miércoles, 1 de octubre de 2014

miércoles, octubre 01, 2014

Precious Metals Prices Fall: Gold At A Critical Juncture
             
 
 
Summary
  • This week, the price of gold was basically unchanged from the previous week.
  • Other precious metals -- silver and platinum -- moved lower on the week.
  • Bulls and bears continue to debate the future path of the yellow metal.
  • Short term, gold's path of least resistance is likely lower.
       
Last week in my article, Gold: A Follow Up - The Prospect for 4-Year Lows, I expressed the view that it is only a matter of time until the price of gold tests crucial support at $1185. A bearish view of gold certainly has stoked a healthy and heated debate on the topic of the future price direction of the yellow metal. This past week saw the price of gold virtually unchanged.

Gold attempted to move higher when the US and coalition forces began bombing raids in Syria last Monday night. Gold managed a meager rally to $1237 where selling emerged. Short-term resistance remains at the $1241.70 level. The price of silver dropped another 20-30 cents over the course of last week. Silver fell through key support of $18.185 (the June 24, 2013 low) on September 19 and has continued moving lower since. Platinum moved sharply lower, falling almost $40 on the week, and palladium fell almost $30. Therefore, gold continues to get more expensive relative to its precious cousins, even though the gold price is deteriorating as well.

As a precious metals trader for some of the most high-profile bullion trading houses since 1983, gold holds a special place in my heart. I have seen gold trade from a low of $255 an ounce in January 2001 to a high of $1920.7 in July 2011. I have watched the daily action in gold during bull markets, bear markets and static markets. From 1983 through 2002, gold never traded below $255 or above $502. I have spoken and traded with Central Bankers around the world that hold the metal as a foreign exchange reserve. I have seen producers come and go. I have seen investors come and go, and I have developed a very special connection to gold and view the precious metal as an asset like no other.

I believe that every portfolio should contain a certain percentage of precious metals. As we have seen over the past decade, gold can cushion an investment portfolio during times of crisis. I further believe that it is appropriate to adjust the percentage of gold or precious metals held according to market conditions. We are at an interesting and perhaps critical juncture with respect to the direction of the gold price as it approaches a key support level. There are many mixed signals out there and the market seems to be vacillating, frustrating both bulls and the bears. Let us look at both cases in order to try to understand what the gold market may have in store for us during the coming weeks and months.

The Bullish Case

Fiat currencies are not "real" money

Gold bulls have argued for a long time that fiat currencies have little intrinsic value. These currencies, the US dollar, yen, euro and others have only the full faith and credit of the countries that print them supporting their value. Central Bank policy of printing more and more currency, which some argue, will lead to an eventual inflationary spiral discredit the paper money. The current move higher in the US dollar is occurring because dollars are the best choice in a foreign exchange environment loaded with only poor choices. Moreover, throughout history, gold is the only means of exchange that has survived thousands of years and gold is real money.

China is a massive buyer that waits in the wings

There are two components to Chinese buying. First, the Chinese government holds a very small percentage of their foreign exchange reserves in gold relative to other countries in the world. Therefore, the Chinese government plans to increase these reserves. China has recently become the largest gold producer in the world, producing 420 tons in 2013, more than 15% of world production. It is likely that much of that production will serve to increase governmental reserves with occasional purchases adding to the mix. Second, Chinese citizens will continue to purchase gold particularly while the Chinese currency, the yuan, remains non-convertible. Lower gold prices will spur physical buying in China.

Gold has corrected lower and is oversold

Gold has moved 36% lower from the highs to an oversold condition on daily, weekly, monthly and quarterly charts. A technical rally is overdue in the gold market and recent selling has seen tepid volume. Not only is gold in an oversold condition, but gold mining stocks are also putting in bottoming formations.

Festival season in India will reinvigorate physical demand

There is certain seasonality to the price of gold, and festival and wedding season in India tends to bring buying to the market. Signs of Indian buying are clear, as premiums for physical bullion in India have moved higher over the past week.

Production costs are above current prices

Some argue gold is now falling below production cost and in the case of some producers and mining projects, this is true. Higher gold prices have caused aggressive mining concerns to explore for and mine higher cost production. Mines in South Africa have become deeper over recent years; the deeper the mine, the more expensive production becomes.

The Bearish Case


Strong US Dollar

Since June 30, 2014, the dollar has rallied 7.3%. Priced and traded in US dollars, gold traditionally has an inverse relationship with the greenback. The current trend in the dollar is negative for the price of gold.

Prospect for higher US interest rates

The US economy has been showing signs of strength, which has prompted some Federal Reserve members to favor raising interest rates in the future. The prospect for higher US interest rates increases the cost of carry for all commodities, including gold.

Weak precious metals prices

Silver has shed 18.5% of its value since early July. Platinum is down 14.5% during the same period, while gold has only depreciated by 9.5%. Clearly, recent action in precious metals markets has been bearish. The key question for the future is, given recent price moves and relative values, is gold expensive relative to silver and platinum, or are the industrial precious metals too cheap at current levels?

Technical weakness

Open interest in COMEX gold futures has dropped from 417,000 contracts in July to 388,000 contracts, a decrease of almost 7%. Interest in gold ETF products has been tepid. An oversold condition in gold has been in place for over a month, but the yellow metal continues to move lower. The relative strength index on daily charts has remained below the 30 level, with slow stochastics also below 30. Momentum and sentiment in gold remains negative, according to technical indicators.

No rally in the face of military action

Last week's failure of gold to react on news of military actions in Syria and Iraq is another example of gold's inability to appreciate on geopolitical tensions at its current price level. The weak rally up to $1237 failed and the gold price actually closed close to the lows at $1222 that day. Gold proceeded to trade down to $1206.60 later in the week, making a new low for 2014. Gold opened on January 2 at $1207 and did not trade below that level during the year until last week.

No evidence of a big short position

The low level of open interest in gold futures (the total number of open long and short positions) provides evidence that there are no large long or short positions in the gold market at present. A move lower will likely encourage trend, following systems to short the gold futures market, which would set the stage for lower prices, at least initially.

A conclusion...

I am not on the fence here, I believe gold will eventually test and break the $1185 support.

There is too little interest in the market to support a rally now. Right now, the overall pressure on commodity prices, a stronger dollar, the prospect for rising interest rates and weakness in other precious metals will most likely overwhelm the bulls in the near future.

However, it is possible that the price of gold continues to trade in a sleepy range, frustrating bulls and bears alike. Gold has always represented value and it always will. Gold's value dates back many thousands of years; its luster has intoxicated humanity for virtually all of history.

That illusive value is set each day in the international gold market at prices where buyers and sellers meet. Whether bullish or bearish, we should never forget that the daily price of gold is the right price for the commodity. The world has changed in the new millennium and the role of gold has gained resurgence in popularity. Discussions about gold often reveal deep convictions about politics and economics. Gold is a symbol of value and its price can be a consensus indication of the perception and faith in political and economic systems. I have no doubt that lower prices will increase physical demand for gold. Lower prices will eventually set the stage for another leg in what will be a continuation of the long-term bull market in gold.

Bulls and bears each have strong and compelling arguments, it is possible, maybe even probable, they will both be correct over time. Currently all evidence for the short term is that the path of least resistance in gold continues to be lower.

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