Gold Sees Mild Bargain Hunting
Commentary for Wednesday, February 26, 2020 – Gold closed down $6.90 today at $1640.00. So, is there enough going on with the precious metals? Near panic to the upside on Monday – our phones were overloaded but eventually folks got the chance to either buy or sell and we appreciate your patience. Then, just as suddenly gold turned choppy suggesting a near term high. The drama further heightened by shaky stocks, the DOW off 2000 points in three days as the world worried about China manufacturing and the corona virus.
What you see here is what I talked about on Friday – the expected volatility of a market driven by fear of the unknown. What I forgot to include was the added turbulence of overcharged prices and the possibility of profit taking when the wind suddenly changes.
Gold closed last Friday (Feb 21st) up $28.00 at $1644.60 with plenty of buzz in the paper and physical market going into the weekend. Monday, we moved higher by another $27.80 at $1672.40 – our phones and parking lot were jammed. Then, just as suddenly, gold sold off, down $25.50 on Tuesday at $1646.90 and everything turned quiet – crickets. Today’s market saw continued weakness with a range between $1625.00 and $1655.00 – but look at the numbers, gold closed significantly off its lows seeing some bargain hunting around ($1640.00) and the store was busy most of the day – again with the public buying and selling.
Because of the fear that the world economy might become unstable over this growing epidemic the FOMC is considering lowering interest rates – a new wildcard in this already volatile financial roller coaster. Their last meeting was late January – they stood pat – then things looked pretty good – not much in the way of clouds, US stocks were strong and so was the dollar. In less than a month the world was seriously worried over this developing health menace.
Will the FOMC lower rates to encourage growth? I think this is likely and this will further stabilize the gold market while it’s finding solid footing. The Fed could lower rates anytime, but it’s likely they will wait until one of the following dates – March 17th and 18th, June 9th and 10th or September the 15th and 16th. All of which are close enough to watch carefully.
What can gold bullion buyers and sellers expect between now and the summer? Because there are powerful dynamics at play expect a rocky ride which will ebb and flow depending on how this fear factor plays out. But I think safe haven demand is always overplayed – keep in mind that if the virus really gets out of hand it might even reduce physical demand.
Gold’s long-term price performance presents a better case. We have been in a rather bullish market since August of 2015 as gold has moved from around $1100.00 through a $1700.00 challenge. Be patient on this latest pullback and don’t be afraid to buy the dips. For years this has been a good diversified strategy. And it seems to me that world problems are not improving which makes a reasonable case for owning physical gold and silver bullion.
This from Zaner (Chicago) – “Global equities overnight were lower again with some declines over 2% but most declines 1.5%. In addition to the stark US warning of a “pandemic” potential, the market is also seeing inverted US yield curves, massive unloading of physical copper supplies (which suggests heavy industry is anticipating dramatic slowing) and German economic data that has fostered talk of recession in Europe. Surprisingly the equity markets are uninterested in the slight improvement in Chinese infection count news/expansion pace mostly because of an additional death in France and similar anecdotal occurrences in a number of other countries. Overnight economic data was sparse with Australian construction work done for the fourth quarter contracting by 3% on expectations of a decline of only 1%. From Europe French consumer confidence came in slightly better than expected but only match the prior month while Italian trade balance figures with non-EU trade partners shifted into a deficit. From Switzerland the CEW survey of expectations for February came in at half the expectations and below the prior month. The North American session will start out with a weekly private survey on mortgage applications. January new home sales are expected to have a moderate uptick from December’s 694,000 annualized rate. Dallas Fed President Kaplan will speak during morning US trading hours while Minneapolis Fed President Kashkari will speak during the afternoon. Earnings announcement will include Lowe’s, TJX and JM Smucker before the Wall Street opening while Booking Holdings, Crown Castle and Marriott report after the close.
In our opinion it was a major failure for the gold market to sell off in the face of another collapse in equities on Tuesday. In fact we see the action again this morning in gold as very damaging to the bull case as it would appear that gold needs a clear sign of a pandemic and clear signs of severe global slowing to ignite a return of aggressive investment buying. The trade could be fearful about the potential for a sustained setback in Chinese physical gold purchases and while we have no credible evidence of this, it is possible that China could be selling gold from its central bank holdings to fund activity to stimulate their economy. Furthermore given significant palladium’s strength on Tuesday, it almost seems like it has become the safe-haven of choice instead of gold. However it should be noted that ETF’s increased their gold holdings for the 25th straight day bringing this year’s net purchases to 2.93 million ounces and that inflow was very significant as it was the biggest inflow since the beginning of the headlines on the virus outbreak. Other stories have pointed out that gold backed ETF’s are seeing an unprecedented inflow which should leave that long-term investment driven bull market hope alive. Not surprisingly May silver performed poorly as well yesterday gapping lower and trading back into the range up day from a week prior as it clearly rejected Monday’s high move. Fortunately for the bull camp May silver appears to have found some support at $18.00 but pushed into the market we see silver behaving as an industrial commodity facing recession unless gold prices began to lead again with very strong gains.
While Palladium might be the new gold, with its combination of safe-haven and tight-supply arguments, we are still fretting over the potential that the Chinese economic shutdown will be pushed out longer than is currently expected (despite improved virus headlines yesterday and today). In short, it would seem folly to think that Chinese auto catalyst demand for palladium will not be injured significantly when the data comes in. Over the near term, using the January/February sideways pattern as a measuring tool, projects the next upside target in April palladium at $2,820. In order to turn the Palladium charts bearish requires a failure back below $2,535.30. Platinum is looking more like its old self (from 2018) as it fell below its February consolidation to its lowest level since December. The nearby contract fell right to the uptrend line drawn off the June and November lows on the weekly chart, and that level ($922.60) could be key support/pivot-point this week, as a breach of that line could turn the long term trend down.
The gold market could be on the cusp of a major failure if it cannot gain in the face of collapsing equities and record-low interest rates. Given the extreme volatility, traders should stick to using options in combination with futures positions. While action this week has shifted away from the massive bullishness on Monday, pressing the short side of gold is not advised as being less bullish is not cause to get “short” a market that has shown significant strength since December. In fact the significant declines in US interest rates could result in negative rates and or a chain reaction of easing by a long list of global central banks and that could take the focus of gold off physical demand destruction and catapult speculative buying from classic financial themes. We look for a major trend to be set in gold before the end of this week. Possible support levels are the 50% and 61.8% retracements of the February 4-24 rally at $1,621.40.
Silver closed down $0.35 at $17.83.
Platinum closed down $17.50 at $912.30 and palladium closed up $45.00 at $2714.70.
This is our usual ETF information – Gold Exchange Traded Funds: Total as of (2/19/2020) was 79,545,377. That number this week (2/26/2020) was 80,280,811 ounces so we gained 735,434 ounces of gold. The all-time record high for all gold ETF’s was 85,108,867 ounces in 2013. The record high for Gold ETF’s in 2020 was 80,280,811 and the record low for 2020 was 76,763,936.
Silver Exchange Traded Funds: Total as of (2/19/2020) was 696,359,080. That number this week (2/26/2020)was 697,612,253 ounces so we gained 1,253,173 ounces of silver.
Platinum Exchange Traded Funds: Total as of (2/19/2020) was 3,143,833. That number this week (2/26/2020) was 3,138,481 ounces so we dropped 5,352 ounces of platinum.
Palladium Exchange Traded Funds: Total as of (2/19/2020) was 604,018. That number this week (2/26/2020) was 590,615 ounces so we dropped 13,403 ounces of palladium.
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