Gold Moves Higher on a Small Short-Covering Ralley

Gold Moves Higher on a Small Short-Covering Ralley

Commentary for Wednesday, Oct 1, 2014 (www.golddealer.com) – Gold closed up $4.10 today at $1214.60 but it saw highs on the day of $1220.00 before the short covering rally lost steam and gold settled for what was on the table.

Still there was some buzz from China where an official claimed  China needs to accumulate 8500 tons of gold – their official reserves are now at 1054 tons. What the Central Bank of China now holds is not a big deal – the US holds about 8000 tons – but if they accomplished the so-called plan it would make them a much bigger fish.

From what I can tell China now holds about 1% of their reserves in gold bullion so this dynamic might play well over the longer term – relative to gold’s future pricing. Finally don’t underestimate the encouragement the Chinese government gives to its citizens when it comes to owning physical gold.   

The Swiss gold referendum is another factor not getting much attention. The public will be able to vote one way or the other in November but the government does not like the idea because it would require the Swiss National Bank to hold 20% of its assets in real gold. Further the Swiss gold position would have to be stored within the country and could not be used or hypothecated.

The wild card here is that this initiative would require the purchase of 1500 tons of gold over the next 3 years – which is about half of the world’s annual production.

The pro here is of course safety against the move toward fiat currency – the con is that such a requirement might hinder their financial decisions going forward in the modern world of banking and finance.

If the referendum passes (unlikely) it could provide an enormous positive edge to the physical market because as advocates understand there really is not as much gold bullion around as most believe. Going further there is some credible evidence that claims on the existing gold exceed what is available and a checks and balance system would expose this fraud.

At any rate all of this is interesting and adds some element of mystery to the physical gold market. Whether it will eventually push prices through the roof remains to be seen – but the story does have a few interesting Bond elements.

Silver closed up $0.21 at $17.21. Physical buying has slowed a bit here but there are still plenty of small to mid-size silver bullion buyers.

Platinum closed down $10.00 at $1290.00 and palladium was up $9.00 at $784. Rhodium remained unchanged at $1290.00. I still like trading gold for platinum but this action has fallen off of late and there is absolutely no buzz in the PGM metals complex.

This is our usual Wednesday report which covers the movement of all Exchange Traded Funds – this is a handy gage to get a feel of another physical market alternative.

Gold Exchange Traded Funds: Total as of 9-24-14 was 54,108,581. That number this week (10-01-14) was 53,891,667 ounces so over the last week we dropped 216,914 ounces of gold.

It might also be interesting to note that in 2013 the record high for all gold ETF’s was 85,112,855 ounces. In 2014 a new record low was set today 53,891,667 ounces.

All Silver Exchange Traded Funds: Total as of 9-24-14 was 638,441,602. That number this week (10-01-14) was 645,340,316 ounces so over the last week we gained 6,898,714 ounces of silver. 

All Platinum Exchange Traded Funds: Total as of 9-24-14 was 2,746,070 ounces. That number this week (10-01-14) was 2,750,397 ounces so over the last week we gained 4,327 ounces of platinum.

All Palladium Exchange Traded Funds: Total as of 9-24-14 was 2,924,712 ounces. That number this week (10-01-14) was 2,923,850 ounces so over the last week we dropped 862 ounces of palladium. 

If you are wondering about “where do we go from here” relative to the price of gold the 5 day gold chart should be worth a peek. Why 5 days? The answer being that anyone can tell you technically the bears have been in charge since October 1st when gold was trading at $1336.00. From this point onward it was bad news as the short players mercilessly pushed gold lower. The “safe-haven” vote was lost – the stronger dollar was relentless – the improving US economy assured traders that quantitative easing would be history in October – and many traditional physical buyers were simply waiting for better prices. 

But for a more precise look narrow the picture to the previous 5 days and you will find two factors which might provide clues. First this general downward trend did find some traction at the $1215.00 level – actually flattening out the trend. Was this the bottom? No but the short players did cover their short positions and took additional profits.

Now some traders might say that at this point gold was oversold – and more than a few considered the notion that the dollar might give up ground – at least providing some respect for gold.

But Europe, already economically faulty, assured everyone that a weaker euro was in the cards. I think this along with the lack of any gold investor buzz reinforced the notion that shorting gold was the trade de jour.

I predicted a snap-back which would push the price of gold higher as caution prevailed and the short trade covered their bets – but this has not happened – even in light of an anticipated better buying season from India.

So back to my original question – as gold broke down at $1215.00 the next stop to lower pricing would be $1205.00, a 9 month low. As of this writing we have bounced off that number 3 times – something which normally would create some fear in the short trade.

And the notion that gold finished the trading day up $4.10 at $1214.60 is not the snap back I was looking for – but it does demonstrate short traders have not lost their minds.

Still positive gold sentiment is lacking and the bears continue to hold a strong hand. Across the counter we are now seeing some rather large gold bullion sellers so whether $1200.00 will hold remains to be seen.

This is curious because things are not all that good. The Consumer Confidence Index turned weak for September coming in at 86.0. The August revised reading was 93.4.

And the Chicago Purchasing Index dropped 3.8 points in September to 60.5. Still anything above 50 would suggest a buildup in inventory supposedly getting ready for strong consumer sales – a wrinkle in my mind because where are the people getting the money in this jobless recovery? It appears to me that the middle class wage earner has not participated in the “all boats rising theory”.

This from Nouriel Roubibi (Kitco) – Market’s Rational Complacency – “NEW YORK – An increasingly obvious paradox has emerged in global financial markets this year. Though geopolitical risks – the Russia-Ukraine conflict, the rise of the Islamic State and growing turmoil across the Middle East, China’s territorial disputes with its neighbors, and now mass protests in Hong Kong and the risk of a crackdown – have multiplied, markets have remained buoyant, if not downright bubbly.

Indeed, oil prices have been falling, not rising. Global stock markets have, overall, reached new highs. And credit markets show low spreads, while long-term bond yields have fallen in most advanced economies.

Yes, financial markets in troubled countries – for example, Russia’s currency, equity, and bond markets – have been negatively affected. But the more generalized contagion to global financial markets that geopolitical tensions typically engender has failed to materialize.

Why the indifference? Are investors too complacent, or is their apparent lack of concern rational, given that the actual economic and financial impact of current geopolitical risks – at least so far – has been modest?”

Deutsche Bank came out this morning and claimed $1200.00 is not cheap for gold – it could go lower. They are right in that it could go lower but I disagree with their basic premise and this is a matter of selling the sizzle.

Gold is cheap no matter how you look at it relative to the gigantic increase in the money supply. So let me reiterate – the physical gold market looks cheap at this level – whether the American investor has the sand to take advantage of lower prices is another matter.

It does appear some long-term players like China, and others which use gold to offset the risk of a large cash position are taking advantage of the sale.

This from MineWeb.com (Lawrence Williams) – China gold demand surging again – Latest weekly withdrawal figures from the Shanghai Gold Exchange suggest Chinese demand is near 2013 levels.

We cannot emphasize more strongly that gold followers should ignore the mainstream media reports, based on Hong Kong gold export figures to mainland China, that Chinese gold demand has plummeted by anything between 30% and 50% this year.  As we pointed out in an article last week, Hong Kong is now no longer the principal port of entry for gold into the Chinese mainland.  When it was still so, gold exports into China were extremely high at the beginning of the year, but since then the Hong Kong figures have tailed off as China effectively opened up gold import routes through other entry points – notably Shanghai and Beijing , resulting in the Hong Kong net gold exports falling back month by month from a peak of 111 tonnes in February to a mere 21 tonnes in August.  This is thus no longer an indicator of overall Chinese gold demand.

That this does not represent the overall Chinese picture is apparent from the withdrawals of physical gold from the Shanghai Gold Exchange (SGE).  True these withdrawals are also down this year suggesting a more gradual slowdown in Chinese demand, NOT a precipitous fall as suggested by the mainstream media.  However, recently SGE gold withdrawal figures have been particularly strong again – a fact apparently ignored by most gold commentators.  Indeed the past four weeks’ withdrawals from the SGE have totalled over 170 tonnes – this suggests an annual rate of over 2,200 tonnes although weaker figures from March up until August will mean this level will not be reached for the 2014 calendar year, but it may well get much closer to last year’s 2,197 tonnes withdrawn from the SGE than previously estimated.  We would suggest that this year’s figure may well get close to 2,000 tonnes given the lower gold price has been stimulating demand at a time of year when it is traditionally strong anyway.  We can thus anticipate continuing demand at high levels and China maintaining its place as the world’s largest gold importer – even disregarding the assumed-probable additional gold imports to swell the country’s gold reserves.

For SGE withdrawal figures we look at those reported by the excellent Koos Jansen who seems to be about the only gold analyst who monitors these on a week by week basis.  And significantly his figures for the latest week of withdrawals from SGE published by the Exchange show that just over  50 tonnes of gold were withdrawn in week 38 (Sept 15-19), the latest for which figures are available and that thus gold demand in China is currently accelerating again.

With Indian demand also reported as strengthening substantially with the festival /wedding season now upon us/approaching, and reports of some substantial purchases of bullion by the ‘super rich’ to protect against any significant stock market downturn and  continuing turmoil in Ukraine, the Middle East and North Africa, the current weakness in the gold price does not seem justified.  This would suggest that the main depressor of the gold price of late has been U.S. dollar strength adversely impacting the dollar price of gold, although the downturn has not been quite so severe in some other currencies.

The walk-in cash business was back to average today – really unexpected – I thought the action would be crazy today. The phones were also just average. But a look at the activity scale will show the volume numbers over the past week remain strong.

The GoldDealer.com Unscientific Activity Scale is a “6” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 5) (last Thursday – 5) (last Friday – 5) (Monday – 5) (Tuesday – 6). The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be very busy and see a low number – or be very slow and see a high number. This is true because of the way our computer runs what we call the “book”. Our “activity” is better understood from a wider point of view – perhaps a week or two. If the numbers are generally increasing – it would indicate things are busier – decreasing numbers over a longer period would indicate volume is moving lower.  

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