Gold Investors Weekly Review – September 19th

In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. Gold closed the week at $1,216.98 down $12.76 per ounce (-1.04%). Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 5.44%. The U.S. Trade-Weighted Dollar Index rose 0.63% for the week.

Gold Market Strengths

China officially opened the Shanghai Free Gold Exchange on Thursday. By giving foreign investors direct access to its gold market for the first time, China is seeking to obtain more influence over prices while simultaneously boosting the global use of its currency, the yuan. In addition to the deregulation of the gold market in Shanghai, Hong Kong’s Chinese Gold and Silver Exchange Society was given permission to set up a precious metals vault in Shenzhen this week. The continued deregulation of the gold market by the world’s largest consumer is a huge boost to the precious metal.

In the first eight months of this year, Shanghai imported $15.98 billion of gold, a staggering indicator of demand in China. Furthermore, last Thursday, two tonnes of gold was imported into Shanghai, indicating that gold imports into the city are not slowing down.

China is planning on boosting its gold reserves. The country’s reserves, a mere 1.1 percent of total reserves, have plenty of room to grow if when compared to nations such as the United States and Germany, which hold roughly 70 percent of their reserves as gold. The increase in gold demand from Chinese central bank purchases should place upward pressure on gold prices.

Gold Market Weaknesses

Despite historically being the best month for gold, September has shown nothing but declining gold prices. The typical increase in demand from India due to the festival season appears to be overshadowed by the extraordinary strength of the U.S. dollar and its negative effect on gold prices.

Gold traders have become the most bearish in three months, according to a survey from Bloomberg. The poor market sentiment is the result of the Federal Reserve lifting its median estimate for the Federal Funds rate by the end of 2015.

The ratio between gold prices and global equities, as measured by the MSCI ACWI, has declined to its lowest level since September 2008. The low point is due to the unusual headwinds for gold as of late and the continued strength of equities. It will be interesting to see if the strength in equities continues in the near future.

Gold Market Opportunities

Despite overall market sentiment favoring equities, George Soros has decided to bet on gold. Soros increased his bearish position in equities by 605 percent last quarter. The world famous investor did double down his position on gold mining ETFs, while also adding many gold companies.

Gold

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Gold Price Recuperating: Bull Market Restarting 2015

In its latest update to its 2014 Gold Survey, Thomson Reuters GFMS sees gold as entering a period of recuperation, but holds out little hope for any short term price appreciation, with physical demand falling sharply in the first half of the year compared with a year ago.  It sees last year’s substantial price falls as highly anomalous and talks of the market regaining its composure.  However the report will have been written ahead of the recent gold price collapse, down to a nine-month low yesterday following some heavy sales on COMEX after the release of the latest statement from the FOMC. (Although, given that it kept its ‘not for a considerable time’ wording for the likelihood of interest rate increases, and no other surprises on tapering, this might actually have been seen as gold positive.) Indeed we foreshadowed this reaction on Mineweb as a follow-on from a pattern seen in previous FOMC statement gold price reactions whether they were generally seen as gold positive or no.

GFMS reckons the Asian markets over-bought gold during the 2013 price falls and this has affected purchases which otherwise might have been made this year. And there is also a suggestion that overbought gold may have meant inventories had been built up to a level more than sufficient to meet demand atb the time and that these have been gradually run down following the Chinese New Year. Thus we have seen quite a sharp demand downturn from China in particular, although this may well not have been quite as steep as some commentators have suggested. Indeed both Indian and Chinese demand appear to have been picking up again towards the end of the third quarter

Gold Prices 2015

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The World Order Becomes Disorder: Gold is Part of Any Risk Mitigation

Is the post-Cold War global boom over?

Since the fall of Bolshevism, the world has seen remarkably sustained growth in international cooperation, brought about by freer trade and new technologies. Financial assets have generally performed well, increasing prosperity across most of the world. There were just two major interruptions—the tech crash in 2000, and the financial crash in 2008.

The world warmed up fast after the Cold War. Prices of most commodities rose, despite major corrections:

  • Oil climbed from $15 per barrel to as high as $140. It collapsed with the crash, but climbed back swiftly to near $100.
  • Corn climbed from $2 to as high as $8 before sliding to $3.60.
  • Copper climbed from 80 cents to $4.30 before sliding to $3.
  • Gold shot up from $350 to $1,900 before pulling back toward $1,200.

So what’s happening with commodity prices now? Is this just another correction, or has the game really changed?

Commodity prices have risen against a backdrop of falling interest rates:

10-Year-US-Treasury-Yield

The US ten-year Treasury yielded 8% as recently as 1994, and as low as 2.1% during the crash. Recently the consensus target was 4%—before fears of outright deflation drove it to 2.4%. Bond yields have fallen below 1%. Even the bonds of the southern members of the Eurozone yield Treasury-esque returns.

Remarkably, those low yields persist even as major geopolitical outbursts have ended the mostly benign post-Cold War era. The foundations of global economic progress are being shaken by geopolitical earthquakes from Russia and Ukraine to Syria and Iraq, where a new caliphate has been proclaimed.

It seems bizarre, but the world is heading toward a revival of both the Cold War and the Ottoman Empire.

Unfortunately, these concurrent crises are occurring at a time when the great democracies’ leaders bear scant resemblance to those leaders responsible for the end of the Cold War and the launch of global cooperation and free trade: Reagan, Thatcher, and George HW Bush. Mr. Obama won his nomination by voting against the invasion of Iraq. He ran on the promise of ending wars, not starting them. Now, faced with sinking popularity in an election year that could give Republicans complete control of Congress, he naturally fears dragging America into the ISIS chaos—or Ukraine.

Obama is also haunted by the collapse of his most daring and creative foreign policy achievement—the reset with Russia. Last week, Mr. Putin doubled down on his Ukrainian attacks by warning that Russia should be taken seriously, because it is a major nuclear power and is strengthening its nuclear arsenal. Those with long memories recall Khrushchev banging his shoe at the United Nations and shouting, “We will bury you!”

Meanwhile, Western Europe’s leaders show few signs of being prepared for either crisis. Angela Merkel, raised in East Germany, is cautious to a fault. British Premier David Cameron is struggling to prevent Scottish secession and to deal with the likely return of hundreds of ISIS-trained British citizens. (Military analysts generally agree that well-funded returnees with ISIS training are much greater threats than Al Qaeda ever was… yet Cameron has failed to convince his coalition partner to support restraining their re-entry into British Muslim communities.)

The backdrop for long-term investing has, in less than a year, swung from promising to promises broken by wars and threats of more-terrifying wars.

Another unlikely threat is deflation.

DEflation?

When central bankers have been running the printing presses 24/7?

Most economists, strategists, and investors would have deemed deflation a near-impossibility with government debts at all-time highs, funded by money printed at banana-republic rates. Who thought that the Fed would quadruple its balance sheet? And who dreamt that such drastic policies would be sustained for six years and would be accompanied by outright deflation in much of Europe and minimal inflation in the USA?

So why have Brent oil prices fallen from $125 in two years despite production outages in Syria and Libya and repeated cutbacks in Nigeria? Are Teslas taking over the world?

The answer is that the US is once again #1 in oil production, thanks to fracking (in states that allow it). Mr. Obama likes to boast about the new US oil boom, but he has been a bystander to this petro-revolution. According to an oil company executive interviewed in the New York Times last week, without fracking, global oil prices might be at $200 a barrel, and the world would be in a deep recession. He’s a Texan and thus inclined toward hyperbole, but his point is directionally valid.

US frackers—deploying advances in science and technology with guts and skill—have averted fuel inflation. And farmers, using the tools of modern agriculture—GMO and hybridized seed, farm machinery equipped with GPS and logistics, and carefully monitored fertilizers—have combined with Mother Nature to unleash record crops of corn and soybeans. So much for food inflation.

Capitalism is doing its job: to expand output of goods and services, thereby preventing shortages from derailing recoveries through inflation. That success story means central bankers can keep printing away.

So what should investors do? The S&P’s rally has been sustained through near-zero-cost money used to: (1) buy back stock to enrich insiders and please activist hedge funds which have borrowed big to buy big; and (2) prop up the overall market because investors have learned that buying on margin when the costs are minimal—and below dividend yields—just keeps paying off. Stein’s law says, “If something cannot go on forever, it will stop.” Too bad it doesn’t say when.

Gold loses its luster when: (1) inflation seems to be as remote as a pot of gold at the end of the rainbow; and (2) even a concatenation of crises fails to send investors rushing into the time-tested crisis consoler.

We had predicted in February that 2014 would be the year of increasing geopolitical risks that would challenge conventional asset allocations. We see geopolitical risks expanding from here—not contracting—and stick to our investment advice that the broad stock market is precariously valued. A range of options is available for those who wish to hedge themselves against even worse news.

Gold is part of any such risk mitigation. So are long government bonds.

Most importantly, we have entered an era when wise investors will devote as much time to reading the foreign news as they allocate to reading the investment section.

H/T Casey Research

Heavy Gold And Silver Futures Shorting Is Actually Very Bullish

Summary

  • Gold and silver were hammered by heavy shorting by U.S. futures speculators over the past month.
  • These elite traders have been extremely bearish on gold since its major lows in mid-2013, but they are actually a strong contrarian indicator.
  • Every time their hyper-leveraged short-side bets soar up near extremes, gold is bottoming and ready to surge in a frenzied short-covering rally.

Gold and silver have been pounded lower over the past month, contrary to their bullish seasonals.  This selling pressure has come from the usual suspects, American futures speculators.  They’ve been busy aggressively dumping gold and silver futures, particularly on the short side.  But each time they pressed this bet in the past 15 months, gold soon surged higher.  Shorts are bullish since they must soon be covered.

Gold suffered its worst quarter in 93 years in 2013’s second quarter, a nauseating 22.8% loss.  This was triggered by the Fed’s stock-market levitation, which sucked vast amounts of capital out of alternative investments.  Gold plunged early in that catastrophic quarter when major support failed, and again later on Ben Bernanke’s initial QE3-taper scare.  This naturally left gold sentiment overwhelmingly bearish.

American futures speculators responded by betting heavily against gold and silver during that Q2’13 timeframe.  And given gold’s once-in-a-century plunge, they obviously enjoyed great initial success.  But even after gold decisively bottomed in late June 2013, this elite group of traders remained extremely bearish on the precious metals and kept selling their futures.  This has continued for the 15 months since.

The ironic thing is that fantastic Q2’13 gold-downside bet hasn’t worked very well since then.  Of the 303 trading days since gold plummeted to $1199 in late June 2013, it has only closed lower briefly on 3 trading days in late December.  The universal gold bearishness of the past 15 months hasn’t paid off, it was a bad bet.  Gold has weathered the heavy selling to grind sideways in a massive bottoming consolidation.

Yet American futures speculators still remain exceedingly bearish on precious metals, which is truly seriously irrational given their sideways price action.  The reason is likely twofold.  Until the Fed-driven stock-market levitation decisively rolls over, demand for alternative investments will remain weak.  And given the extreme leverage inherent in gold futures, speculators must maintain an ultra-short-term focus.

At $1250 gold, a single 100-ounce gold-futures contract controls $125,000 worth.  Yet the maintenance margin on US gold futures is now just $4600.  Thus traders running at maximum margin have leverage to gold of 27.2x!  That is astoundingly risky, as a mere 3.7% gold move against these guys would wipe out literally all of the capital they bet. For comparison, stock trading is legally limited to 2.0x leverage.

Big gold moves aren’t uncommon.  Since 2009, fully 1/13th of all trading days have seen gold close 2%+ higher or lower.  So highly-leveraged futures speculators can be wiped out in a matter of days if they make the wrong bet on gold!  Thus their myopia is as extreme as their leverage, with their whole world existing between a week in the past and a week in the future.  Any minor gold slide rekindles their bearishness.

If the stock markets edge up to new nominal records, American futures speculators are quick to dump gold.  If the US dollar is stronger, they are quick to dump gold.  If the Fed hints at interest-rate hikes, they are quick to dump gold.  If some elite investment bank makes its umpteenth weathervane bearish call on gold, they are quick to dump gold.  If some geopolitical hot spot appears to cool, they are quick to dump gold.

Already having a heavily-bearish bias and forced by leverage to be short-sighted, American speculators jump on every opportunity to sell gold futures.  And that is exactly what happened to gold and therefore silver over the past month or so.  Gold would droop for a couple days, futures traders would rationalize that as confirmation of their bearish theses, so they would sell more gold futures and amplify its decline.

This creates a vicious cycle.  And in the absence of normal levels of gold investment demand thanks to the Fed’s artificial stock-market levitation, there isn’t enough offsetting physical buying.  So futures selling dominates the gold price, and it slumps towards lows.  The funny thing is these extreme bets against gold by such sophisticated tradersalways prove wrong, as gold rallies right at their peak bearishness!

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