GOLD: Balancing on a Knife Edge

It’s time to fess up:  Over the past week or two, I’ve been reluctant to say much about gold’s short-term price prospects.  Now, it seems to me that prices are set up for a big move . . . but in what direction?  That is the question.

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India: Propitious Times for Gold Ahead

We are soon entering a propitious period for gold in the annual calendar.  Historically, prices have moved higher as gold traders and buyers returned from their summer holidays.

In reality it has been the approaching Indian holiday, wedding, and agricultural harvest seasons that have boosted gold demand and supported higher prices in world markets as summer draws to a close.

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GOLD Explained: A Brief Note on Recent Market Action

Gold’s failure to sustain its recent price gains, gains achieved over the past few weeks, triggered a wave of computer-generated technical selling on Monday morning that, in minutes, knocked gold prices back down to psychologically important technical support levels just above $1300 an ounce.

I do not subscribe to any of the various conspiracy theories to explain gold’s latest tumble, even though the recent news and gold-market fundamentals suggest the yellow metal should be moving higher.

(For more on this bullish view, see “Gold: Now is the Time,” NicholsOnGold, July 2, 2014.)

The idea that the gold market is somehow rigged by the Federal Reserve, other major central banks, and/or the big bullion trading firms in an attempt to discredit the yellow metal and suppress its price strikes me as simply ludicrous.

However, I do believe that any of the major gold-trading firms or large-scale institutional speculators — acting independently — has the power to knock gold one way or the other by $25 or even $50 an ounce or more when the internal technical triggers are properly aligned.

Moreover, it would not surprise me if two or more of these big gold-market speculators, though acting independently, appear to be in cahoots as their computerized robotic trading programs react simultaneously to the same gold-related information, financial-market news, and internal market action.

(For more on this theme, see “Dark Pools, Program Trading, and the Price of Gold,” NicholsOnGold, April 2, 2014.)

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Gold: Now is the Time

I’m frequently asked, “Is now a good time to own gold?”  I’m no “gold bug” but I am super-bullish on gold’s long-term prospects.  I believe now is an excellent time to invest in gold . . . and I advocate investors hold five-to-ten percent (and for some, sometimes more) of their investment assets in physical gold.

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India Spicing Up the Gold Market

Readers of NicholsOnGold know we have long been of the view that robust Indian gold consumption in the years ahead would be an important pillar supporting significantly higher prices in the world marketplace.

But since mid-2013, the Indian government’s anti-gold policies have put this scenario on a temporary hold as buyers within India have been reluctant to incur the high cost of the government’s punitive anti-gold policies.

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Back from Vacation: The More Things Change . . .

I’m just back from a two-week vacation from the gold market.  In the interim much has changed – especially the metal’s price, which has fallen some $65 to $75 an ounce.  That’s more than five percent – but no reason to despair!

While the price has weakened, the metal’s fundamentals, fundamentals we have discussed in past reports, have continued to improve, so much so that some bounce-back now seems likely – with bigger gains due later this year.

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Gold: On the Verge . . . or Nearing a Cliff

Gold has had difficulty sustaining recent rallies and remains trapped in a $50 trading range.  At the lower end, incremental physical demand has so far kept the price above its recent floor around $1175 an ounce . . . but selling by funds and other institutional traders of gold ETFs and “paper” proxies has limited attempts to rally.

Whatever improvement in sentiment and upward momentum that may have resulted from this year’s encouraging first-quarter start has now dissipated.  The longer gold lingers in its current range the more difficult it will be for the yellow metal to break out on the upside and reestablish its long-term bullish trend . . . and the more likely it will be for gold to sink before it learns to swim again.

For now, the gold market’s key drivers are, first and foremost, the flow of U.S. economic indicators as they affect expectations about prospective Federal Reserve monetary policy . . . and, second, of a more temporary nature, the ebb and flow of geopolitical anxieties arising from events in and around Ukraine. 

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Gold Insights on Recent Price Action

The past few weeks have been trying times for gold investors.  In mid-March, just when it looked like gold prices were set to break out into higher territory, the market shifted into reverse, leaving many investors and analysts wondering what was going on.

To put some numbers on it, at its recent low point, gold was off some eight percent from its mid-March six-month high – and is continues bouncing around within the technically significant $1265 to $1305 range.  A breakout in either direction could set the market’s tone for the weeks ahead.

That said, we’ve never put much faith in short-term forecasts, preferring instead to focus our attention on the long term where gold’s own supply/demand fundamentals and global macroeconomic trends rule the market’s price-setting function.  Indeed, this explains our multi-year bullishness despite gold’s failure to satisfy our immediate desires.

However, we can look at the market retrospectively to for insight into gold’s recently disappointing performance. 

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Dark Pools, Program Trading and the Price of Gold

(This report first published and posted on May 15, 2013 — but is even more timely today!)  

Day after day, gold trading has been, and continues to be, dominated by institutional trading in the “dark pools” where over-the-counter dealer and interbank activity goes largely unseen.

Don’t under-estimate the influence of trading in the dark pools where “invisible” institutional trading can – in a flash – knock gold to the mat, leaving most gold-market participants and observers wondering what happened.

Indeed, much of this activity in the interbank and dealer market goes unreported – but buy-sell transactions, high-frequency, and other program trading in these dark pools, often at crucial chart points, can be overwhelming — sometimes triggering bigger waves of buying or selling –with big profits for those institutional trading desks that know how to play the game.

The gold market is especially vulnerable to trading in the dark pools because it offers a relatively small playing field compared to equity, bond, and currency markets – and the flow of funds, in or out, can have a larger price effect.

With gold markets sometimes overwhelmed by trading in these dark pools of low-cost liquidity (thanks to the Fed’s near-zero interest rate policies) the near-term outlook for gold remains highly uncertain.

That said, the long-term fundamentals and physical-market developments are more bullish than ever – or at least more bullish than we’ve seen in many years – and sooner or later these must rule the day.

Gold continues to confound as technical and computer-driven program trading triggers selling on U.S. derivative markets – all despite favorable physical-market fundamentals and what should be seen as economic and geopolitical developments favorable to gold.

The underlying gold-market theme in recent days, weeks, and months has been, and continues to be, selling of paper gold derivatives on futures exchanges and, importantly, over-the-counter dealer and interbank markets (the so-called dark pools of liquidity).

Much of this undercover paper activity is made possible by the Fed’s near-zero interest rate policy. The dealers and traders that comprise these dark pools are profitable, at least in part, because their cost of money is so low and the availability of liquidity is seemingly unlimited.

Indeed, this machine-driven trading activity — and the abandonment of long positions seeking higher yields — explains the paradoxical failure of gold to move higher . . . as one would expect during a period of super-accommodative, highly reflationary, monetary policies now being pursued by the Fed and other major central banks around the world.

If this were a sic-fi movie it might be titled “Invasion of the Machines.” And, just like the movies, the good guys — those with patience who have trusted the long side — will win in the end.