Western Investment Demand Surfacing for Gold

I have been adamant in stating that without Western-based investment demand for gold, the market cannot mount any sustained rallies. Asian gold buying provides the solid floor of support underneath the gold market but in and of itself, CANNOT maintain gold in a sharp bullish trend move higher. That requires concerted effort by the big Western specs.

My friend John Brimelow's reports on Asian gold demand and premiums/discounts are the best source for gauging demand for the physical metal from that corner of the world but as a gauge of Western demand, I rely on the large gold ETF, GLD in particular. It is the best bellwether we have to determine whether or not we have some determined buying from this crowd.
We have finally seen some signs that this Western-origin demand is surfacing. Monday and Tuesday's number show a 7.5 ton increase in the reported holdings of GLD. With today's strong move higher in the metal, one would expect to see the number increase further. This is a good sign if you are a gold bull and looking for allies. It is a real shame that this Friday's COT report will not pick up the internal positioning of traders in today's move as I would dearly love to know how much FRESH long buying we are getting in comparison to the amount of short covering that is occurring this morning thus far among the speculative side of this market.

Please note that this has nothing to do with gold forward lease rates, backwardation claptrap or any of the wild theories that consistently are birthed out among the gold community. It has everything to do with good old-fashioned, easy-to-understand INVESTMENT DEMAND.

Here is a look at the chart:

 

The big driver for gold this AM is the announcement last evening of sanctions being prepared by the West against Russia depending on the outcome of the expected vote in the Crimea region this weekend. That has led to strong safe haven flows for the metal.

Further clouding the picture is disappointing economic news out of China.

Combined, both of the above have the equity markets nervous and this is leading to some outflows from stocks into both bonds and gold. You can see the concern in FALLING interest rates again.

Keep in mind what I have said before, gold needs an environment in which REAL interest rates are negative in order to thrive.

Very noteworthy is the fact that the US Dollar has not been able to garner much if any support during this latest round of events. That needs to be monitored.

If this is not enough to add some uncertainty, crude oil is doing what we could expect it to do on poor global economic news - it continues to sink lower. Copper's woes are also continuing.

Today we got (thus far) a big break lower in soybean prices. The Board structure shows a big drop in bean prices for later this year, barring any unexpected weather woes as the big S. American crop comes online. Issues in China and here in the US with the hog PEDV are expected to dent meal demand.

We now have sharply lower energy prices. Heating oil prices have dropped over $0.40/gallon since their spike peak early this year. Unleaded gasoline prices have lost $0.10 this month ( that is great news for cash strapped consumers). Crude is off nearly $7.00 this month thus far.

Thus there is going to be a deflationary tug lower coming from some commodities while others are firm. Meat prices will be higher this spring and into summer. In other words, the outlook from the commodity sector remains mixed. Some sectors are strong; others are weak.

The overall bias in the commodity sector as a whole is one that reflects the above. Notice that prices continue to work back and forth within a downtrending pattern. Lower highs continue but so do higher lows. In other words, there is no clear discernible trend in the sector as a whole at this time. Individual markets are responding to their own set of demand/supply fundamentals. This is how it should be in my humble view. We do not have the wild, reckless, mindless rush head-long into all things tangible that we have seen in the past by the hedge funds of the world. They appear to be more selective this time around ( finally ). Remember, they are net short copper as an example.

That means we will need a continued catalyst in the form of geopolitical uncertainties to keep gold strongly supported. It is NOT going to come from inflationary expectations UNLESS this chart confirms a strong upside breakout on a weekly basis. Those who keep endlessly screaming hyperinflation are NOT looking at the charts.

The US Dollar will therefore be key moving forward. Will it garner some safe haven buying or will it continue to languish? If it breaks down sharply on the charts, we will get some mindless commodity sector buying in expectation of a currency-induced cost push.

Back to gold briefly - the weekly chart shows how today's move higher is playing out on the intermediate term chart. If the bulls can maintain today's strong gains into the close of trading Friday, they have a real shot at taking the metal higher and even setting up a test of $1400. A change in the handle to "14" that could be maintained, would bring in an entirely new set of momentum based buyers. That will be a  tall order but if things deteriorate in the Crimea this weekend, it is certainly not out of the question.

As you can, the reason I say it is a tall order right now is due to the following chart. The miners, while the chart has stopped going down, are certainly not lighting the world on fire. They have not managed to make it anywhere near the 280 level and are certainly no where close to closing that big gap below the 300 level. Whether or not one likes it, the miners still tend to lead the bullion (maybe this time will be different) and based on that, it is not exactly a ringing endorsement of gold at this point. The week is still young however so let's keep an eye on things.