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Gold: Technical Correction Before the Final Frontier
By Economist Forecasts & Opinions
Gold fell for the first time during last week, off 4% on Friday to $1,162.40 an ounce, the biggest drop since Dec. 1, 2008 after the new U.S. jobs data showed unexpected strength. The Dollar rallied against rival currencies while traders reversed the “Sell Dollar/Buy Gold” strategy. (Fig. 1)
The Dollar's decline has been a key factor in the record rising gold price this year by boosting the metal’s appeal as an alternative investment along with other commodities and high-yielding currencies.
Though gold briefly touched a low of $1,136.80 during the Thanksgiving week on fears of a possible debt default in Dubai, the precious metal had otherwise continued its vertical ascend into uncharted territory advancing in 21 of the past 23 sessions.
While gold has some underlying support from central banks and investment funds, there are some indications suggesting gold is moving mostly on momentum, and that a deeper correction may be due.
India Leading the Gold Rush
Gold’s rally in the past couple weeks was largely on speculation that India’s central bank may buy more gold from the IMF adding to the 200 ton purchase it made last month.
This second purchase by India would be the fourth central bank sale this quarter of IMF bullion. The three prior sales were Sri Lanka’s $375 million purchase of 10 metric tons; India’s initial $6.7 billion purchase 200 metric tons, and Mauritius bought 2 tons for $71.7 million.
The three sales so far leave about 190 tons up for grabs from the 403.3 tons the IMF announced Sept. 18 it would divest to shore up its finances.
China, The New King of Gold
Private Chinese gold buying, for both jewelry and investment, will overtake Indian demand this year, predicts metals consultancy Gold Fields Mineral Services (GFMS). China is now the world's No.1 gold mining nation. The People's Bank is widely thought to have grown its gold reserves by buying domestic production direct.
In addition, China has cut the import tax on jewelry and allowed select commercial banks to sell gold bars, and gold is now traded freely on the Shanghai Gold Exchange.
Russia & Vietnam Not Far Behind
On Nov. 23, Russia's central bank announced it had bought 15.6 metric tons of gold in October and has said it aims to increase gold's share in its reserves this year to keep its investments diverse. The Russian central bank had been steadily building its gold stocks this year, which has been up 17% since Jan. 1 to 606.5 tons.
The Vietnamese central bank has also granted quotas to import 10 tons of gold for use by its banking system and gold traders.
Low Interest Rate with Worthless Paper
Some analysts attribute the most recent rally to the reversal of a decades-long selling of gold by developed economy central banks to net buying by emerging market authorities.
Gold accounts for 9% of reserves held by central banks (valued at market prices). Therefore, it is logical for central banks stocking up on gold as it does bring the much needed diversity due to gold’s low correlation with key currencies and its strong inverse correlation with the US Dollar.
However, diversifying reserves primarily via gold rather than other currencies partly suggests the expectation of interest rates around the world to stay low for a long time. Moreover, it reflects central bankers' growing distrust of all paper currencies, not just the Dollar.
Surging Derivative Trading
Some of the world’s most successful traders, including John Paulson, David Einhorn, and Paul Tudor Jones, have positions in gold or gold related investments. Pension funds allocate about 5% as protection against the weakening Dollar. Hedge funds and traders are piling into gold futures markets around the world, lured by the record-high prices in the precious metal.
Based on the Commitment of Trader (COT) report as of November 24 by the U.S. Commodity Futures Trading Commission (CFTC), the number of long positions in gold was around 370,000, up about 5,000 from just a week ago, mostly from non-commercial short-term speculative investors.
It is also interesting to note CFTC Nov. 2009 monthly report shows that while commercial participants held net short positions; non-commercial and other participants, who accounted for 51.4% of open interest, held net long positions,. Some traders already indicated there has been some good upside buying in March and April in the $1,300s and even $1,400s.
Overall, NYMEX Gold futures open interest increased 4.8% in November with longs outnumbering the shorts by 71% to 12%. This would have been the highest number of long speculators in the history of the New York gold market since 1975, except for last year when the gold hit $1,030. (Fig. 2)
High number of speculative positions is the driving force of the commodities rally in general, but that also makes gold vulnerable to further corrections as well as high volatility.
Diminishing Physical Demand
Regardless of the gold fever this year, according to the third quarter 2009 Gold Demand Trends Report from the World Gold Council, demand reached 800.3 tons, representing a drop of 34% year-over-year. The report also found that average gold prices for the quarter were 10% higher than in the same quarter last year.
Diminishing physical demand coupled with higher price suggests it has been mostly speculators that are driving up the price. In addition to central banks using gold to rid Dollar dependency, fund managers and speculators also have been driving up the price of gold, partly seeking protection from potential inflation in a low interest rate environment.
Fear Factor
Gold is a commodity that perception plays a more significant role than other market factors. Almost all other commodities such as crude oil, natural gas, copper, prices often fluctuate on indications of inventory, supply, and demand; whereas gold moves primarily with investor’s fear or perception of inflation, U.S. Dollar and the economy.
But just as fast as the market perception can drive prices straight up, it could tank an asset class in a matter of minutes. As discussed here, investment/speculator demand is clearly a major factor in the current gold price rally, a decline could potentially take the gold price down quite significantly on indications such as rising interest rate, or the U. S. Dollar starts to strengthen.
If history is any indication, after gold rose sharply in 1979-1980 to $850, it was followed by a drop to near $500 in less than 2 months. It is conceivable that gold could take a similar loss in a short time.
Short-term Outlook
The general expectation is that the Federal Reserve will not act in favor of the Dollar until later next year. Gold and Dollar correlation is still highly negative, but one should expect a fair amount of volatility given the uncertainty of global economic direction intensified by the Dubai crisis. In that sense, gold could certainly challenge the $1,225 levels again, with $1080, $1050 and $1025 each represents significant support level.
Technically Overbought
Friday’s pullback has moved gold’s MACD to the downside and the 14-day Relative Strength Index (RSI) back in the neutral territory (Fig. 1), which could spur more selling if Dollar retains its strength.
Though gold’s longest rally (nine days) since 1982 ended last Wednesday, the precious metal is racking up a near 35% gain on the year, and moved up almost 17% this month alone, heading for the sharpest annual increase in two decades.
So, at this level, gold has also run into profit-taking, as well as year-end fund managers' portfolio repositioning. Closes below the 20-day moving average crossing would likely confirm that a short-term top has been posted.
Long Term Bullish Intact
Sporadic green shoots of economic data could obscure the harsh reality, and lead to gold weakness in the short term. Nevertheless, there's enough momentum around for gold to make new highs as long as the Dollar stays weak spurring further safe haven demand on concerns about a double dip recession.
Therefore, the potential exists for a large rise in the longer term. However, if this rally extends into uncharted water on momentum without a healthy enough correction, upside targets will be hard to project with the eventual correction equally difficult to predict, just as they say, "The higher you climb, the harder you fall."
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Again, I call your attention to....
Gold is not "going down". Today, one ounce of gold will buy slightly less fiat currency that last Thursday. However, without FAIL, the fiat currency's ability to buy wheat will go down, in the long term, because of the irresistible inability to control the government's (or their proxy's) ability to make it out of thin air.
Quit pricing gold in "dollars". Price EVERYTHING else in GOLD OUNCES (GRAMS, GRAINS, take your pick). Try it for a month. See how your perspective changes. For the better (particularly for you own long-term good).
Gordon Gekko and other bugs have said this. I am going to try it, price everything in gold. I hope it turns my brain inside out. I love it when that happens.
Thanks.
take it out, spread it out on your bed, and look at it for a few minutes,hold it in your hand, you'll feel better. its worth just as much as it was before, its the other stuff, that has no price stability. the dollar has lost 17% of its value this year. if you've made more than 17% you're ahead of the game, and a smart cookie in my book.
My early buy in points, much more like 25%. The last few, a small loss if you count the commission. Thanks for your answer. The poster below is correct, I need to get my head screwed on straight about the long term.
I am not an investor/trader, I have a chunk of money I have decided to gradually put into PMs, though, for me, I did a big buy a couple of weeks ago.
Strong hand is the plan. I'll get there. I'm here to learn.
I think there are a few of us, delacroix, that have a lot in common. We prep, we understand we always should have and that we have wandered away from what is natural. Depending on the government and our distribution systems was never reasonable. Even at its best, the government is very fallible, human. Katrina taught us this, if we did not know it before hand.
Not prepping is another way we have drawn on the metaphorical home ATM. The money you do not put into this kind of insurance (food, garden, tools) goes into TVs and ipuds we don't need. So PMs are a form of prepping that I postponed till a year and a half ago. They are volitile. You can't just wade into this, you have to start swimming or you get swept along by the tide with no power over your destiny.
Gold and silver can serve as a rudder.
I enjoy your posts. Thanks again.
the valuation of gold to silver, historically has been similar to the ratio that they occur in nature. since we've used up so much silver, the ratio has been radically distorted, and yet the price has not adjusted to this reality, YET. gold is just dirty silver, sorry goldbugs, if the original ratios were reversed, the historic values would be reversed. it's all relative. one metal is not better than the other, although, obviously, I prefer silver. it just has the aura of purity. its not crazy to imagine that at some point in the future, silver could be more valuable than gold. OKAY OKAY, thats my favorite daydream, I admit it. (long silver)
Gold is "dirty silver"? LOL! We don't see products on the shelf specifically for cleaning gold, now do we? Yes, I hold silver too, for much the same reasons you do, but please don't say dumb things. Gold is anti-entropy, and silver cannot make that claim.
Can't beat gold foil (no pun intended). Silver foil has to be twice as thick (3 to 4 microns vs 1 to 2 microns for gold). This makes gold a lot more desirable in decoration, obviously. Gold's value for foil is still 5 to 8 times more than silver at these thicknesses.
That's a good point but mankind has a fascination with gold that it does not have with silver, that has to be priced in. Don't get me wrong I'm long silver as well. When it's buy time I try to load up on both and I think I'll do better with silver because I see it as shamefully under priced right now. If you look at the historical prices silver should at least be $50 an ounce. We have have the big silver market shorters to thank for this buying opportunity, and I welcome then to continue shorting into the market so I can buy more!
I'm enough of a silver bug to be giving silver rounds to my 5 and 3 year old nephews for Christmas :)
I'm long more silver than gold but I'm not 100% confident on silver. Gold still has the very high density and softness going for it.
its not just physical gold, the comex has a hard time delivering. local coin shop out of 1oz silver, when he had some they were $5 over spot
I don't do much checking at the local dealers. I do my bulk buys at apmex, seem to get the best prices there even though I have to wait like a month to actually get the physical in my hands.
I know some of the premiums are quite high. I tend to by the bullion bars or coins since I'm interested in it as a metal not for "art". I'm trying to get below $1 over spot, lets me buy more!
As for the Comex, I think we all know they are a fraud. When they changed the rule that allowed them to pay out delivers in shares of an ETF I almost had a meltdown. Nothing like advertising you are a fraudulent bankrupt organization!
I continue to read comments above about how one should "hold" gold, as an "investment". That it is "going up". Or "correcting".
Step back through the looking glass. Gold is money. It has ever been thus. It does not "go up", or "go down". It does not "correct". Fiat currencies "go up" and "go down" in terems of gold. Wheat "goes up" and down in terms of gold. Land does the same. Even silver does the same. But an ounce of gold is, always, an ounce of gold. Period. It has no intrinsic value, except that given to any money, meaning, it is valued unequally (greater by one who accepts it in trade for wheat, less than that amount of wheat by the one who trades the gold for it).
Gold is not an investment. It is money. It is insurance. It is a fundamental form of money (perhaps THE sine qua non). View it in this way, and you view it correctly. Granted, a huge portion of the world, by far the majority, no longer views it this way. In THIS lies the huge opportunity of gold.
See the Buddha (everything is transient), Gary North, Fofoa. Gold is not money; it has served at times 1 or more of the 3 generally accepted functions of money. Right now it is being called back to serve as the wealth reserve function. Unless society breaks down it doesn't appear that it is going to fulfill the accounting function or the medium of exchange function any time soon. Gold's value has severely fluctuated along with everything else as its usefulness has. It just happens to be under priced severely right now. There is nothing stable in this life to measure other things against.
+1, #154908 re gold as wealth reserve.
fofoa.blogspot.com has lots of information on gold as wealth measure. fofoa also posits a median price of $55,000 / toz (2009 non-hyperinflated dollars) on his Freegold Price Probability Distribution Curve, worth checking out.
I agree that fofoa is a great blog and up I keep up on, but that gold projection seems a quite high to me. Don't get me wrong I think golds still a great bargain right now, but I have a hard time predicting it at that real value. I know the market's rigged so have to wait and see where the dust settles.
I'd like to combine your view of gold with Shameful's above:
The one attribute that gold has which makes the bridge between the wealth preservation function and the physical nature of the metal is its property of being a LUXURY.
It ultimately has no utility which makes it nearly perfect to serve both functions! Jewelry is the form chosen by many and it's malleability is a key factor.
It does have utility. It's incorruptible. It wont rust. It wont react to much of anything. It's the ultimate in ANTI reality compared to every other thing on the planet. Shiny cars turn into junkers. Houses turn into ruins, ponzi schems turn into karmic retribution.
Gold is simply perfect for wealth storage. Not kind of perfect. Not perfect under a narow confine of factors. Perfect in all ways for it's role.
My mistake in not reiterating (ad nauseum) the very points that you make. Don't we just get bone weary of replying to the uninformed "...but you can't eat gold..." crowd? Having to start at square one several times a week is wearing me out. I should just let it slide!
I made the mistake of forgetting that I sometimes address the unwashed masses about the attributes of gold as you outlined. Of course gold has utility -- ask any electronics manufacturer. Relay contacts are a prime example. It's just that I get really tired of having to reinvent the golden wheel with every post. Thanks for pointing out what we "gold bugs" take as gospel.
I sometimes wonder about those who join in the fray to rub in the face of a gold bug the fact that gold went "down" $X.XX. Are they being joyous in the seeming diminution of a person's wealth? How sick is that? It's not true Schadenfreude, it's ignorance.
It doesn't matter. Whatever stupid dollars to gold ratio comes up I DON"T CARE. Now when prices for GOODS go up. You'll find me haggling hard when I do sell gold. It brought to me the awareness of the money changer scam and how much they do fuck you over on a so called "spread". That spread is LUDICRUOS now. They are buying at comex and selling at 120 over spot and once it crashes they are going to get spread eagled over a barrel.
I see where you are coming form and on some levels I agree others I must disagree. I agree that gold has held value as money for thousands of years, that is true, and can still be considered money now. However gold can still be produced and made so it is also a commodity. It is used as money because of it's high value, portability, divisibility, and uniformity. Gold does this better then other commodities, after all we don't have barrels of oil sitting in our homes, nor do we carry with us bushels of wheat when we go shopping. Gold is commodity money. After all money only exists to facilitate trade. Now instead of paying gold directly for an item we must change it into a fiat paper currency then make our purchase with that. Gold has become more of a store of value and wealth, a place of security rather than a day to day trading money.
I buy gold and silver when I can because I recognize they have held value as money since the dawn of civilization. However the amount of fiat paper money that gold and silver buys fluctuates as you pointed at. We have to be watchful of these changes, it's simply the nature of the beast.
When I say I'm willing to hold gold forever I mean it. I mean it because I'm loathe to divest myself of an asset that will always hold value unless I have a great need to do so. Gold is great because it is money with no counter party risk, but the days of sound money are in the past. We live in a fiat world and we are forced to make the best of it.
My last purchase of bullion was a couple of Maple Leafs at $1225 per ounce. In fact, the check is still in the mail. Oops.
look at the price quoted over spot right NOW and SHOW ME THE DISCOUNT if you purchased today.
(HINT, HINT, there ain't one!)
This may sound absurdly simplistic, but every time I buy another few Eagles, I never regret exchanging paper dollars for them. I don't even think about the price--I just buy as many as that period's budget allows. It really FEELS like savings, unlike virtually anything else I do with my money. Just wait until the average guy/gal figures this out...
who else do you have in mind as safe haven? if RMB was free floating then perhaps... worst comes to worst the US brings out the guns and puts everyone against the wall to fleece their pockets. thats my definition of a safe heaven.
Can someone pls explain this:
"Overall, NYMEX Gold futures open interest increased 4.8% in November with longs outnumbering the shorts by 71%..."
Trading futures is a zero-sum game. If a trader opens a long position in a synthetic contract there is a seller in the same contract. Or in other words: 1long implies 1short.
As 'long' as the positions are not closed they add (or subtract) up to the open interest, but the number of longs has to equal the number of shorts or am I totally off? So how come the longs outnumber the short?
Thanks
The number of long contracts is always equal to the number of short contracts, sure. But the same number of contracts doesn't necessarily mean same number of buyers and sellers.
If Joe wants to enter 5000 contracts, he could do that by taking asks from Greg (who can only afford 500), Tom (who wants 2000), and Jamal (looking to enter 2500). The trade will create the same number of contracts but will create an imbalance between the number of parties who are long and those who are short.
Brandy.
Makes sense now.
I see what is meant by longs outnumbering shorts now..It's the number of parties.
Thanks again.
Thoughtful post. I may lose short term, but I think I'll hold my physical PMs, like Shameful above, for a long time.
Agreed. Physical bullion is insurance on fiat. Therefore, if purchased, it is buy and hold. Forever, IMO. Not that I own any, or any other hard assets for that matter.
and yet another guy that assumes that the dollar will be the safe haven trade just because it was in 08.......Dollar bulls are not contrarian.
haha, "Gold will drop $500 in a short time" Thats a good one.
Everyone including some big central banks are buying gold on dips and these dips get shorter in duration every time. Gold bug indexes have not even taken out their 08 highs, bubble ? I don't think so.
Actually, to make a similar move from $850 to $500, gold would go from $1250 to $735.
Maybe a bit more on the overshoot. In which case call me Hannover... Hannover Fiste.
Either way, the safe thing to do is average in (in either direction), and increase your percentage as the clock counts down.
My bet is down first, then up, if only because it's *obvious to everyone* that gold just takes a moon shot from here WTF MAN ARE YOU AN IDIOT THE DOLLAR IS SH!T, BRANDY, BEANS, BULLETS, BANDAGES AND BULLION UH-UURRRR! O_o
And also because they might actually try and defend the dollar, squeeze the dollar bears, screw J6P out of some more $$$ before they rotate into the new asset classes, etc.
Good article. I don't know about other gold bugs, but I see gold as a risk free play. What I mean by that is I invest my savable income into it, and plan to hold it for a while. I will only lose money on it if the dollar strengthens and I sell. However as I am employed and will be in the labor market for 30 years barring death so I am pleased when the dollar strengthens. I'm also willing to hold the gold forever. My father still has gold Rubles my grandparents had when they fled the Soviets during WW2. Heard stories as a kid, and them having gold saved their lives.
Personally I want gold to crash down, I want gold at $100 an ounce and to stay there. Shit I want gold back to $20.67 an ounce like it was before FRD robbed America. I want a strong dollar, so I buy gold. If I get a strong dollar I win, I'm still paid in dollars. If the dollar crashes then I have an asset that will have some purchasing power.
Though really gold is going to the moon. Gold crashed in the 80s because of Volcker. Does anyone here think that Bernake will crank interest rates up to 20%? If he does I will probably piss myself in surprise, and then Zimbabwe Ben would owe me a pair of new pants and a new chair.
To Shameful: Well put...People love to cite how gold crashed after hitting $850.00 in the 80's, but they never look into, or at least never state, why. Volcker was an animal. He flipped his middle finger at politicians and gave us super high short term rates. That will never happen again in the U.S. The new central banker mantra is the exact opposite; it is to heave massive amounts of money at everything even resembling a problem, and try to dress it all up as some form of genius. It certainly isn't genius, it's the policy of an undisciplined, spoiled rotten nation that has been hijacked by the entitlement and handout crowd.
Our views of gold and of the dollar are closely aligned. I too am willing to hold it forever, and I too am hoping for it to correct. As I said on another gold post recently, I think its long term trajectory is skyward, but when I open newspapers and see full-page full-color ads shouting at me to buy gold, it smells bubblelicious to me. Here's to a nice correction!
<deleted, wrong respondent>
well put