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The World Gold Council this week released some very interesting data which I want to relay here although you can get it firsthand by clicking on the link below to take you directly to their site.
http://www.gold.org/media/press_releases/archive/2013/08/gdt_q2_2013_pr/
I want to first start with a chart of the largest gold ETF, GLD. I consider this ETF to be a very good proxy for overall WESTERN gold investment demand.
Notice how the gold holdings in the ETF have been consistently dropping for this entire year thus far. GLD Began the year with 1350 tons of gold reported in their holdings. As of yesterday, August 15, reported holdings are 913 tons. Doing the math we learn that a total of 437 tons have gold have been offloaded from this ETF by predominantly large WESTERN investors, aka, hedge funds. So we have it established that investment demand for gold in the West has been pitiful. That we know and have stated repeatedly as the gold price chart has continued to deteriorate for most of this year.
However, what stands out to me in the WGC data is this: (By the way, I could not help but notice that they misspelled the word ' jewelry)!
Globally, jewellery demand was up 37% in Q2 2013 to 576 tonnes (t) from 421t in the same quarter last year, reaching its highest level since Q3 2008. In China, demand was up 54% compared to a year ago; while in India demand increased by 51%. There were also significant increases in demand for gold jewellery in other parts of the world: the Middle East region was up by 33%, and in Turkey demand grew by 38%.
Bar and coin investment grew by 78% globally compared to the same quarter last year, topping 500t in a quarter for the first time. In China, demand for gold bars and coins surged 157% compared with the same quarter last year, while in India it jumped 116% to a record 122t. Taking jewellery demand and bar and coin investment together, global consumer demand totalled 1,083t in the quarter, 53% higher than a year ago.
Look at that last sentence again.... total global consumer demand for gold totaled 1,083 tons in the second quarter. The report also states that demand for bars and coins was 508 tons - that is more than enough to completely absorb the 437 tons of gold dishoarded by hedge funds!
What the hedge funds have been throwing away, the Chinese and the Indians have been buying as well as smaller buyers of bars and coins.
This fits with the Commitment of Traders reports which have been detailing the continued long liquidation by the category of traders known as Managed Money or Hedge funds, not to mention the rapid escalation of new short positions in gold.
It has been this solid, sustained demand for PHYSICAL GOLD that has put the price floor under this market and prevented the bears from cracking the market lower. However, in and of itself, that buying was insufficient to drive the price SHARPLY HIGHER. To do that, MOMENTUM BUYERS must make their entrance into the metals markets. That now appears to be occurring; not in a large way as of now, but nonetheless it is happening.
As mentioned yesterday hedge funds are beginning to take a look at the precious metals once again and getting some exposure on the long side. They are grossly under-invested in this category (and that includes the mining shares) and thus we are seeing somewhat of a rebalancing of their portfolios to favor a larger exposure. This bodes well for the metals as we head into the historically strongest season for gold prices.
Oh and by the way, It is certainly helping matters to learn that Paulson has cut this holdings in gold in a significant way. A move by such a large player of his nature goes a long way in assuaging fears that more "capitulation" type selling in gold is coming. Maybe we can look back at some point in the near future and point to his selling as the final bottom. I find that incredibly ironic. It also goes to show how the STREET shows no mercy and has no friends whatsoever but is a violent, cruel and brutal entity. The smaller barracudas seem to relish harassing the larger sharks when opportunity presents itself.
The metal has been knocking on the door at the top of the range trade/consolidation for some time now but has been unable to break through. Today it did so in a very big way.
Note the change in the indicator which I have posted previously on the metal. Positive Directional Movement, or + DI, has now bullishly crossed above the Negative Directional Movement line for the first time since NOVEMBER of last year!
Also, both of the shorter dated moving averages have completed upside bullish crossovers of the 50 day moving average.
Lastly, the move off the low is not yet at 20% so we can not officially state that gold has entered bull market territory as silver has done, but the chart is significantly improved and looks quite strong at the moment. A change of handles from "13" to "14" would be very significant as it would signal that WESTERN INVESTMENT INTEREST in gold has returned.
Thus far it has been very strong Asian demand for the metal that has kept it supported. That has provided the solid floor of support that we have been seeing of late. What is necessary to drive it higher however is that investment demand which is not as price sensitive as the physical markets over in Asia are.
One more thing - the seasonal tendency is now firmly on the side of the bulls as the bears have run out of time. Generally speaking the latter part of August into October is strong for gold prices as the festival season buying commences. Combine that with a renewed investor interest in the metal ( based on what I am seeing in the ETF) and the bears are going to have to look around to find some recruits for their side in a real hurry.
WOW! What a day in the precious metals complex! The entire sector was firing on all cylinders in today's session with the HUI breaking out above the recent swing high and generating solid buy signals across a wide number of the individual shares. If that was not enough, silver, which is the KING of the precious metals complex of late, smashed through $22, then $22.50 and then $23 before it set back. Meanwhile, the yellow metal took out a serious band of overhead resistance on its price chart as well.
Early in the session, gold was lower as the unemployment number brought on the talk of tapering once again. However, around mid morning here, it reversed course with many citing the rapidly deteriorating situation occurring over in Egypt as the catalyst. I agree with that assessment as events in the Middle East seem to be going from bad to worse. Brent Crude has certainly taken notice!
It also seems as if the unrest in that region has been an excuse for some to take some profits out of the equity markets as well. Incidentally, the US Dollar, instead of seeing a safe haven flow on a day like this, especially with the rising yield on the Ten Year which is now near 2.78%, ended up being the whipping boy today against a host of majors. The Swiss Franc definitely saw some safe haven buying.
I keep wondering if forex traders are beginning to grow concerned over the upcoming US budget battle and burgeoning debt levels once again.
When you get a day like this, with so many huge moves taking place ( even in the grains - more on that later), it is a sign that money managers are reallocating some investment funds and moving into and out of various sectors. With all the short positions we have seen in the gold market in particular, there is not a lot of exposure to the precious metals by this group compared to what we have seen at some points in the past. The technical showing has them not only covering shorts, but some are moving onto the long side of the market. THAT is exactly what this market has been missing for a very long time now. I will say it again and again - it is not the bullion banks that bother me all that much (they have been buying of late anyway and yes I do believe that they work to cap rallies) - it is what the large speculators are doing or not doing as has been the case for the metals of late and what they have not been doing is buying. It now seems that they are.
It is perhaps ironic that the big move higher in the metals has come just after news was released that famous hedge fund manager Paulson had cut this holdings in the ETF significantly. OUCH!
I want to mention here just in passing that this sharp move higher in gold has not changed the futures market structure as far as that backwardation/contango situation goes. The spreads remain tight with the August bid at the same level as the December and the October exactly 10 cents above the December. A friendly structure but not a full bore backwardation either. December remains at a 90 cent discount to the February 2014 contract and about a $3.00 discount to the June 2014.
Let's start with the star of the complex of late, and that is silver. One look at the chart says it all. Silver can now be officially labeled as having rallied over 20% off its recent low. For definition purposes, that is considered a bull market. It does not mean it is going to the moon; it does mean that the bear market is over barring any subsequent sharp price collapse in the metal. You will also notice that on the Directional Movement Indicator the ADX is now beginning to turn higher. It was rising strongly since early February indicating the presence of a sustained DOWNTREND. The line then turned down for good in late JUne/early July indicating that the downtrend was halted. That was followed by a period of sideways trade or consolidation. Now the ADX line is rising indicating that silver is in the incipient stages of a trending move, this time however, to the upside. As you can also see that is confirmed by the fact that the +DI (blue line) has now crossed solidly above the -DI ( red line) which is moving lower.
Downside support in this market remains near $20.50 which is also not far from the 50 day moving average of $20.25 and is also beginning to rise, albeit slightly.
More later - markets beckoning...
A quick update on the mining shares - The strong performance on Wednesday has set them up for a real shot at beginning a trending move to the upside. They are right at the top of the range that has been containing them for a while now. Just like Silver was knocking on the door of the $20.50 level prior to its nice move above $22, the shares are at a technical juncture. If the bulls can hold firm tomorrow (Thursday) they have a real chance at flushing a fair number of short sellers out of this sector.
Gold retreated from that stubborn band of chart resistance up near the $1340 level having failed to maintain its footing up there yesterday and today. There exists some very strong selling at that level, which adds to the significance of that zone. If and when it is broken, it will signify a strong shift in sentiment towards the metal. We will continue to closely monitor it.
Working against gold were several items today. The first is the strength in the US Dollar, especially against the Yen which is down over 1.5% against the greenback as I write this. Also lower are the Euro, Pound and Franc with the commodity currencies also lower. King Dollar is back, at least for today.
The second is the sharp selloff in the US Treasury market which is pushing yields up once again. Today the yield on the Ten Year which is at 2.715% and is knocking on the door of that recent spike to a TWO YEAR HIGH. Recently, a rising interest rate environment in the US has tended to quell gold buying.
Thirdly is the mining shares failing to extend past the top of the recent trading range and drifting lower.
Fourth was news out of India that they are back to slapping additional import taxes on gold and silver in an effort to get their widening current account deficit under control. Gold traders in particular viewed that with alarm fearing a drop in gold demand. However, and I think this is important, China is on its way to replacing India as the largest demand source for physical gold. Just yesterday we got the news from the China Gold Association that Q2 demand hit a record of 385.5 metric tons. That is double from the previous year! It also continues to explain where a great deal of the gold being dishoarded over in the West is ending up.
In a sense, it was a trifecta plus ONE against gold in today's session but all in all the metal is holding fairly well. I personally think that the Chinese news is really positive for the metal especially when you hear reports of gold mines being shuttered and low grade ore deposits being drained. At some point the supply/demand equilibrium becomes unbalanced and price needs to rise to adjust it.
Please realize that this is longer term oriented but it is something that those who have an investment horizon of that nature should keep in mind.
For the shorter=term oriented traders - gold is knocking on the door at the very top of the range but still has not forced it open. IF (note the emphasis) the market can stick around here closer to the top of the range and stay above $1300, the onus is going to be on the bears to cap it off because the seasonal tendency for the metal to rise heading into the 4th quarter is going to make life tougher for them.
One has to wonder if the fact that the yield on that 10 year is going to get the Fed governors back out to the microphones for a little "verbal intervention" soon. The last time we had mortgage rates kicking up recently, some realtors were already making noise about the rise hurting the sales of higher-end homes due to the inability of buyers to qualify for loans now that interest rates had gone up. not only that, but it is the BORROWING COSTS of the Federal Government that keeps the Fed awake at night.
Over in the grains corn was whalloped lower today after staging a big short covering rally yesterday on immense volume. USDA came up with some goofy number that I certainly do not believe for the final yield but it was enough to send a large contingent of shorts heading to the hills. Today, after some time to digest the number I think the market began pooh-poohing it and back in came the selling. Hey, gasoline is expensive at the pump but maybe I can afford to buy a box of Corn Flakes at the grocery store soon without having to leave a pint of my blood as a surety.
Silver remains impressive as does copper, both of which got a lift today on the news that Germany's economy is doing better than was expected. News that the Eurozone's largest economy has perked up is good for copper usage and silver usage as well. Remember, silver has been moving quite a bit in sync with the base metals recently having launched higher last week on the Chinese trade data. As long as the base metals are firm, silver bears are going to have to look for something else as an excuse to aggressively sell it.
I still need to see silver trading through $22.00, preferably through $22.50 or so to feel like it has a solid shot at beginning a more exciting trending move.
Silver is pulling gold higher today in a continuation of what the grey metal was doing late last week. It appears that the market is still keying in on the stronger-than-expected Chinese trade data from last week.
I should also note that the Goldman Sachs Commodity Index or GSCI has been higher the last two trading sessions with some short covering in the soybean market helping pull the grain complex a bit higher as traders attempt to balance today's USDA crop numbers with previous market expectations. It never hurts silver to see the broader commodity complex ( as a whole ) moving higher.
However, in the precious metals sector, what has my attention is the fact that the mining shares continue to lead the bullion higher. This is important as far as I am concerned because whether or not we like it or agree with it, the shares have been pretty accurate over the last two years in leading the metals lower. Now, if they are indeed reversing course and putting in some long term bottoms, then they should once more take the lead in the precious metals sector but this time to the upside.
Take a look at the following chart of the HUI. I am always fascinated by the price action of various markets that I track/trade but this HUI chart, especially that GAP REGION is incredibly interesting to me. So much of the price action over the last two months has revolved around this gap on the charts. It acted as a ceiling for the better part of a month beginning in late June until it was broken in the second half of July. Then it was giving a hint of something greater for the bulls but the miners promptly surrendered their gains leaving the index to plunge back through it to start this month.
Back up the index went into the gap last week on the Chinese news but it was unable to hold its gains into the bell Friday so that it closed within the gap. Today, it GAPPED ABOVE THE GAP - same exact thing it did back late last month.
Now the question is, will the bulls be able to finally drive the bears out of the shares cementing a solid, long-lasting bottom and the beginning of a sustained uptrend or will it run to the TOP of THE RANGE near the 260 level and sell off again signaling that the RANGE TRADE is alive and well? Who knows for certain but one has to be impressed thus far with the price action in that the last setback in price the first week of August uncovered willing buyers above the recent panic selling low down under 210. That tells us that buyers were more eager to get in than they previously had been...
I wanted to provide a quick update for those who are following the "backwardation" talk out there.
I am currently showing the August, October and December gold futures contract all at the same exact bid. Also, the December has a mere $0.80 discount to the February. The futures market has still not entered a backwardation state but it is just about there. I will continue to monitor this and report on it should it occur.
Also, thus far I have not seen anything that would signal any problems with the delivery process for the August gold contract but one thing that does stand out is that J P Morgan continues to be the consistent, large stopper of gold for their "House" account. Morgan is acquiring a lot of gold.
It is going to be interesting to see whether they retender it before the month ends or at some point during another delivery month process but either way, they are acquiring it right now.
I am still watching that $1340 level in the December gold contract. So far it is proving to be formidable resistance. Strength in the gold shares is helping keep a very firm bid in gold but it is silver that is really proving a great degree of lift to the yellow metal.
That push through $20.50 is squeezing the shorts and it now looks as if the metal has a decent shot at testing $22.00.
Downside support for silver is first at $20.50 followed by $20.
Incidentally, gold is moving higher in spite of the fact that the US Dollar is stronger today.
