Gold Fear Index Cools
Commentary for Friday, January 31, 2020 – Gold closed down $.060 at $1582.90. I think too much emphasis is being put on gold’s safe haven status relative to the coronavirus outbreak in China even though this tragedy has surpassed the SARS epidemic of 2003. The problem here however is that on the short term it is difficult to say because this type of human tragedy is impossible to measure.
Worse it can get out of hand exponentially because of modern transportation – in a matter of days this virus can be carried worldwide while concerned countries are still just considering quarantine. Still, today’s halt of airline service to China by Delta and American highlights this evolving problem as the virus creates more confusion.
Gold’s initial reaction was to spike higher in early trading, but it quickly lost altitude and closed virtually unchanged. The point here is that when real trouble knocks on the door gold becomes a legitimate warning bell as to the degree of danger. That is why sound financial planning should include some bullion before the trouble begins. The opportunity to take a physical position might be limited, perhaps even impossible once the problem is widely known and understood.
Subsequent weakness in the dollar also encouraged the price of gold today. Since Wednesday the Dollar Index has moved from 98.2 to 97.5 so lower and enough lower to support higher gold prices and reflect the tension created by just the possibility of a pandemic.
Now add to this mess the fact that gold has an established bullish leg up – one which began last November ($1450.00) has pushed above the important $1550.00 level and is now looking at $1600.00. In my mind, if it were not for the serious China problem these prices would be considered “too much too soon” even with the continued dovish FOMC inclination.
Whether or not this turns out to be an overreaction remains to be seen. But there still remains an absence of gold high rollers in the US market. I would have expected more “across the counter” sales of gold bullion given gold’s bright technical picture – but this has not been the case.
This might suggest that while the US market remains interested in gold and silver bullion – recent higher prices have not convinced those still on the sidelines to join the party.
If you look at the larger 10-year gold picture you must respect the notion that it has pushed above stiff overhead resistance at $1400.00 which has been in place for 7 years. Perhaps a wake-up call or hint that inflation is not as dead as most suppose.
In any event the next technical hurdle goes back to that “old highs” channel – established between 2011 and 2013 between $1600.00 and $1900.00. This too is formidable but will easily melt if inflation returns (always an FOMC concern if you read between the lines) or something like the coronavirus turns into a dreaded Black Swan.
The very least you can take away from this human misery is that gold will remain more than “interesting” in 2020 – challenging $1600.00 or $1700.00. This pot has not begun to boil as yet but it is heating up and will be watched carefully.
The fact that the FOMC “must” keep the “cheap money” floodgates wide open or risk significant damage to Wall Street and Trump’s second term is gaining more attention. This will continue to support the price of gold and encourage the return of inflation.
If you are on the fence there is time to develop a longer-term plan, but this period of grace will not last near as long as most believe. Indeed, we have already begun to see the consequences of fiscal abuse as world central banks hedge their bets by increasing their core gold holdings.
It’s amazing how easily most forget that history repeats itself. So, acting before the crowd shows up makes perfect sense. Or more succinctly, if you are one of the many which lamented missing the last “gold rush” – make sure you don’t miss the next one. The old adage “don’t wait to buy gold, buy gold and wait” comes to mind. Blessings and prayers for our world neighbors.
This from Zaner (Chicago) – “Global equity markets overnight were weaker with the exceptions the Russian, Australian and Tokyo indexes. News from the virus front is not overly concerning with new cases showing up at a very slow rate outside of China and news from inside China on the virus somewhat limited in its flow. The World Health Organization did declare a global health emergency but that distinction posted yesterday afternoon did not apply noted pressure to global equities. Overnight economic developments included very soft Japanese retail trade data for December, significant weakness in large Japanese retailers sales and a very surprising report from China indicating nonmanufacturing PMI for January came in stronger-than-expected and higher than the prior month. It should also be noted that Chinese NBS manufacturing PMI for January matched expectations but ticked lower from the prior reading. On one hand we are surprised that the Chinese government release data given the holiday and the chaos inside the country but it might have been tactical to release data before the midmonth debacle hit their economy. In other economic news Japan saw some rather volatile readings from construction orders which jumped by 21% over year ago levels in December while housing starts in December fell by a sharp 7.9%. From Europe GDP for France declined 0.1% (worse than expected), German retail sales for December fell by 3.3%, Swiss real retail sales in December fell by 0.1%, while French consumer spending for December also fell by more than expected. It should also be noted that French consumer prices came in softer than expected with the only bright spot in the overnight European economic news flow seen from Spain and Italy which produced slightly upbeat GDP readings for the 4th quarter. From the UK which is gearing up for the mechanical exit the market was presented with net lending to individuals which came in stronger than last month, a bigger than expected rise in consumer credit and a significant jump in mortgage approvals for December. The North American session will start out with December personal income which is expected to have a modest downtick from November’s 0.5% reading while December personal spending is forecast to have a minimal downtick from November’s 0.4% reading. The fourth quarter employment cost index is expected to hold steady at 0.7%. November Canadian GDP is forecast to have a minimal uptick from October’s -0.1% reading. The January Chicago PMI is expected to have a modest downtick from December’s 48.9 reading. A private survey of January consumer sentiment is forecast to hold steady with the previous 99.1 reading. Earnings announcement will include Exxon Mobil, Chevron, Honeywell, Caterpillar, Colgate-Palmolive, Illinois Tool Works, Phillips 66 and Aon before the Wall Street opening.
While the gold market appears to be starting off on a softer footing we would suspect it will regain its footing at some point during the trade today. In fact today might be a day where prices pay little if any attention to classic supply and demand fundamentals and instead look ahead to the potential virus/economic developments inside China from over the weekend. However recent chart action has been supportive and the market has shown signs of shaking off morning weakness and clawing higher in the afternoon trades. In a sign of rising speculative bullish interest gold ETF’s saw their holdings increase for the 7th straight day yesterday bringing this year’s net purchases up to 1.19 million ounces. It should be noted that total gold holdings by ETF’s are now at the highest levels in 12 months with gold holdings last year thought to be poised to make more new record high holdings this year. As for the virus situation cases continue to show up sporadically around the globe and the death toll has climbed above 200 but the markets are not concerned about the global health threat. In fact we would suggest the containment efforts outside of China are seemingly slowing the spread to a very manageable level and the incubation/transmission window could be mostly closed one week from today. However as we will continue to suggest the major uncertainty thrown off from the virus is what is taking place in the Chinese economy with images of major thoroughfares, train stations public spaces like shopping centers and parks completely empty. While China released a surprisingly upbeat nonmanufacturing PMI reading for January, economists are quickly discounting that reading as a “pre-virus” reading. In short expect choppy two-sided trade with the likelihood of a grind higher and potentially a re-test of $1594.70 with even higher prices possible if equities show increased concern and the S&P falls below 3260.00. The biggest threat to the bull camp would be any fresh soothing commentary from World Health Organization officials regarding progress toward global containment or maybe even the slowing of the spread of the virus inside China but that is unlikely considering that the WHO provided a statement yesterday.
With a fresh higher high/4 day high in palladium to start today, the bull camp probably congratulates itself on weathering this week’s major potential demand destruction threat from China. However we would also note that equities have not shown significant downward action yet with global investors still confident in global containment and as of yet they are not too concerned about the dramatic vulnerability of the Chinese economy because of the nearly complete economic shutdown. In retrospect, the palladium market has absorbed news of a fresh source of supply (96,000 ounces from Russia’s Norilsk nickel) impressively but with that company overnight indicating its palladium and platinum output in 2019 gained 7% and 8%, the company would appear to have more supply than the markets might have been expecting. In our opinion if the company decided to liquidate some of its fund holdings, it has more supply in reserve and could be motivated by more attractive prices to liquidate even more supply. While it is difficult to know for sure if, when and how much palladium the Russian mining company plans to move on to the market, the initial report of 96,000 ounces is material when combined with surging demand destruction fears. From our analysis, it appeared that some mining concerns began to build their funds of palladium in 2015 and therefore the holdings are likely to be much more significant than the 96,000 ounces in play this week. In early 2016, palladium prices bottomed out below $500 which means some of those purchases reaped 4 or 5 times their investment! On the other hand we have to admire the company’s resolve to hold in the face of a nearly doubling of prices since the middle of last year. While the relationship might be suspect between palladium and platinum prices those looking to remain long palladium might consider a cross hedge with the purchase of puts in platinum. In conclusion the initial bias is up in palladium but volume and open interest has fallen off dramatically since the highs and the $2300 level should offer some measure of resistance this morning with the afternoon direction of equities a potentially important catalyst for the PGM markets.
As indicated already we think the path of least resistance is pointing upward in gold but the bull camp has to be somewhat concerned that the rapid expansion of the infection tally inside China (nearing 10,000) has not undermined global sentiment more significantly. In fact following a declaration of a global emergency from the WHO yesterday equities held and gold failed to sustain modest gains. Given the “weekend impact” we suggest there will be an inflow of speculative money later today expecting something notable to surface into the opening on Monday. In short there should be an attempt to retest 3 week highs in April gold at $1594.70. On the other hand, the inability to hold above support at $1576 could be problematic as volume and open interest has declined notably over the last 5 days in a sign that overall interest toward gold is declining in the face of a major health/economic incident.”
Silver closed up $0.02 at $17.97.
Platinum closed down $17.90 at $959.20 and palladium closed up $9.00 at $2246.60.
Our Patented Employee Survey – Gold’s Direction Next Week?
Of course, it’s not really patented but we do have some fun along the way. This is what the GoldDealer.com employees think: 9 believe gold will be higher next week and none think gold will be lower and 1 thinks it will be unchanged.
Our Patented Customer Survey – Gold’s Direction Next Week?
Like the employees our customers were given three choices – up – down – unchanged. We limited the survey to a random sampling of 100 transactions – unscientific but worth considering because these people took action: 58 people thought the price of gold would increase next week 20 believe the price of gold will decrease next week and 22 think gold will remain the same.
Precious Metal Closes & Dollar Strength – Jan 27 – Jan 31
This is our usual ETF information – Gold Exchange Traded Funds: Total as of (1/22/2020) was 77,448,755. That number this week (1/29/2020) was 78,011,036 ounces so we gained 562,281 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 78,011,036 and the record low for 2020 was 76,763,936.
Silver Exchange Traded Funds: Total as of (1/22/2020) was 683,385,695. That number this week (1/29/2020) was 689,977,645 ounces so we gained 3,145,506 ounces of silver.
Platinum Exchange Traded Funds: Total as of (1/22/2020) was 3,131,305. That number this week (1/29/2020) was 3,145,506 ounces so we gained 14,201 ounces of platinum.
Palladium Exchange Traded Funds: Total as of (1/22/2020) was 668,542. That number this week (1/29/2020) was 659,834 ounces so we dropped 8,708 ounces of palladium.
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