So Far a Normal Correction

In last week’s update on the gold sector, we mentioned that there was a lot of negative sentiment detectable on an anecdotal basis. From a positioning perspective only the commitments of traders still appeared a bit stretched though, while from a technical perspective we felt that a pullback to the 200-day moving average in both gold and gold stocks shouldn’t be regarded as anything but a normal – and in this case actually long overdue – event.

 

1-goldGold has pulled back to its now rising 200 dma (the fact that it is rising differentiates this pullback from declines during the pre-2016 bear market period) – click to enlarge.

 

Between May and August, gold stocks became quite “overbought”. They had clearly risen too far too fast and a correction shouldn’t have been a surprise. The pullback was quite sharp, adequately mirroring the relentlessness of the preceding rally. This is nothing unusual in this sector:

 

2-hui-dailyGold stocks are revisiting the 200 day ma as well and they are their usual volatile self – click to enlarge.

 

A Growing Chorus of Bears

Nevertheless, the number of prominent bears has increased noticeably last week, on practically no price movement. Here are a few examples; at Kitco we read: “ABN AMRO Downgrades Gold Outlook As Prices Remain Below 200-DMA

Really? We heard a similar argument in the previous week, and as we noted, one practically needs a microscope to see by how much gold has undercut its 200-dma. It seems simply not worth mentioning. What is worth mentioning is this though (from Kitco’s article):

 

“The latest bank to join the chorus of bear calls is ABN AMRO, with analysts at the bank saying that the 2016 bull market is over as gold has dropped below its 200-day moving average…”

 

When there is a “chorus” of mainstream banks calling for a gold bull market to be over based on such flimsy arguments, it is almost certain that it isn’t over. Just remember, most mainstream observers only turned bullish on the last gold bull market after it was already a decade old.

More importantly, they were extremely reluctant to call for its end after it peaked in 2011. So the speed with which they are reacting to the recent dip this time should be music to the ears of gold bulls.

ABN Amro did mention the commitments of traders as well, which admittedly still was a legitimate concern last week. But they should perhaps have considered the matter more deeply (see our remarks on trading volume after the CoT report cut-off date).

Yet another bank called for the bull market’s end last week: “Gold’s Bull Market Over; Prices To Fall In Next Two Years – Natixis”. Natixis offers three main arguments for this call, only one of which makes sense, at least “technically”, if you will:

 

“For 2017 and 2018, we think that the biggest factor influencing the price of gold is the expected path of U.S. interest rate hikes,” the analysts said. “Also, we do not expect further rate cuts by the [European Central Bank] or [Bank of Japan] as this is likely to damage their banking system especially in the case of Europe.”

Natixis economists are expecting to see the Federal Reserve raise interest rates by 25 basis points three times next year: June, September and December.
Not only will higher bond yields raise gold’s opportunity costs but they will also boost the U.S. dollar, providing another headwind for the precious metals, the analysts explained.”

 

We are inclined to agree that the ECB and the BoJ are not likely to ease further in the near term, but their actions are of little importance compared to those of the Fed. It is true that if the Fed were to hike rates several times, it would likely represent a headwind for gold, but only if these rate hikes actually exceed the market’s “inflation expectations”.

 

3-ff-rate-and-goldAs this chart shows, context is very important. In the 1970s, Fed rate hikes lagged behind inflation expectations and gold prices actually surged in parallel with the FF rate most of the time – click to enlarge.

 

The question is of course whether the Fed will really continue to hike rates beyond what at the moment looks like a very likely hike in December. We have grave doubts about that for a variety of reasons, and we think the Natixis analysts are simply guessing. Neither they, nor the Fed itself have even the foggiest idea what the Fed will do next year.

It is not even certain that additional rate hikes will be negative for gold if inflation expectations decline or remain unchanged, as rate hikes could lead to a plunge in risk asset prices. This would be a positive factor for gold, as the gold market tends to anticipate the reaction of central banks to falling asset prices with a very long lead time.

The other two arguments forwarded by Natixis make no sense to us:

 

“Although demand for gold from physically backed ETPs has provided a substantial boost to gold prices, we expect the trend to reverse and for investors to become a source of supply of the metal,” they said. “At current levels, the total amount held in physically backed ETPs is equivalent to roughly 60% of 2015’s mined output and 47% of that year’s total production. As we saw in 2013 when 850 tonnes of gold exited physically backed ETPs, the effect on gold prices can be very negative.”

Unlike the past three-year bear market, Natixis is not expecting to see strong physical demand from India or China to help support prices. They added that the Indian government’s gold tariffs are expected to continue to curtail domestic demand.

“Should tariffs be reduced, we could expect a stronger return in demand for Indian gold, but we believe that the current government will keep the tariffs unchanged as it pushes for its gold scheme to gain further momentum,” they said.”

 

We think this is simply erroneous. The holdings of gold ETFs change in reaction to moves in the gold price, they are not causing moves in the gold price. First of all, ETF holdings represent only a tiny portion of the global gold supply (which amounts to approx. 180,000 tons).

Secondly, their holdings increase when ETFs like GLD trade at a premium to the gold price and decrease when they trade at a discount to the gold price, as these arbitrage opportunities are the only reason for “authorized participants” to either create new or dissolve existing baskets of GLD shares (and buy or sell the offsetting physical gold holdings). ETF holdings may be useful as a sentiment indicator, but that’s about it.

The arguments about demand from China and India are falling flat for exactly the same reason. These essentially concern price elastic jewelry demand.  Gold prices are solely driven by investment demand though, and the by far largest part of investment demand is reservation demand. There simply is no way to “measure” reservation demand (see Robert Blumen’s excellent article “What Determines the Price of Gold” for a detailed explanation).

Lastly, Wells Fargo is also calling for gold to resume its downtrend and we believe the reasoning behind this call is flawed as well:

 

“Traditionally those long bear markets for commodities average about 20 years—and that is using data back to 1800—and we are only in year five.” Laforge sees gold heading back to its December lows since a commodity will “go back and test its lows off of the first move down multiple times.”

 

It is in principle not wrong to consult history  – however, as we have pointed out previously, the current gold bull market is actually shadowing the 1970s bull market, only everything is taking precisely 2.1 times as long (see: “Eerie Pattern Repetition Revisited” for details).

Thus the bear market from 2011 to 2015 is more likely to turn out to be a cousin of the mid-cycle correction of 1974 to 1976 rather than the first leg of a 20 year long bear market. There is also the problem – roundly ignored by Wells Fargo’s  analyst as well as the others quoted above – that the current time period with its utterly crazy monetary experiments is pretty much historically unique.

Historical samples since 1800 contain a plethora of monetary regimes,  none of which are comparable to what we are currently experiencing.

 

Positioning Update

Naturally, the bears could still turn out to be correct for the wrong reasons. It is also to be expected that gold won’t have it easy until the December rate hike is actually out of the way. We expect it to remain stuck in a sideways move until then, and a deeper correction cannot be ruled out either.

However, concerns over positioning in the futures markets have diminished considerably with the release of last week’s CoT report:

 

4-cots2cncnrgcThe total net speculative long position in gold futures has declined by another 50,000 contracts as of the last reporting week, to around 220,000 contracts net. This is down more than 120,000 contracts from the peak reading of early July – click to enlarge.

 

Admittedly, a 220,000 contract net speculative position is still large, and more selling may be required to create the foundation for a renewed advance. We cannot be certain of that though; it is possible that an upward shift in futures positioning has occurred  and that what used to be a sufficiently small position in the past is now situated at a higher level.

Until the market has gone through several rally and correction cycles we can only guess. It is worth noting though that the net position of the “managed money” category in the disaggregated CoT report has declined by about 40% from its peak:

 

5-cotmmrangegc03The managed money net long position in gold futures is down about 40% from its peak level – click to enlarge.

 

Conclusion

Gold remains the asset Wall Street loves to hate. It is currently under pressure due to the recent increase in rate hike odds and there was definitely a need for stale long positions to be cleared out. When we see the mainstream gang up on gold so quickly though, we tend doubt that the bears will be correct.

Of course we have no crystal ball either, but we remain convinced that the monetary experiments of recent years will end quite badly. As far as we are concerned, the long term case for gold remains intact regardless of short term price gyrations.

Currently the fundamental drivers of gold are mixed, which makes a sideways move the most likely prospect, barring new developments. We would regard any additional short to medium term weakness in the gold price as an opportunity though  – and although we obviously cannot rule it out, we are not at all convinced that a lot more weakness is actually in store.

 

Charts by: StockCharts, St. Louis Federal Reserve Research, ShareLynx

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

3 Responses to “Ganging Up on Gold”

  • Ron, a gold coins in the hand is worth 2 in the bush.

  • ron leonard:

    “Secondly, their holdings increase when ETFs like GLD…”

    How reliable are GLD’s holding reports? GLD does not give retail investors the right to redeem for any of its mystery physical gold holdings. This fact alone ensures the GLD shares to be nothing more than paper at the end of the day. GLD also has a glaring audit loophole in their prospectus that states they have no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this backdoor to the fund. Some other red flags I’ve stumbled upon, verified and welcome everyone else to verify for themselves:

    “Did anyone try calling the GLD hotline at (866) 320 4053 in search of numerical details on GLD’s insurance? The prospectus vaguely states “The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody.” When I asked about how much of the gold was insured, the representative proceeded to act as if he didn’t know and said they were just the “marketing agent” for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors.

    I remember there was a highly publicized visit by CNBC’s Bob Pisani to GLD’s gold vault. This visit was organized by GLD’s management to prove the existence of GLD’s gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this “GLD” bar was actually owned by ETF Securities.”

  • I’m not sure the average liquid gold holder should be concerned with the day to day movement in the price of gold. I was fortunate to acquire my gold and silver positions near the last bottom. I would like to own more, but must maintain my currency liquidity. If it breaks lower, I will buy more.

    I own gold, because I believe we are in a period where some crisis is almost 100% likely to occur. The political climate around the world is out of kilter and the central banks are playing chicken with the currencies. Debt is in poor shape internationally and governments are in perilous financial shape.

    Keith points to a time there won’t be any gold offered for sale. Anyone who has the extra money and doesn’t have gold should buy what they can sleep on now. Otherwise, they could find themselves in a position of having to decide whether to get in during a upwardly racing market. These markets almost always go higher and he who hesitates usually ends up buying on the top. When the fires are raging, everyone wants to buy insurance and the insurers shut their doors to new business. Gold might not make a bottom for years. Your house might never burn down either.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Canada: Risks of a Parliamentary Democracy
      A Vulnerable System Parliamentary democracy is vulnerable to the extremely dangerous possibility that someone with very little voter support can rise to the top layer of government. All one apparently has to do is to be enough of a populist to get elected by ghetto dwellers.   Economist and philosopher Hans-Hermann Hoppe dissects democracy in his book Democracy, the God that Failed, which shines a light on the system's grave deficiencies with respect to guarding liberty. As...
  • Federal Reserve President Kashkari’s Masterful Distractions
      The True Believer How is it that seemingly intelligent people, of apparent sound mind and rational thought, can stray so far off the beam?  How come there are certain professions that reward their practitioners for their failures? The central banking and monetary policy vocation rings the bell on both accounts.  Today we offer a brief case study in this regard.   Minneapolis Fed president Neel Kashkari attacking a block of wood with great zeal. [PT] Photo credit: Linda Davidson...
  • Thoughtful Disagreement with Ted Butler
      Too Big to Fail?   Dear Mr. Butler, in your article of 2 October, entitled Thoughtful Disagreement, you say:   “Someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.”   Ted Butler – we first became aware of Mr. Butler in 1998, and as far as we know, he has been making the bullish case for silver ever since. Back in the late 90s this was actually a...
  • Donald Trump: Warmonger-in-Chief
      Cryptic Pronouncements If a world conflagration, God forbid, should break out during the Trump Administration, its genesis will not be too hard to discover: the thin-skinned, immature, shallow, doofus who currently resides in the Oval Office!   The commander-in-chief - a potential source of radiation?   This past week, the Donald has continued his bellicose talk with both veiled and explicit threats against purported American adversaries throughout the world.  In...
  • The Donald Can’t Stop It
      Divine Powers The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.   The DJIA keeps surging... but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During...
  • Precious Metals Supply and Demand Report
      Fat-Boy Waves The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77.  A look at the chart of either metal shows that a downtrend in prices (i.e. uptrend in the dollar) that began in mid-April reversed in mid-July. Then the prices began rising (i.e. dollar began falling). But that move ended September 8.   Stars of the most popular global market sitcoms, widely suspected of being “gold wave-makers”. From left to right: Auntie Janet...
  • On the Marc Faber Controversy
      Il n'y a rien à défendre - by Vidocq   Dr. Marc Faber, author of the Gloom, Boom and Doom Report Photo credit: Michael Wildi / RDB     Il n'y a rien à défendre - There is nothing to defend Personne n'a lu ce qui a été écrit. - Nobody read what was written. Personne n'a pensé avant d'agir, comme la plupart des gens de nos jours. - No one thought before acting, like most people nowadays. L'homme que tu pends est l'homme que tu as fait, pas l'homme que...
  • 1987, 1997, 2007... Just How Crash-Prone are Years Ending in 7?
      Bad Reputation Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.   Sliding down the steep slope of the cursed year. [PT]   Just think of 1987, the year in which the largest one-day decline in the US stock market in history took place:  the Dow Jones Industrial Average plunged by 22.61 percent in a single trading day. Or recall the year 2007,...
  • Stocks Up and Yields Down – Precious Metals Supply & Demand
      Where the Good Things Go Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?   Since putting in a secular low at the turn of the millennium,...
  • The 2017 Incrementum Gold Chart Book
      A Big Reference Chart Collection Our friends at Incrementum have created a special treat for gold aficionados, based on the 2017 “In Gold We Trust Report”. Not everybody has the time to read a 160 page report, even if it would be quite worthwhile to do so. As we always mention when it is published, it is a highly useful reference work, even if one doesn't get around to reading all of it (and selective reading is always possible, aided by the table of contents at the...
  • Tales From a Late Stage Bull Market
      Pro-Growth Occurrences An endearing quality of a late stage bull market is that it expands the universe of what’s possible.  Somehow, rising stock prices make the impossible, possible.  They also push the limits of the normal into the paranormal.   This happens almost every time Bigfoot is in front of a camera. [PT] Cartoon by Gary Larson   Last week, for instance, there was a Bigfoot sighting near Avocado Lake in Fresno County, California.  But it wasn’t just...
  • The Falling Productivity of Debt
      Discounting the Present Value of Future Income Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.   We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article)....

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com