Currently several newsletters are pointing to the prospects of a fall in the gold price to $850 during this summer. They then say that later in the year, after September the gold price will rise to $1,200 Some say it will rise now to $1,000 first then tumble back to $850 before rising to $1,200 later in the year. If it does pull back to $850 prior to a rise to $1,200, then it is clearly an excellent trading opportunity for even long-term investors, with a potential 50% trading profit!
But others say that it will not pull back, that it has built a firm base after a long period of consolidation in the last months. If it doesn’t pull back to $850 or lower then those who exit the market now will miss a rise to $1,200 and pay the price to get back in, or will they? It’s time for a close examination of the potential rise and or fall.
Take a look at the charts drawn up by Peter below [in the latest newsletter]. These give our view of the Technical position that lies ahead. However, it is vital that we look at what is happening to the traditional market and to the new large institutional players who dominate the market and have done so for the last year and more.
This is the title given to the traditionally quiet period in the gold market from May until the end of August in the gold market. It came about because this is the time period in the year when Indian gold imports virtually cease. The greatest amount of gold imported into India between September and May was 850 tonnes a year. This meant that Indian off-take of gold each of those months average was 106 tonnes. In 2008 the total fell to around 660 tonnes. But this was only seen from January to May and averaged 132 tonnes during each of those early 5 months of their ‘gold season”. It was no wonder then that when this demand ceased, the market went quiet and had a tendency to fall. Demand then came from Long-term investors during this quiet time.
The market was expecting to see around 750 tonnes demand from October 2008 to May 2009 in line with the ‘gold season’. But it saw virtually nothing of this until we saw a small amount of gold imported in April 2009. Consider this for a moment. The market saw the average demand from India of 100+ tonnes a month disappear from the market during that time and yet the gold price held and then rose again. Clearly our sums have to be adjusted to accommodate a jump in global physical demand as well as demand for the gold Exchange Traded Funds of a huge amount [totaling 100 tonnes?] of gold a month. Right now we have seen demand for the shares of the gold Exchange Traded Funds start to climb in the last week after an absence of nearly one month. But again consider the numbers. In the absence of the demand for the shares of the gold Exchange Traded Funds and of Indian demand the gold price rose to present levels from below $900. The demand came from physical buying out of Europe and the Middle to Far East as well as from physical [for coins and bullion] demand still and traders on COMEX. That gives us a ‘feel’ for the demand.
The consequences of these developments are to remove the traditional “Doldrums” and bring life to the gold market between May and September of a far more vigorous nature than ever seen before. That’s why we are seeing the current gold price rise.
Central Bank Buying?
Meanwhile Central Bankers have turned into net buyers from net sellers in the amount of close to 10 tonnes a month. This is not so significant in its tonnage as in its structural and monetary importance. If institutions of this size have changed from a 30 year stance as sellers of gold, to net buyers, then we should find many sizeable and influential institutions recognizing the importance of gold in portfolios in the light of potential financial crises. With $18.4 trillion of assets held by funds [Pension and Mutual, etc] just a small amount of that turning to gold would suck up any remaining Indian demand shortfall in the days ahead.
Unseasonal Investment Demand
The gold Exchange Traded Funds arrived three years ago. To date they have acquired well over 1,300 tonnes in that period. That’s an average of 36 tonnes a month over that time. But this demand is completely unseasonal and cannot be averaged like this. It responds to outside uncertainties alone so may leap in a day and disappear the next. All investment demand is unseasonal. It forms a new layer of demand on the traditional shape of the gold market, filling in any price ‘dips’ as lower prices prompts ‘buying-the-dip’ demand, which we have seen in the last period of consolidation.
The eyes of this demand is focused on the macro-financial scene that is presently lurching forward uncertainly with warning signals on so many fronts countered by soothing words from Politicians and central bankers. This shows no sign of abating. Indeed, many believe the ‘ripple’ effect from the ongoing global financial crisis will produce more structural dramas and increasing levels of uncertainty. We believe this will lead to greater demand for gold and the marginalizing of the seasonal shape of the gold market.
Jewelry & Indian Demand
But don’t write the traditional seasonal demand off. Jewelry demand is likely to come back even if it is not at the same levels as it was when the gold price was lower. We think it will rise again as fashion for gold will improve as an expression of wealth, not simply decoration. As for Indian demand, as we mentioned last week, it will never go away. Indian are conservative buyers who don’t like to see the price fall just after they have bought. As a new and higher ‘floor’ price for gold is established at higher prices this demand returns and pays the higher price. Yes, the agricultural sector traditionally bought 70% of the gold demand in India and has not seen large jumps in their income, but India is developing fast and there is a gold-buying middle class that does have greater disposable income. Hindu respect for family and their elders will continue to favor gold as part of financial security. They are also far less seasonal in their buying and now have better communications and education than their elders. They will soften the seasonal dips and bumps in Indian demand. Indian wholesalers too are able to buy forward and also ‘buy-the-dips’ ahead of seasonal demand that remains. Consequently, Indian demand is becoming far less seasonal.
Impact on the Gold Price and $1,200 Gold?
If we now feed all of the above into the market we will see the gold market evolve into a far more price sensitive market with far less a seasonal influence to it. This brings the focus of the market back to the demand that the gold price itself inspires.
Investment demand is driven by the ‘big’ macro-economic picture with the Technical picture defining entry and exit points for these large investors. They do not see the $ as the defining value for gold. This type of demand has shown itself strong in Europe where investors see a Euro gold price. Likewise in other countries where the gold price is seen in the local currency. As the dollar weakens against other currencies, investors gauge its future direction in local currencies not the U.S. dollar. So, for instance, in India the Rupee gold price has hardly moved, as the Rupee has appreciated 10% in the last few weeks. In the Rand, which has seen a 20% appreciation in the last few weeks the gold price has fallen. But investment demand globally is strong because of uncertainty worldwide.
COMEX speculators rely very heavily on the Technical picture. Demand on COMEX can come from outside the U.S., but only from the very well financially educated. This demand is primarily U.S. demand from short-term traders. They continue to believe that gold moves in the opposite direction to the $.
In the last few weeks it has been COMEX that drove the price from the low $900 to the high $900 regions. Long-term investment demand favors moving in on a rising gold price. Pure bullion demand is less actual price-sensitive and more trend-sensitive. Long-term investment came in at around $950 then slowed once a pullback started. COMEX backed off too as the Technical picture showed overhead resistance. Right now all are watching and consolidating prices between $950 and $990. How long will this take? We see the next move as happening fairly soon, well before the end of August. We see the drive coming from long-term investment demand, not COMEX, who will flee gold if they are left holding the baby.
Pure bullion demand will come in on pullbacks or in a continuous stream. Will scrap sales rise at this point? We think not, because that stream of supply has been flowing for several months now and has seen the tendency to rise irrespective of their sales. So both a natural slow in these supplies and the potential for higher prices will discourage scrap sales shortly.
The turning back of the gold price from $985 to $950 was not accompanied by new macro-economic news only by a rally in the Dollar: Euro exchange rate, stunting COMEX demand. We are sure that the dollar will not strengthen, but it may consolidate, so we don’t expect COMEX to drive the price higher at this point.
So our eyes turn to long-term demand and its next steps. How and when will they move forward?
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