Gold Continues Weaker and Contrary
Commentary for Monday, Aug 13, 2018 – Gold closed down $19.80 at $1191.30. The bullish contingent is getting thinner and their hope had been that while gold broke down at $1250.00 in early July the price curve flattened out around $1210.00. So perhaps the important $1200.00 support would hold and going into this past weekend there was talk that the crises in Turkey would help support this optimistic view as the lira imploded and safe-haven buying increased. All of this turned into wishful thinking as the price of gold broke down in Hong Kong and London and was confirmed in the domestic market. The world decided that the dollar was a better bet short term – not gold – most likely because the technical picture for gold has been bearish since late March as gold broke down from $1340.00.
And trying to guess a “bottom” here is impossible – but fun. It allows everyone to get into the act – big player, small player or no player.
Some observations – weaker prices seem likely in this “pile on” game because the momentum players can’t believe their luck – there was virtually no bargain hunting even when the informed thought gold was oversold just a few short weeks ago.
That means pay day continues for the “short contingent” encouraged by the absence of the usual Asian contingent, a still ragingly hawkish FOMC and the curios lack of trader concern over President Trump’s continuing attack on lopsided tariff policy.
Today it was the Canadians and the car industry – this is no longer rhetoric – it’s turning ugly. Tariffs cost everyone and push prices higher (inflation). Playing around with this balance in the tariff trade is dangerous – those recently imposed on Turkish steel being a good example.
It’s also no secret that geopolitical events have not moved the gold needle much recently. In a normal market something as big as the Trump Canadian assault would push gold prices up $50.00 and create a lot of buzz. The fact that this did not happen is troubling – the disconnect in the safe haven market is a big deal, like it or not.
There are a few more things which should also be noted. Yes the price of gold is lower but so is the price of silver and in fact it is approaching that “cheap” zone closing today at $14.95. This price area has always created physical action – so where are the physical silver bullion buyers?
I’m one for consistency between gold and silver bullion – the fact that silver buyers are staying home even when prices are this cheap helps develop the bearish scenario in gold.
So that is some of the bad news – but for you bulls this picture finally sets up a reasonable scenario for market stabilization and yes even higher prices as inflation returns. The continued weakness in gold prices pulls gold out of the “summer – ho hum doldrums” and creates interest. And keep in mind that gold is always in demand – strong dollar or not – it is just a matter of price and the lower the price higher the interest level.
For now we have everyone’s attention. This is not simply rhetoric we are looking for gold’s “blow-off” pricing base. Usually difficult to spot yet easily identified in the rear view mirror.
Staying bullish in the face of lower prices takes a special talent and historical insight. If you belong to this group protecting your financial house remains a primary objective and cost averaging is the primary planning tool.
This approach suggests adding to your core holdings in smaller increments if prices continue to move lower. Still think this market has downside? You are probably not alone so just stand aside and watch – sooner or later the notion of “cheap” gold and silver bullion will reenter the speculative dialogue – it always does.
Finally who is left in this fight? The usual’s of course – the Chinese are buying, first half purchases up 7% year on year for jewelry. Indian July imports up 42% year on year and I suspect these numbers will continue higher if gold prices continue lower. Some things never change.
This from Zaneer (Chicago) – “While the situation in Turkey has probably fostered some safe-haven flows toward gold, the market just hasn’t received enough anxiety buying to offset the ongoing currency selling tide. In short continued strength in the Dollar (which posted another higher high and the highest level in over a year early on today) continues to sit right on the backs of gold, silver, platinum, palladium and other commodities. Unfortunately for the bull camp, strength in the dollar does not look to be ending anytime soon and that strength could actually accelerate given growing talk that the situation in Turkey is prompting talk of a currency contagion. In the end, the addition of Turkey to the growing list of geopolitical flashpoints looks to leave gold and silver facing a deflationary commodity selling theme. On the other hand, the net spec and fund long in gold came down by a very significant 23,504 contracts in the latest weekly positioning report and it now stands at a mostly liquidated (in our opinion) net long of only 8,234 contracts! Unfortunately for the bull camp in silver, the net spec and fund long positioning remains vulnerable to further stop loss selling with the net long still sitting roughly 18,000 contracts above the all-time low net long positioning. The Commitments of Traders Futures and Options report as of August 7th for Silver showed Non-Commercial and Non-reportable combined traders held a net long position of 23,385 contracts.
While the PGM complex last week held up fairly well against the strong dollar/falling gold situation, prices this morning have succumbed to the wave of selling in physical commodities. As in many other physical commodity markets today the PGM complex is obviously factoring in the potential of a currency contagion inspired headwind for the global economy and little safe haven interest is surfacing so far. It is clear that the platinum market could be poised to take a downside leadership role as it ranged down sharply this morning and forged a seven day low in the process while palladium remains within the last three days trading range early this morning. In conclusion, with a risk off continuation in global markets this week and further tensions between the US and China, we have to remain bearish toward both platinum and palladium. Fortunately for the bull camp, both platinum and palladium have seen their net spec and fund long positions washed out and that should begin to make it difficult for the bears to press prices. The Commitments of Traders Futures and Options report as of August 7th for Palladium showed Non-Commercial and Non-reportable combined traders held a net long position of only 3,162 contracts. This represents a decrease of 1,569 contracts in the net long position held by these traders. The Commitments of Traders Futures and Options report as of August 7th for Platinum showed Non-Commercial and Non-reportable combined traders held a net “short” position of 619 contracts. This represents an increase of 356 contracts in the net short position held by these traders.”
This from Zandi Shabalala (Reuters) – “Gold hits 17-month low as investors seek refuge in dollar – “Gold prices sank below $1,200 per ounce for the first time in 17 months on Monday, losing out to U.S. Treasuries and a stronger dollar as investors sought refuge from a financial market rout triggered by a crashing Turkish lira.
Investors traditionally use gold as a means of preserving the value of their assets during times of political and economic uncertainty and inflation. But it has this year failed to benefit as investors made a beeline for U.S. Treasuries, seen as the ultimate safe haven, which meant they had to buy dollars.
A higher U.S. currency also makes dollar-denominated assets more expensive for holders of other currencies, which subdues demand – a relationship used by funds to generate buy and sell signals from numerical models.
The lira has tumbled on worries over Turkish President Tayyip Erdogan’s increasing control over the economy and deteriorating relations with the United States.
“Gold is not doing what a lot of investors had hoped it would do,” said Andrew Cole, multi asset manager at Pictet Asset Management, referring to gold losing its safe-haven appeal.
“The longer it doesn’t behave as a risk-off hedge the more likely it is that it won’t.”
Bearish sentiment can be seen in data from U.S. Commodity Futures Trading Commission showing gold speculators added 22,195 contracts to their net short position in the week to Aug. 7, bringing it to 63,282 contracts, the largest since records became publicly available in 2006.
Holdings of the largest gold-backed exchange-traded fund (ETF), New York’s SPDR Gold Trust, at 25.3 million ounces have dropped about 10 percent from their April peak and are at their lowest since Feb 2016.
Meanwhile, platinum prices headed towards the 10-year lows below $800 an ounce seen last month, due to a glut of metal. Platinum is heavily used in catalysts in diesel vehicles that have fallen out of favor since 2015’s Volkswagen emissions-rigging scandal.
The world’s top producer of platinum is South Africa, which saw its rand currency hit a two-year low due to contagion. “Supply is holding up well as a weaker rand provides support to South Africa’s mining industry,” Julius Baer analyst Carsten Menke said in a recent note, adding this was because it would lower rand-based costs when expressed in dollars.”
Platinum closed down $30.20 at $794.60 and palladium closed down $20.20 at $888.90.
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