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Gold Quickly Corrects

Gold Quickly Corrects 

Commentary for Tuesday, February 4, 2020 – Gold closed down an unexpected $26.80 today at $1550.40. Its weakness over the past few days is, most likely a combination of stronger equities and the notion that stocks are the right place to be, given the Fed likes cheap money and perhaps too soon a change in the world view that China’s coronavirus scare might be overblown.

This “back to business” mood on Wall Street is based on the DOW’s recent rebound so higher stocks make sense, but the coronavirus remains a potential big deal in my mind so I’m wondering why the big turnaround in sentiment just over the weekend.   

So, what is gold’s “across the counter view” as we move further into 2020 now that its most recent up trend might be negated? In the broader picture the bulls still hold sway but there are crosscurrents, as we have seen today so a bit of caution is warranted. 

The technical picture in place at the close of business last Friday was positive. As gold pushed to the higher end of the pricing trough established this past month between $1550.00 and $1590.00. But closes yesterday and today were lower so we must rethink this market on the short term. 

Gold closed down $5.70 on Monday and $26.80 today with a $4.00 aftermarket bounce to the upside, so pricing is choppy. And the trading conversation has turned from “maybe higher” to “we are now searching for a short-term bottom”.

The question of whether this down draft will bring in more players buying “cheap” or turn into a profit taking rout is difficult to say. On the short-term gold is in a solid profit position. Will these folks take the money and run or is world angst high enough that traders will buy the dip? 

It will most likely take this week for gold to find its feet. But even from that point it could break in either direction so expect more volatility. It looks like $1550.00 level is the technical Rubicon if you look at the 60-day pricing chart. A break below that number would be troubling. There is some support at $1520.00 and a worst-case scenario looking at $1480.00.

Gold was trading around a 7-year high with a great deal of overhead resistance between $1600.00 and $1800.00 so a round or two of profit taking makes sense. And today’s downdraft will throw some cold water on the bulls but this market has plenty of reasons to trade higher especially if stocks get wonky or the dollar again heads south.  

Just a week ago plenty of Wall Street traders thought that gold’s firm uptrend might confirm a growing suspicion – there was trouble in the paper markets. Today’s action will sweep away this grumbling, but it could easily return – perhaps worse depending on the catastrophe de jour.  

For the optimist there are reasons which support higher gold prices even on the shorter term. The big central bank players remain the same – Russia and China, and both are engaged against US interests so gold bullion will remain on their shopping lists. And I see no reason why central bank buying of gold will slow down in 2020. In fact, it might push higher than an encouraging 2018 and 2019. Central banks aren’t price watchers – they use gold to hedge their crazy bets in the fiat currency markets now white hot across Europe as interest rates go negative.  

On the minus side, consider that Asian gold demand lags with higher pricing. It’s difficult to pin this down because of the underground market but informed guesses claim that as gold approached $1600.00 Asian demand might drop by half or more.

The virus impact cuts both ways – if it gets out of hand the economic damage to China will further dampen regional sales. But the potential for worldwide slowdown might increase safe-haven demand as countries implement quarantines, still there appears to be no panic worldwide.  And the price of crude oil – moving from 63.00 through 50.00 this past month is a negative. And finally, the rebound in the dollar also hurts gold shorter term.

So you can see there are reasons to adopt a bullish or bearish position. The middle of the road US perspective is to remain watchful and see how this latest change in settlement shakes out – good or bad. On the plus side it will take some uncertainty out of the market and make planning easier. I would not read too much into this latest drop – here are no bells or whistles going off but this situation remains fluid.

This from Zaner (Chicago) – “ Despite growing infection and death rates inside China global markets have seemingly begun to discount the long term negative impact of the virus outbreak. However Taiwan is suggesting that China is restricting WHO access to information on the outbreak which Taiwan says has resulted in the World Health Organization spreading “fake news” on the status of the situation. Therefore the potential for the virus to become a sudden and massive flight to quality buying catalyst in gold again should not be discounted. On the other hand, given fresh damage on the charts, ongoing strength in the dollar, definitive global risk on flows into equities and speculation that Indian gold imports in January will fall by 48% over year ago levels provides a pretty bearish cocktail for gold prices to start today. Furthermore the gold market closed lower in Hong Kong and the charts in the April gold contract have suffered fresh damage early on. However gold could garner some very minimal support from news that gold ETF’s raised their holdings for the 9th straight session pushing this year’s net purchases up to 1.29 million ounces and to the highest level in over 12 months. According to one measure global holdings of gold bullion backed ETF’s have now reached 2537.9 tons which surpasses the previous all-time record high holdings achieved back in 2012. Another supportive issue that looks to be discounted by the trade today is a report from the Congo that their gold production last year fell 5.7% on a total of 34,657 kg. While Chinese December gold imports from Hong Kong jumped in December that should be considered “old news”. In fact with a sustained contraction in January and February gold imports highly likely and substantial it could be impossible for Chinese gold imports to remain near 1,000 tons. In fact for most of the last 6 years, Chinese gold demand has held below 1,000 tonnes but a sustained idling of the Chinese economy could bring 2020 imports down to the lowest level since 2012 with a net reduction in the neighborhood of 150 tonnes! Unfortunately for the bull camp, the latest net spec and fund long positioning in gold was relatively close to the all-time record long (within 23,000 contracts) and therefore the market has used a lot of fuel to get to and remain near the $1,600 mark. Since the last positioning report into the high on Monday April gold managed a further rally of $25, thereby increasing the odds that the spec long might have reached a new record. In conclusion, without a major economic meltdown from a noted breakout of the virus from quarantined areas, the bear camp is likely to control on a softening physical demand argument.

The palladium market has once again impressed with a sharp range up extension in what appears to be relief provided by a surge in global equity prices. Apparently the market is nonplussed with the potential lengthening shutdown of the Chinese economy and its potential knock on impact on auto sales and auto catalyst demand for palladium. In fact the market is also unconcerned of recent extractions from palladium ETF holdings with the market instead embracing a forecast from the Amplats CEO of a possible 1 million ounce global supply deficit. On the other hand Norilsk Nickel has blamed the historical surge in prices on financial speculation but at the same time the company indicated miners are struggling to meet surging auto catalyst demand from pollution control efforts inside China. In the end it would appear as if the palladium market is looking beyond the Chinese virus crisis but we would also note that palladium hasn’t exactly shown a tight correlation to the ebb and flow of economic conditions inside China. While we are suspicious it is clear the charts have shifted back up and near term resistance might not be seen until $2335.60. Fortunately for the bull camp, the net spec and fund long positioning in the palladium market has liquidated to the lowest level since September 2018 and that combined with 11 days of chop around $2,250 has probably helped balance the overbought condition in palladium from the early January rally. While we continue to have serious fundamental demand reservations for palladium, at the same time, the market has been made aware of potential special supply flows from fund holdings, comments from the South African President that “time is running out to enact reforms to save the mining sector” rekindles some supply uncertainty. While the markets have not paid too much attention to the disruptions of South African production due to electrical grid shortages, mining companies there have little hope of expanding output under the current situation.

While we can’t discount the potential for a sudden without notice resumption of the upward track in gold from a revival of safe haven buying interest, it now appears that the spread of the virus will have to become very severe with perhaps a breakout beyond initial quarantine areas to overcome fears of lost Chinese physical gold demand. Critical support in April gold today was already violated at $1,575 and that shifts the next support level down to $1,567. The outlook for silver is even more vulnerable than gold as the market hasn’t seen much safe haven interest to begin with and the market continues to face the threat of deflationary selling in the wake of news overnight that some global factory activity might be idled because of supply chain problems caused by China. Initial downside targeting is seen at $17.52 and then again down at $17.28.”

Silver closed down $0.11 at $17.53.

Platinum closed down $4.60 at $963.40 and palladium closed up $102.10 at $2357.50.

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