to a six-year low. While sales of American Eagle silver coins are on track for a record, gold buyers seemed least interested in buying gold in Aug with sales falling to just 11,500 ounces – it’s worst sales figure for the complete month till now in 2013. . Sales of American Eagle silver coins soared to 3,625,000 and their year-to-date sales to 33,075,000. The silver bullion coins remain on track for a new annual sales record. In record-year 2011, the Silver Eagles did not top 33 million until October 1, 2011. While the pace in August was down from July’s tally of 4,406,500, the month ranks twelve all-time. But not surprisingly, the August sales of American Eagle gold coins came in at 11,500 ounces with 4,500 of that from this week. The August tally is the weakest monthly showing for the gold coins since July 2007.

The US Mint’s sales Silver to Gold ratio:

Month Gold Ounces Silver Ounces Ratio of Silver Oz bought per Gold Oz
JAN 150,000 7,498,000 49.98:1
FEB 80,500 3,368,500 41.84:1
MAR 62,000 3,356,500 54.13:1
APR 209,500 4,087,000 19.50:1
MAY 70,000 3,458,500 49.40:1
JUN 57,000 3,275,000 57.45:1
JUL 50,500 4,406,500 87.25:1
AUG 11,500 3,625,000 315.21:1
TOTAL 691,000 33,075,000 47.86:1
Figures above are in ounces and not in the number of coins sold.
Data source: U.S. Mint

The silver to gold ratio on sales for the year stands around 47.86 : 1, but this same number for the month of August is a nerve wrecking 315.21 : 1. Just Imagine that! The sales of gold coins will surely rise in the rest of the month but I feel confident that this would be an outstanding final ratio favoring silver by the month end. Silver seems overwhelmingly favored by the physical investors globally. Remember the earlier article I had posted on India’s War on Gold. Furthermore, sales of American Eagle silver coins seem well poised to hit a new all-time record this year, beating the past record for 2011 of nearly 40 million oz. At the average of current pace of sales, silver bullion may reach a minimum of around 46 million ounces. But if we also take into consideration the addition of investments flowing into silver after rising interest rates and bond yields have been seen, and also with US stock markets poised for sharp corrections, the number could very well cross the 50 million ounce mark for 2013.

I have a very strong feeling that, though there is a reasonable demand for gold coming out of China, gold prices may under perform silver this time. Though gold investment demand has considerably fallen in India due to historically high prices, festive demand may yet remain high and that may get catered to by the illegal channels. Officially, silver investment may get a big boost in India as silver remains the only alternate to gold and also that its prices are yet much below the historic highs of 2011 provides the necessary incentive.

For more on “The Endless positives for Silver Prices


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