Commodity Trade Mantra

Gold & Silver seem Poised for a Price Rally

Gold & Silver seem Poised for a Price Rally

Gold & Silver seem Poised for a Price Rally

Indian & Chinese Gold consumers kept up their bargain-hunting for Gold Bars, Gold Coins and Gold Jewelry after Gold Prices slumped to a 8 month low last week. Gold and Silver seem poised for a Price Rally on signs of increased demand in India, China & as political turmoil in Italy after an election spurred haven demand. Initial results in Italy suggested the election may end in a divided parliament. Such an outcome may have induced safe-haven Gold and Silver bullion buying. Italy may require another vote after partial election results suggested the four-way race may end in a divided parliament. Gold Bullion’s discount to Platinum narrowed. With Silver prices down close to $28.50 & Gold price down to $1,555.55 on Feb. 21, the lowest since July 12, seem to have triggered fresh rally hopes for Bullion Investors. Daily volumes for cash benchmark Gold Bullion of 99.99% purity on the Shanghai Gold Exchange have been more than double the average in 2012 since Feb. 18, when it reached a record 22,024 kilograms, according to exchange data. The re-emergence of physical buyers in China following the Lunar New Year celebrations was an encouraging sign. The China Securities Regulatory Commission issued a new regulation allowing Gold ETFs – exchange-trade funds in January, which expands the channels for investors to buy the metal. India Gold Demand rose as traders & consumers rushed to buy Gold as prices seemed attractive & also on expectations that the Finance Minister may add more curbs on Gold Import or buying in the Union Budget to be announced on Feb 28.

Central Banks add more Gold to Reserves:

Central Banks bought 77.3 tons of Gold Bullion in 2010 & 456.8 tons in 2011. Central banks are expected to again be strong buyers this year after they boosted purchases 17% to 534.6 tons last year, the most since 1964, according to the London-based World Gold Council. Total investor holdings in Gold ETPs stood at 2,560.097 tons on Feb. 22, down 2.8% from a record reached on Dec. 20. Data from the International Monetary Fund showed the central banks of Russia and Kazakhstan raised Gold Reserves in Jan. Russia and Kazakhstan expanded Gold Reserves for a fourth straight month in Jan, while Azerbaijan acquired bullion for the first time in more than three years, as central banks sought to diversify their assets. Russian holdings climbed 12.2 metric tons to 970 tons last month after gaining 8.5% over 2012. Kazakhstan’s Gold Reserves grew 1.5 tons to 116.8 tons, following last year’s 41% expansion, data on the IMF website showed.Azerbaijan’s holdings rose 1 ton, the first gain since May 2009, when it held 64 ounces.

Bernanke faces the first of two days of congressional testimony:

US Federal Reserve Chairman Ben Bernanke faces the first of two days of congressional testimony that will subject the Fed’s controversial bond-buying program to tough scrutiny and gauge his confidence in the resilience of the US Economy. Coming just a week after the Fed’s meeting minutes sent Gold & Silver in a tailspin & U.S. stocks reeling by suggesting the central bank could pull back its economic stimulus earlier than had been expected, and a day after another sharp stock market drop, investors are certain to hang on every word. Beginning with the U.S. Senate Banking Committee today, Bernanke will be quizzed by some bitter critics of the aggressive steps he has championed to spur growth. On Wednesday, he will appear before the House Financial Services Committee. His opinion remains that there is still not enough growth, that high unemployment is a cyclical issue, that there is not enough inflation. Now that is amazing. Lawmakers in both chambers will seek his comment on the likely impact of $85 billion in across-the-board government spending cuts that are set to take effect on March 1. He is also expected to be grilled on his bold bond- buying program, which has tripled the size of the central bank’s balance sheet to $3 trillion since 2008. Bernanke is likely to repeat his line that the indiscriminate axe they take to the budget will hurt the recovery, and argue that it would be better to cut the deficit over time and avoid the risk of a near-term fiscal shock, reported Reuters. The Gold & Silver markets are keen to find out where Bernanke stands.

Goldman foresees Turning of Gold Cycle:

Gold Price cycle has probably turned as the recovery in the US Economy gathers momentum and investment holdings collapse, according to Goldman Sachs Group. Goldman Sachs cut its three-month target to $1,615 from $1,825 and lowered the six- and 12-month forecasts to $1,600 and $1,550 from $1,805 and $1,800. Goldman reversed an assumption, Gold ETP holdings will expand in 2013. “The turn in the gold cycle has likely already started,” the Goldman analysts wrote in the report, after predicting an end of Gold’s Bull Run in a Dec 5 note. “The latest collapse in Gold ETF holdings stands in sharp contrast to our assumption that ETF positions were likely driven by longer-term allocation rather than short-term trading.” – Bloomberg.

Sharp Inflation Rise may trigger Gold & Silver Price to Rise:

Raw commodities & metals have never been at currently seen prices at this time of the year ever. Yet you see most Central Bankers & Finance Ministers repeatedly claim that Inflation is low & in fact going down. Do you agree to this claim? Why are Central Banks buying Gold Bullion then? Are you paying any lesser for Food, medication, insurance, clothing, fuel or education than you have been paying a couple of years ago or is it that these costs have escalated much more than the normal annual pace seen for a long time? In recent years strong global demand for food and bio-fuels has been pushing crop prices higher. The drought has helped & not hindered farmer’s profits. For farmers able to produce corn (maize), it raised prices dramatically. The average price of corn was about 20% higher last year than in 2010, and reached $8.49 a bushel (25kg) in August. This year, according to a report from the USDA on February 11th, farm profits may rise by 14% to $128 billion, the highest in real terms since 1973. Historically, creating money to monetize national debt & financing wars by borrowing money have always given birth to very high Inflation. The recent and ongoing creation of trillions of fiat dollars through multiple Quantitative Easing programs to provide a stimulus to the Economy which is being followed by the Currency Wars is a sure shot formula to achieve Hyperinflation. Although there are many warning signs, when hyperinflation finally strikes, it strikes suddenly, so it’s imperative to prepare before it’s too late. Investing in Gold and Silver earlier is the best way for individuals to protect their capital. There can be several hurdles imposed by Governments on owning or trading in Gold & Silver as Inflation accelerates to higher levels. Higher slabs of Profit tax, Higher Value added Tax, Added Import or Export limitations among many others may come into effect as Inflation rises. Imposing new curbs on Gold in faster succession is already being seen in India, but this is just the tip of the proverbial iceberg. When hyperinflation itself kicks in, there are two more extreme actions the federal government might take: gold and silver confiscation, as happened in the US in 1933, or a return to the gold standard. In the event of a return to the Gold Standard, the value of bars and modern bullion coins would be fixed by the government.

Currency Wars Effect on Gold & Silver:

Some Central Banks like BoJ now want Inflation to rise & their wish may soon be fulfilled. Ordinary inflation precedes hyperinflation. Many politicians, Fed governors & economists also say that inflation is low and under control. One needs to understand that most currencies are undergoing a major devaluation, read Currency Wars – A Race to the Bottom. Central Banks are consistently buying Gold since 2010 since they know that this mindless money printing will on fine day explode into a massive currency devaluation leading to an uncontrollable hyperinflation. Ordinarily, Central Banks fight Inflation by increasing Interest Rates which tends to slowdown the economic growth and gives investors alternatives to buying Gold & Silver as inflation hedges. With US Debt now above $16 trillion and the need to constantly borrow money to make debt payments, it’s virtually inconceivable that the US Federal government would allow interest rates to rise. The other alternative would be to devaluate the US Dollar. This worsening scenario can take sometime to reach its peaks but by that time, strong emerging nations like China, India, Russia, etc would be comfortably out of huge US Dollar reserves by exchanging it for more Silver & Gold Reserves. Supported thus, by that time, Gold & Silver prices would have reached sharp new highs but how much an individual could own or hold remains to be seen as new rules & curbs get imposed.

Contract Expiry Influence on Gold & Silver:

What can be bought using leverage must eventually be sold.  Traders who buy Gold and Silver Futures cannot profit from the rising prices until they sell. So, sooner or later, they must sell. Alternatively, if the price goes down, they must sell because they are incurring losses at a multiple of the price drop due to their use of leverage. Nearly all buyers of futures are only speculators & not investors generally. They could be called “naked longs” because they have neither the intent nor the means to take delivery. Their predictable behavior when a particular contract heads into expiry has a characteristic behavior. One can see this happening in the Gold and Silver many times & especially now. Naked longs must sell the expiring contract, and if they wish to remain long in the metal, they must buy another farther-out or next contract. Right now, for example, we are in the late stages of “rolling” from the March Silver Futures contract to May. In the short run, this can have an enormous impact on the price but almost none in the long run. The largest chunk of these speculators do not read important & price movement influencing news or data & are mostly unaware of why price swings are seen or what is driving the prices in a particular direction – the fundamentals. They simply enter markets on their own notions of the “right price” & the “right time.” They don’t even look at the price measured in US Dollars. They are using another currency, such as Rupees. These traders rarely have access to the right knowledge or advisory. These are the people that also can be categorized as “Penny wise & Pound Foolish.” They try & save on buying right knowledge which comes at a fraction of the amounts involved in the trade, while many a times opting for free advise. Some of the more tech savvy ones take a look at the available charts on the net, form their own opinions of the right & wrong & start applying the same to the trade. While technical knowledge does form an important part of the trade, longer term price direction is rarely determined by the same. Fundamental knowledge plays the major role in determining this but individual traders may most of the times be unaware of where to look for the same as there is no single point of know-how for the same. Speculative trade entry may certainly end in loses most of the times but if these entries are fundamentally driven, they create Wealth.

Silver longs fell to the lowest levels since August & the number of total Gold speculative short positions now stands at the greatest level since 1999. With near-record short positions on Gold, a potential short covering on Gold Bullion may lead to higher prices. The potential for a short-covering rally in Silver is much higher, should a catalyst emerge to support prices also based on the fact that much of the concentrated net shorts are in the March Silver Futures contract which expires in a couple of days. One potential catalyst for covering would also be if remarks from Federal Reserve Chairman Ben Bernanke should be construed to mean policy-makers were staying the course of Quantitative Easing. Another potential catalyst may come on Feb 28 from India– the world’s largest Gold consumer. India may impose additional curbs on Gold imports or add taxes & levies on its way to keep a check on its bloating Current Account Deficit which, if unchecked, could lead to a potential credit rating downgrade. The government’s move to hike the customs duty from 4 to 6% will have a loud impact on the Bullion sector. The hike sums up to around INR 60,000 (approx) per kilogram of gold. To be clear, with this duty hike a difference of 7% between the international and domestic price of the yellow metal is evident. Due to this, the increase in duty on the actual price of gold is being passed on to the retail consumers by the jewelers. This may also lead to rise of illegal channels and malicious activities with respect to importing gold and related products like jewelry etc., in the country. Gold Demand in India has seen a rise in Dec 2012 & then again now based on the same fears.


India to put investors before voters in election-year budget – Reuters

India government ducks passenger fare hike in railway budget – Reuters

Italy Renews Market Concerns as Voters Reject Monti – Bloomberg

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