Archive for Exchange-Traded Funds
(Posted: June 4, 2013)
For now, gold remains captive to the flow of U.S. and global economic indicators and prospects . . . especially those that may influence Federal Reserve monetary policy.
With the U.S. economy far from a satisfactory and self-sustaining recovery, the news is likely to become increasingly positive for gold — with diminishing expectations of imminent “tapering” (that is scaling back the Fed’s monthly bond-buying program) eventually replaced with talk of additional monetary stimulus of one sort or another.
Home in the Range
At the moment, however, gold appears range-bound between $1370 and $1420 — bouncing around within this range on the release of every relevant economic indicator and every comment on prospective monetary policy from one or another Federal Reserve official.
Paradoxically, a significant break out of this trading range — either up or down — is likely to boost buying interest. On the upside, if the price moves much above $1420, the momentum and other program traders will begin migrating back to the bullish camp. On the downside, if prices move much beneath $1370 (and even more so near $1320 (if we ever see gold prices back to this bargain price level), physical demand from all corners of the globe will underpin the market and lead to a swift increase in buying.
Paper vs Physical
It is important to distinguish between the paper markets, which are reactive to the daily news flow and where most of the short-term speculative trading is occurring . . . and the physical market, which has been — and will continue to be — a giant sponge soaking up every ounce of gold available at prevailing prices and premiums.
Much of the “paper trading” is among a small number of dealers and institutional speculators — not only in the transparent futures markets, but also (and sometimes more so!) in the largely opaque and unregulated inter-dealer over-the-counter markets, also known as the “dark pools” of liquidity where high-volume trading goes on virtually unnoticed. For more, see my May 15th post “Dark Pools, Program Trading, and the Decline of Gold.”
And, I would include in this group of short-term paper traders the hedge funds that for several months now have been lightening their gold holdings (mostly in the form of gold ETFs) in order to participate in, and benefit from, the upward march in world equity markets.
I expect when markets turn — that is when Wall Street turns down and gold prices begin convincingly moving higher — we will see a reversal with some of these funds rushing back to gold, contributing to a surprising recovery in the metal’s price.
Gold is Forever
Importantly — and in contrast to the paper markets where trading is very short-term oriented — the physical markets have an increasingly long-term orientation. The Chinese (both on the Mainland and across Greater China) are accumulating gold, not to resell for a quick profit as prices recover, but with the intention of holding forever as an inheritance to be passed on to future generations.
Many retail buyers of bullion coins and small bars in Western markets are also long-term holders with little intention of taking profits anytime soon. Â These buyers are motivated more by fear than by greed — Fear of financial market breakdown, fear of monetary debasement and future inflation, fear of an uncertain economy, fear of government intervention in personal affairs, and so on.
Indian demand is less certain and typically more price sensitive — with sellers, often led by housewives selling a bangle or two, emerging on rupee-denominated gold-price rallies. The country’s central bank, the Reserve Bank of India, and the Finance Ministry raised import duties earlier this year and have taken other regulatory actions to discourage gold imports, which after oil are the country’s second biggest commodity import and a major contributor to India’s gaping current account deficit. These efforts are increasing the domestic price premium over the world price, assuring a rise in illegal imports, and ending the sale of old scrap gold to world markets. In any event, Indian gold buyers will gradually adjust to the higher domestic price and demand will return to past levels dependent on local economic conditions, especially in the farming sector, which is traditionally an important buyer of gold.
Don’t underestimate the bullish influence of official-sector demand on the future price of gold. Indeed, purchases by a number of central banks, especially the People’s Bank of China and the Bank of Russia (which are by far the two biggest buyers month after month, year after year) are unlikely to be sold within our lifetimes. These official purchases are intended not only as a vehicle for reserve diversification and reducing reliance on the dollar, the euro, and other old-world currencies — but are part of these two countries’ strategic goal of raising their respective currencies’ international reserve status and gradually reshaping global monetary affairs.
The bottom line is that when gold turns higher there will be insufficient liquidity and a shortage of available supplies — except at much higher prices . . . and many will be surprised by the magnitude and swiftness of gold’s next big leg up.
(Posted: May 29, 2013)
Sentiment in the gold market - especially among the hedge funds and institutional speculators - is already EXTREMELY NEGATIVE.Â Â Market psychology can’t get much worse.Â Even the gold bugs are dumbfounded.Â But, contrarians say this unbalanced situation could be signaling an approaching upturn in prices.
The downward pressure on prices emanates from two distinct sources of selling:Â First, trading by the gold dealing firms and institutional speculators in the regulated futures markets and the unregulated over-the-counter markets often guided by complex computer algorithms.Â These are the “dark pools” where trading goes unnoticed but the volumes of paper gold bought and sold may be huge. Â For more, see my May 15 post: “Dark Pools, Program Trading and the Decline of Gold.”
Second, a more recent phenomenon of great significance, has been a switch from gold (mostly in the form of gold exchange-traded funds) to equities by hedge funds and other institutional investors seeking to benefit from the raging Wall Street bull market.
With all the selling that has knocked gold to the mats over and over again in recent months - preventing price advances above $1400 from sticking - it’s just possible that there’s not much left for gold bears to dump. ?It may be that those who want to reallocate investment assets from gold to equities have already done so. ??This alone could be enough to turn the market around, if not in the next few weeks, then soon thereafter.
In truth, the recent spate of selling activity has come from in a very small number of hedge funds and institutional speculators.Â As noted above and thoroughly discussed in the financial press, the funds have rushed to equities, attracted by the prospect of continuing appreciation on Wall Street.
It certainly has not been a global flight from gold:Â Despite some softness in the past few days, physical markets remain overstretched, and bullion-bar premiums in Asian markets remain large, indicating a continuing shortage of good-delivery metal.
A small number of would-be buyers believe that patience may be a virtue.Â They’d rather wait than fight the hedge funds and other large-scale players who have recently made it difficult for gold to move higher.
This does NOT mean physical buyers have run out of steam — nor that they won’t eventually assert themselves — but it suggests some prospective buyers are waiting for a deeper sell-off and still more attractive acquisition prices near the lows plumbed earlier this year.
But, buyers waiting for much lower prices may be disappointed.
Meanwhile, a number of emerging economy central banks have used the last few months of price weakness to stock up.Â Across the board, these central banks are underweighted in gold and over-weighted in dollars, euros, yen and other depreciating paper currencies.
This week’s release of IMF data on central bank purchases showed Russia as April’s top gold buyer once again. The country’s leadership sees central bank gold accumulation as a strategic policy to diminish the U.S. dollar’s singular leadership in the global monetary system.Â Importantly, Russia’s gold purchases will continue regardless of market conditions.
What the IMF data did not reveal was the People’s Bank of China’s continuing purchases - probably running 10-to-20 tons per month - which, like Russia’s purchases, are geopolitically motivated and likely to continue for years to come.
Ironically, these two countries - America’s cold-war adversaries - are setting an example for private investors, particularly those underweighted in gold.
We recommend that most investors hold at least five-to-ten percent in physical gold as a long-term insurance policy against risk.Â Some may wish to hold more.Â Regardless, with equities up sharply in value and gold off considerably from its September 2011 all-time high, many investors will find they are underweighted - and in need of readjustment to bring their gold holdings back to their desired allocation.
(Posted: May 15, 2013)
Gold prices have caved today under pressure from dollar appreciation and wave of technical selling at key chart points - selling aggravated by continued flow of funds from gold (and commodity indexes) to equities.
Just as the rising price trend in the equity indexes has attracting more buying, the renewed downward momentum in gold is engendering short sales and more outflows from gold ETFs.
Importantly, program trading and other technical strategies have added to the downward pressure on gold - and continue to do so. Â (See my previous commentary posted earlier today for more on program trading and the dark pools.)
Institutional selling of the commodity indexes (some of which include gold) and by commodity funds is also contributing to gold-price weakness.
But pricing across asset markets continues to be inconsistent and illogical.Â Rising equity prices are usually an indicator of economic vigor, right?Â And, falling commodity prices are usually an indicator of flagging demand and a weak economy, right?Â So, what’s going on here?
Few would deny that the global economy is faltering:Â Europe is sinking further into the abyss; America has yet to suffer the most serious consequences of sequestration and fiscal drag arising from Federal spending cuts and January’s payroll tax hike; and the major emerging economies are slowing as demand for their exports continue to erode.
So you tell me, which market — equities or commodities — is most accurately reflecting economic realities?
The key here is that the trading models and strategies that are driving gold lower and equities higher do not rely of real-world economics . . . but take their cues from internal market triggers where time horizons for successful trading may be measured in seconds.
As we have discussed long before most other gold analysts and commenters have even noticed, the battle for gold has been between physical markets and paper markets.Â And, for the last year and a half, it looks like the paper markets have won out.
This despite the fact that the physical markets have been super strong with intense demand for bullion bars and retail investment products . . . and from a number of central banks who are using episodes of price weakness to augment their official gold holdings.
Many of these buyers - both private sector and official - have a long-term perspective and allegiance to the metal, often accumulating gold with the hope and intention of passing on their holdings to future generations.
In contrast, traders and investors in the paper markets have much different motivations and often very short-term perspectives.Â To an important extent, they are trading for short-term gains and will take positions in one asset market or another based on their perception of relative return.
Unlike many physical buyers, the paper traders rarely have any long-term allegiance to the metal.Â They may be in or out, short or long, or arbitraging tiny price inconsistencies.Â Some of the biggest institutional players trade on both the regulated commodities futures exchanges (like the CME COMEX Division), regulated ETF markets (like the NYSE), and the largely unregulated dealer and inter-bank market where volumes can be huge but trades and outstanding positions may be invisible.
The abandonment of long gold-ETF positions built up over the past half-decade by hedge funds and other institutional investors and the short-term trading activities of a relatively small number of institutional speculators have together been largely responsible for gold’s steep price decline in recent months.
What could turn the price upward again?
It may be as simple as the depletion of long positions in paper markets — with selling by “weak hands” having run its course.
Or, it could be a revival of “safe-haven” demand — driven by renewed sovereign risk and fears of debt default by one -(or more) of the euro-zone nations . . . or even renewed talk of debt limits and default by the United States, unable to get its fiscal house in order.
Or, perhaps, it will take a rout on Wall Street — as equity investors realize the miss-match between equity prices and the state of the economy.
Or, maybe, it will take a step up in quantitative easing — in reaction to a string of negative economic indicators and deflationary fears — with still more bond purchases by the Federal Reserve.
Or,Â maybe a black swan, perhaps some unanticipated geo-political development, or some other event that strikes from out of the blue.
What do you think?
(Posted: April 4, 2013)
Gold has certainly taken a beating in recent days, giving up all of the gains attained during the Cyprus crisis — and down nearly 20 percent from its all-time high back in September 2011.
And, now having suffered two consecutive quarterly declines for the first time since early 2001, some analysts and investors are abandoning the yellow metal, proclaiming that gold’s decade-long bull market has run its course.
I’m no “gold bug” â€“ but I couldn’t disagree more . . . based on solid reasoning and objective analysis.
Short-Term Shock Therapy
What the gold market needs to move higher is a good dose of Zoloft or perhaps, even more extreme, a high-voltage jolt of electroshock therapy to jog the metalâ€™s price out of its current state of depression.
Perhaps this will come from across the Atlantic â€“ where recessions are worsening, social discord is on the rise, and the euro appears vulnerable to further capital flight.
Maybe, unpredictably, it will come from some geopolitical upset â€“ on the Korean Peninsula or in the Middle East.
Or, possibly, it will come from Washingtonâ€™s inability to deal with its mountain of debt, lack of fiscal restraint, or the insidious and still barely apparent effects of sequestration on economic activity and employment.
More likely, the jolt needed to set gold firmly on its long-term upward trajectory will come from a renewed recognition by the Fed and the financial markets that still more monetary accommodation is needed to prevent the economy from stalling.Â Thatâ€™s what fueled the September 2011 run to record high gold prices . . . and this may be what does it again.
For now, goldâ€™s short-term prospects remain uncertain. We could very easily see a further retreat, possibly to $1520 or even lower . . . but much of the recent selling is also price-sensitive — coming from gold ETFs and “paper gold” products in futures and other derivative markets — and will diminish quickly if prices dip much lower and traders begin to bet on the long side of the market.
Meanwhile, physical demand â€“ from emerging-economy central banks and the private sectors in China and other Asian markets â€“ remains strong and can be expected to strengthen further if prices continue their retreat.Â As in the past, price-elastic physical demand will provide some downside insurance.
Gold’s short-term direction may depend largely upon the flow of outside news and black swan events, those surprises that seem to come out of the blue, rather than the internal fundamentals of the gold market. Â Indeed, there is no telling whether the next move will be up or down.
What I can say, however, is that the long-term bull market remains intact . . . and there will be sizable rewards for those with patience who stay the course.
I can also tell you that central bank reserve managers are not worried their gold assets will depreciate.Â Indeed, they continue to buy more. Â But many are worried about the prospective depreciation in the value of their U.S. dollar holdings and view gold as a legitimate monetary asset, diversifier, and insurance policy.
So what are the factors and forces likely to push gold prices higher?
- First, the U.S. economy is doing worse than generally perceived — and thanks to recession in Europe, sequestration in America, and an enfeebled consumer on both sides of the Atlantic we are heading into economic doldrums or worse, a full-blown recession later this year. Anyone who thinks the U.S. economy is really in a sustainable recovery is just kidding themselves. ??As a consequence, the Fed will have no choice but to speed up its money-printing machine, even as inflation expectations begin rising.Â Remember it was the successive waves of quantitative easing that juiced gold up to its record high of $1,924 in September 2011.Â The adoption of still-more aggressive monetary easing by the Fed later this year or in 2014 will again set gold on fire. Other major central banks will be under pressure to reflate along with the U.S. — and some, like the Bank of Japan — are already greasing their printing presses.
- Second, the European economy — and the euro-zone monetary system — is under tremendous strain with the stronger economies increasingly unwilling to continue bailing out the weaker economies for whom there is no room for more forced austerity. Cyprus was just a warm-up of what’s to come. And, next time, it will be a big economy like Spain or Italy that goes belly up, triggering flight from the euro into both the U.S. dollar and gold.
- Third, whatever may come, China’s appetite for gold will remain firm as the domestic market continues to mature. The introduction of new products and channels of distribution (like ETFs) will increase the efficiency of the domestic gold market . . . and increase private household demand. In fact, valuing private-sector gold holdings as a national resource, the Chinese government will continue to support and encourage private gold ownership — and the associated demand will continue to support the price of gold in the world market.
- Fourth, emerging-economy central banks will continue to accumulate gold, especially at times of price weakness when their purchases are least visible. For some, it is merely a desire to diversify reserve assets and gradually wean themselves from over-relience on the U.S. dollar and the euro, which has now been totally discredited as a reliable reserve currency. ??But for China and Russia — the two central banks with the most aggressive gold-accumulation programs — increasing their gold holdings is undoubtedly part of grander plans to have the yuan and the ruble attain reserve-currency status.
- Fifth, there has been a little recognized structural shift in the world gold market. Many of the “new” buyers of gold in recent years are accumulating gold, not as an ordinary investment to be sold at higher prices for a trading profit, but as a long-term store of wealth to be passed down to the next generation. ??This is true across Greater China where the emerging middle class has more money than ever before and has a cultural affinity and emotional attachment to the precious metal. It is true for the American and European high net worth families and the retail buyer of gold-bullion coins. And, it is true for many central bank buyers — not just China and Russia, but Mexico, South Korea, Kazakhstan, and many others — who are accumulating gold not as an investment, per se, but as a national legacy for generations to come.
Bidding Wars Ahead
Most of this newly acquired gold is in extremely â€śstrong handsâ€ť and will not come back to the market except at much higher prices. As a consequence, the available supply of gold in the marketplace to satisfy future demand — what I call “free float” — is shrinking . . . and future buyers will be forced to bid up prices to higher and higher levels in order to satisfy their hunger to own more.
Jeffrey Nichols is Managing Director of American Precious Metals Advisors consultancy group and serves as Senior Economic Advisor to Rosland Capital LLC.
He has been a leading precious metals economist for over three decades. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.
In addition to publishing his views online at www.NicholsOnGold.com, Nichols tweets regularly @NicholsOnGold