The gold price action since the beginning of 2015 has been frustrating for bullish and bearish traders alike. Futures trading could remain volatile and more on the sideways in choppy trading sessions with a downside bias given that the near term technical factor for both, silver and gold prices remain bearish.
The so-called gains for the U.S. economy have eroded the need for gold as a haven and pushed Federal Reserve policy makers closer to raising interest rates. An increase in borrowing costs would further diminish the appeal of bullion, since it doesn’t pay interest like competing assets. With investors really pulling back from gold as they chase stock markets, their influence on the gold price has naturally waned. This receding investment tide has left one group of traders with an incredibly disproportionate impact on the gold price. Gold investors got hammered several time in the last couple of years and they’re not going to come back in a hurry.
Finding bullish gold investors is getting a lot harder, even in a place where demand has been almost a given in recent years: gold and silver coins, reports Bloomberg. Purchases of American Eagle gold coins from the U.S. Mint, the world’s largest, were the weakest for the month in eight years. And global coin demand this year probably will slump to the lowest since 2008. Coins account for about 6% of global gold demand. Some of the coin buyers are the diehard believers in gold, and seeing them stay away from the market means their faith may have been shaken. With coin buyers heading for the exits, there aren’t many places left to find a bull. Coin lovers were among the most optimistic. When gold plunged 28% in 2013, they expected prices to rebound and started buying. U.S. Mint sales rose 14% that year as the metal presses worked overtime. Since then, futures are down 1.4% and Mint sales fell 39% last year. Gold sales from Australia’s Perth Mint, which refines all the bullion output from the world’s second-biggest producer, tumbled in May to the lowest in three years. Global demand for gold coins is expected to slide 12% this year to 220 metric tons, the lowest since 2008.
Check out the SPDR Gold Holdings:
Holdings in the SPDR Gold Trust dropped 0.2% to 704.22 metric tons on Wednesday, the lowest level since September 2008. That’s the month that Lehman Brothers Holdings Inc. collapsed, spurring a rout across global markets. Since peaking in December 2012, they’ve contracted 48%. Total holdings in gold-backed ETPs dropped to 1,586.9 tons on Wednesday, the lowest since 2009, according to data compiled by Bloomberg. The hoard slumped 40% since reaching a record 2,632.5 tons in December 2012.
The gold market is maddeningly opaque, with very few bothering to try and understand it. With gold investors largely missing in action, it’s the futures speculators’ bets that will be dominating gold prices now. As you know, it was the speculators’ selling of gold futures that forced all gold’s major sell offs in recent years. Whether they sold existing long contracts, added new short ones, or both, gold prices fell sharply in the face of this supply pressure. Speculators’ collective gold-futures bets have been all that mattered for gold prices in recent years, trumping everything else.
This primary driver of gold prices is looking very bullish today, in stark contrast to the ubiquitous bearish sentiment out there in the physical gold markets. The futures market speculators are very likely to be buying big soon. The futures market speculators have a larger influence on the gold price also due to the large amounts of gold bought or sold, due the hyper-leverage inherent trading. A single gold contract controls 100 ounces of gold worth $120k at $1200 gold price. Yet hardly any substantial capital needed to support those bets, with a maintenance margin of just $4K. This, in comparison with the physical gold investment, which is always on a strict cash and carry basis, will obviously have the highest & disproportionate influence on the gold price.
With physical gold market sentiment turning highly bearish, there are almost no buyers – neither physical not paper. To complete a trade, there have to be buyers for each seller. With practically no buyer in the market, except for the few intraday futures buyers (trading on news), futures trading is almost thin to negligible, while forcing the sellers to turn buyers themselves.
The recent CoT data reveals that speculators are once again poised to buy big. Their total long-side bets are languishing at the bottom of the trend channel at support. Historically, each support approach in recent years was followed by major buying, which soon catapulted the speculators’ total long-side gold-futures bets back up. Buying longs to cover shorts has a larger bullish price impact as buying new longs, propelling the gold price higher & faster. The more speculators buy to close their shorts, the quicker the gold price rallies. The faster and higher gold price climbs, the more other speculators are forced to cover their own shorts.
Inflation is poised to quicken – Pimco, which runs the world’s biggest actively managed bond fund, said it likes Treasury Inflation Protected Securities. Federal Reserve efforts to spur the economy will push prices high enough to surprise investors. – Bloomberg
“We see value in U.S. inflation-linked bonds,” Scott Mather, the chief investment officer for U.S. core strategies, wrote on the company’s website Wednesday. “The extraordinary policy response of the past few years could result in more inflation than expected.” The Fed has kept its benchmark, the target for overnight bank lending, in a range of zero to 0.25 percent since 2008 to support the economy. Costs are still falling, though the outlook for inflation is picking up.
If this turns out to as expected – it would provide a strong floor to the price of gold, if not another reason for the gold price to start rising. Gold prices tend to perform best during the times that inflation is rising, and with the kind of money printing we have seen globally since 2008, hyper-inflation should then be just nearby. The Fed’s rate hike will then not necessarily have any substantially negative impact on gold prices in such a scenario. In this case there may actually be increased demand for gold as an inflation hedge. Alternatively, if the Fed tightening triggers a sell-off in other asset markets, including equities as well as bonds, it may as well increase demand for gold as a safe haven.
Michael Feroli, a JPMorgan economist, said the economy will produce even fewer jobs in the future. Job creation is on a slight uptrend now, but it still hasn’t kept up with population growth. Even worse, Feroli says he expects monthly job creation to drop to around 75,000 in the near future. In other words, there will be no recovery. With a population that is still growing, this job shortage is nothing less than a ticking time bomb for social unrest.
The World Gold Council estimates that 120 tonnes of gold were added to global central bank reserves in the first quarter of this year and that’s a whole lot more than they used to buy. In fact even since 2010 the central banks have increased their share of global gold demand from just two per cent to 14 per cent last year. It’s one reason why gold prices have held up recently despite a shift from retail investors to speculation in the final stages of the US and Chinese stock market bubbles. For central banks gold is the classic hedge against monetary instability and against inflation, that is to say unwanted devaluation that puts up the price of goods in the shops. Gold will hold its value while paper money devalues and the nominal gold price goes up and up.
The pressure to buy gold for reserves is becoming even more acute as the legacy of money printing is starting to turn into rampant global inflation, manifest first in equity and real estate prices. This is actually desirable because it is the only way to amortize the colossal debts of the world without bankrupting everybody. But central banks know that if they are to manage another episode of inflation without it turning into a highly destructive hyperinflation then gold is the answer.
The drought in the West is receiving surprisingly little coverage. The drought will impact agriculture, hydroelectric production of electricity and the availability of drinking water. Reservoirs are drying up, sub-surface water levels are sinking and wells are going dry. As the drought goes on, the cost of water, food, energy, and almost everything else will increase. The basic and most elementary examples of tangible wealth are physical silver and gold. One more example of tangible wealth would be a deep underground source of water.
The European Union may be on the brink of inevitable disaster
The European Union has seldom looked so fragile. Greece’s prime minister Alexis Tsipras has said in an interview that if Greece fails, it will be the beginning of the end of the eurozone. Tsipras argued that a ‘Grexit’, as it’s being called, would trigger the unravelling of the whole European project. Meanwhile Britain’s prime minister David Cameron has got in a political tangle over whether he’ll make his cabinet ministers fall into step and campaign for a ‘yes’ vote in Britain’s coming EU referendum. But a new book suggests that whatever happens, Europe is already on the brink of inevitable disaster. Forecaster George Friedman’s book is called ‘Flashpoints’, and he told me on Skype from Texas that Germany – Europe’s economic powerhouse – was the central problem. Southern Europe is in a depression, and I say depression because the numbers – the unemployment numbers and so on – are catastrophic. So, many of the great ideas that the European Union began with have turned, as it frequently happens in history, into problems.
As stock markets roll over, gold prices may also be hit initially as gold may get liquidated to pay for margin calls in equities. A further free fall in equities may then push investors running for cover into gold and silver. It is always the darkest before the dawn! The list of reasons for buying gold could go on and on in addition to the all mentioned above here. Sooner or later something is going to happen to get investors thinking about gold again, likely the lofty central-bank-levitated world stock markets rolling over, where investors are currently infatuated with stocks to the exclusion of prudent portfolio diversification.
Stay safe and secure. Trust none but Gold and Silver to safe guard your wealth.
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