Commentary for Tuesday, July 1, 2014 (www.golddealer.com) – Gold closed up $4.60 at $1326.40. The overnight market in Hong Kong and London wandered in a tight range ($5.00). Again the 30 day chart is worth a peek – technically the bulls are in charge. The generally higher price pattern began early in the month of June pushing steadily higher with some rest in the $1270.00 range. And then the big pop above $1300.00 mid-month which was surprising.
All of this is driven by Federal Reserve policy which is still in flux although they would claim that “changeable depending on circumstance” is good.
Still this generally higher trend in gold has been good for believers short-term, and then the market went flat between $1310.00 and $1320.00 for the rest of June. Today’s push into higher ground once again creates some trading tension in that I have expected profit taking to set in by now – but then platinum pops (up $33.00 at $1514.00) which adds another dynamic. At any rate the paper trading of gold has not lacked buzz – but the physical side leaves something to be desired. Regardless of what your friendly telemarketer is peddling – the physical market lacks luster considering the rather large push in the price of gold.
The gold market has been helped by tensions in Ukraine and escalating violence in Iraq.
SPDR, the largest of the gold ETF’s saw an increase of 183,000 ounces yesterday. This is the largest upward move in a month and could signify the reemergence of the short term gold trader.
Silver closed up $0.06 at $21.06.
From Allen Sykora (Kitco) – ETF Securities: Gold/Silver Ratio Likely To Continue Declining – “Silver continues to play catch-up with gold and has led precious metals for the third consecutive week, with potential to gain some more, says ETF Securities. “Silver rallied 2% last week for a year-to-date gain of 7.9%,” the firm says. “On a 12-month basis, the 13.1% gain in silver has been surpassed only by the 30.5% increase in palladium. Prior to the 2008 crisis, the ratio of gold to silver was about 50. It spiked to near 84 during the 2008/9 crisis and declined to near 32 in 2011. Due to its larger industrial demand base, absent a stumble in the global economy, the ratio of gold to silver is likely to continue to decline in our view.” The ratio measures how many ounces of silver it takes to buy an ounce of gold, with a smaller number signaling outperformance by silver.”
This is interesting because today you don’t see much commentary on the Gold to Silver Ratio. This ratio is a pure number arrived at by dividing the price of silver ($21.05) into the price of gold ($1326.90) using yesterday’s closing – the resulting ration being about 63. Or you could say it takes about 63 ounces of silver to buy one ounce of gold. The theory of ratio trading is based on the belief that there are times when silver is either overpriced or underpriced relative to gold.
This from Dave Kranzler (Investment Research Dynamics / Seeking Alfa) – The Gold/Silver Ratio: Forecasting A Big Move Higher For Silver – “While the financial media tends to focus its discussion on gold, serious precious metals investors typically are more interested in silver. This is because, in terms of a risk/return matrix, silver’s price movement behaves as a “leveraged derivative” of the price movement of gold. One “tool” that can be useful in forecasting the directional movement of both gold and silver is the gold/silver ratio, or GSR. It also can give us insight into how the price of silver might behave relative to the price of gold. Currently, in my view, the GSR is telling us that there is a high probability that gold and silver are starting to embark on a big bull market move higher. Additionally, if you like a little “leverage” with your market play, silver should outperform gold.
The GSR – has traded over the last 100 years in a range from 15 to 100. The low end of the range has typically correlated with the end of long bull move in the precious metals and the start of bear market. Similarly, the high end of the range has correlated with the end of bear market in precious metals and the beginning of a long bull move. On the assumption that this historical relationship holds, the bull market in precious metals that started in 2001 is still in force. Furthermore, after spiking up to 70 during 2013, the GSR appears to be headed lower and is thereby forecasting a big move higher for gold and an even bigger move up for silver.
As you can see, over the last 100 years, the GSR has traded close to 15 three times and is currently in a distinct downtrend channel, possibly headed back to tag the 15 area once again. In fact, over 100’s of years, the long term GSR has been close 15: 324 Years of the Gold to Silver Ratio. On the assumption that eventually the GSR will be pulled back to 15 by the gravity from a “regression to the mean” effect, my view is that we’ll see this level before the bull market in precious metals has run its course. Given that the GSR is currently 60.5, it means that silver would ultimately outperform gold by a 400% from now until the bull market is over.”
I think proponents of Gold/Silver Ratio trading can get carried away with conclusions but the principle makes sense. Lots of people use the ratio to either sell silver and buy gold or sell gold and buy silver. Given the spreads you don’t want to get carried away but there are investors who use this ratio to balance their precious metals holding.
Platinum closed up $33.00 at $1514.00 and palladium was up by $11.00 at $853.00.
Yesterday I mentioned gold’s late in the day after market jump in price but could not cite anything for the cause. Here is what Jim Wycoff (Kitco) made of the pop in price – Gold Rallies to 10-Week High in Late Trading; Bargain Hunting, Technical Buying, Weaker USDX – Gold prices rallied in early afternoon trading Monday, pushing to a 10-week high as traders stepped in to buy the modest dip in prices that occurred in earlier trading. Technical buying, bargain hunting and a drop in the U.S. dollar index to a multi-week low prompted the buying interest in the yellow metal. Also, a gold-market bullish report released by the San Francisco Federal Reserve Monday may have added to the buying interest in gold. The report said U.S. interest rates will remain low for quite some time to come. August Comex gold was last up $8.00 at $1,328.00 an ounce. Spot gold was last quoted up $11.80 at $1,327.40. December Comex silver last traded down $0.022 at $21.17 an ounce.
Monday is the last trading day of the month, of the quarter and of the first half of the year. That makes it an extra important trading day from a technical perspective. It is technically significant when a market price closes out the aforementioned periods at or near a weekly, monthly or quarterly high or low close. Indeed, gold and copper prices posted a bullish monthly high close on Monday. The U.S. dollar index was poised to close at a bearish monthly low close Monday. That’s also a bullish factor for the precious metals markets.
There was more downbeat economic data from the European Union released Monday. EU inflation was unchanged in June from May, at 0.5% on an annual basis. The figure was in line with forecasts and remained at a four-year low. The European Central Bank wants to see an annual inflation rate of around 2%. The same report showed bank lending in the EU fell again, as it has done for 25 months in a row.
The market place is awaiting important economic data from China, as its purchasing managers index (PMI) is due out Tuesday. On Monday China housing prices were reported down in June. This is yet another sign of a slowing rate of growth in China’s still-booming economy.
U.S. economic data due for release Monday included the ISM Chicago business survey, pending home sales, and the Texas manufacturing outlook survey. None of that data had a big impact on the market place. It’s a holiday-shortened trading week in the U.S., what with the Independence Day holiday on Friday. The key U.S. jobs report is issued a day early this month, on Thursday. This report is arguably the most important U.S. economic data of the month. Also on Thursday will be the monthly monetary policy meeting of the European Central Bank. It will be an extra important trading day on Thursday.
The civil war in Iraq is still an issue for the market place but it has at least temporarily moved off the front burner. The oil fields in the south of Iraq have not seen their production levels curtailed by the civil war taking place in the north of Iraq. Don’t be surprised to see in the near future this matter move back into the spotlight of the market place and once again significantly impact some market prices.
The walk-in cash trade today was back to quiet – really quiet. The phones were also below average although there were a few larger buy orders in both silver and gold. Still the activity was disappointing considering the higher markets in all areas except rhodium.
The GoldDealer.com Activity Scale is a “4” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 3) (last Thursday – 2) (last Friday – 2) (Monday – 3). The scale (1 through 10) is a reliable way to understand our volume numbers.
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