28 October, 2015
Even though the price of gold failed to make a decisive break above the 200 day Moving average, the price looks set to continue its upward trajectory. However, one can expect some resistance close to the 200 day MA at around the $1185 an ounce level.
After briefly breaching $1190 an ounce level, gold prices came under some renewed selling pressure as the U.S dollar gained against it major peers especially the euro.
The rally in the greenback was sparked when European Central Bank (ECB) president Mario Draghi announced that the central bank would not cut rates, but at the same time, he strongly hinted that they would act later this year. The ECB left the main refinancing rate unchanged at 0.05%. The marginal lending rate also stayed unchanged at 0.3% and the deposit rate at -0.2%.
At the press conference, President Mario Draghi acknowledged that the QE program has been “proceeding smoothly” but also suggested that the ECB is concerned about the slowdown in emerging markets and as such the central bank would re-examine its bond buying program in December.
According to Draghi the ECB could extend its current programme of Euro-QE beyond its current expiration date of September 2016 or even cut interest rates deeper into negative territory. The bank’s deposit rate is currently minus-0.2%.
That caused the euro to plunge by two full cents against the U.S. dollar. But, the US dollar was also boosted by the dovish actions from the People’s Bank of China (PBoC) and the Bank of Canada.
Last Friday, the Chinese central bank cut interest rates for the sixth time in less than a year, and it again lowered the amount of cash that banks must hold as reserves in a bid to jump start growth in its stuttering economy. Specifically, the PBOC cut its one-year lending and one-year deposit rates by 25 basis points. It also cut the bank reserve requirement ratio by 50 basis points, theoretically freeing up banks to do more lending.
Monetary policy easing in the world’s second-largest economy is at its most aggressive since the 2008/09 financial crisis, as growth looks set to slip to a 25-year-low this year of under 7%.
The announcement by the PBoC sent stock markets worldwide soaring on Friday. Shares across Asia, Europe and the Americas climbed, having already been boosted by Thursday’s message from ECB chief Mario Draghi that the central bank was ready to adjust “the size, composition and duration” of its quantitative easing program.
The BOC meeting turned out to be more dovish than expected. While leaving the overnight rate at 0.5%, the central bank trimmed its growth forecast for 2016 and 2017, and pushed backward the timing of the economy’s expected return to full capacity to mid-2017.
While global stock markets have rebounded, I do not think that real economic growth in the US is anywhere near what is claimed by the popular financial news media. And, as far as I am concerned the expansionary policy of the ECB is an abject failure! It didn’t boost European growth, nor did it boost European inflation, with prices falling 0.1% in September.
Meanwhile in the physical gold market, withdrawals from the Shanghai Gold Exchange following the Golden Week holiday still remain strong. An impressive 53.4 tons was withdrawn in the week ending October 16th – week 40 – the first full week after the holiday. The year to date figure is a fraction short of 2,062 tons.
Looking at past years, demand does tend to fall off by a little at this time, but then picks up again as the year-end nears as stocks increase ahead of the Chinese New Year buying spree. Next year which will be the year of the Monkey under the Chinese zodiac – falls on Monday February 8th, suggesting strong gold demand in December and January.
In Chinese astrology, the Monkey is a symbol of health and wealth and those born under the influence of this sign are said to be intelligent, quick-witted and adventurous.
On the figures to date, it looks as if the total of withdrawals from the Shanghai Gold exchange for the full 2015 year will likely reach 2,600 tons or more – a huge new record, probably over 400 tons more than that of the previous record year of 2012 when 2,181 tons were withdrawn from the Exchange.
Gold consumption in mainland China may match or exceed the record in 2013 after financial-market turmoil and the yuan’s devaluation boosted the metal’s appeal, according to Haywood Cheung, chairman of the Chinese Gold & Silver Exchange Society, which also saw higher sales at jewellers in Hong Kong.
According to Cheung, demand in Hong Kong may expand 25% this half after a lack-luster first six months, he said in an interview. The decline in 2013, when bullion sank 28 percent, spurred increased buying across Asia, and 2015 is shaping up well and may surpass that year’s total, according to Cheung.
When you consider gold withdrawals from the SGE as well as the flows from China, one thing is certain and that is the demand for gold by China remains enormous.
Yet, despite the massive demand for physical gold from China, and as gold flows from West to East, the futures market of Comex is still largely responsible for setting the gold price. But, the more the Chinese become involved in the global gold price mechanism the more their influence will rise in determining the actual price given these massive gold flows. This of course will lead to a more credible reflection of prices as they will be determined according to the correct fundamentals and not simply by a few bullion banks that simply create price distortions.
But, it is not only the Chinese that have been adding physical gold to their reserves. Russia has been consistently increasing its holdings of the precious metal.
Russia added another 34.2 tons of the precious metal in September. This follows on the heels of a 1 million ounce increase in Russian gold reserves in August.
Since the global financial crisis, Russia has increased its gold reserves at an average pace of about 300,000 ounces per month. And, other countries formerly part of the Soviet Union have also increased their holdings of gold.
According to Bloomberg, Kazakhstan increased its gold reserves for the 35th straight month in August. The country purchased about 2.1 tons to bring its stash to roughly 210.2 tons. Belarus also expanded its reserves to 47.1 tons that same month.
And despite being broke, the National Bank of Ukraine added 30,000 ounces of gold to its reserves in September, bringing its total stash to about 27 tons. The value of the country’s gold holdings grew by $41.96 million, to $989.78 million.
As Russia is a gold producer, a way to build international reserves is via buying domestically mined gold. This way this gold will not enter the international market. In a way it reduces its dependency on the US dollar for international reserve building.”
Gold offers that same traditional hedge to individual investors as well as central banks. Today’s financial system where unelected central banking elite conjures trillions of dollars and euros out of thin air cannot continue for ever. It has an expiration date. And, gold with its millennia-long history is making a comeback.
It seems that despite an overwhelming bearish sentiment that has persisted for some time, silver is finally showing some signs of life.
Since around mid-July the price of silver has rebounded even though a huge disconnect remains between the paper price of silver and what should be a realistic price for the physical metal. And, at current levels, the price of silver remains deeply undervalued relative to its primary driver gold.
In order for the price to revert back to a more realistic price, silver will have to move significantly higher. However, this massive price dislocation has not gone unnoticed. Many savvy investors have been aware of this and have used these low prices to buy the physical metal. This can be illustrated by the unprecedented demand for silver bullion coins and bars.
One interesting phenomena of this is the sale of the Canadian Silver Maple Leafs as reported in the SRocco report.
Chart#36 shows total sales of Canadian Silver Maples from 1988 to 2014. There is no other chart of its kind on the internet.
As you can see in the chart, total Silver Maple sales were 21,398,000 from 1988-2007. Thus, sales during this 20-year period averaged a little more than one million Silver Maples (1,069,900 per year):
In contrast, a total of 134 million oz (Moz) were sold from 2008-2014, at an average of 19.1 Moz a year. Basically, investors purchased 17 times more Canadian Silver Maples a year from 2008-2014 (7-year time period) compared to 1988-2007 (20-year time period).
The massive change in Canadian Silver Maple Leaf sales can be seen by the following figures below:
Canadian Silver Maple Sales (million oz = Moz)
2007 = 3.5 Moz
2008 = 7.9 Moz
2014 = 29.2 Moz
As you can see, sales of Silver Maples doubled from 3.5 Moz in 2007 to 7.9 Moz in 2008. However, Silver Maple sales in 2014 (29.2 Moz) were more than eight times higher than in 2007 (3.5 Moz). This huge jump in Silver Maple Leaf sales shows that investors continue to purchase record numbers as they realize the financial system is weaker than ever.
Silver prices are not only ridiculously low today, but they have fallen behind gold periodically in the past too. What happened after those earlier underperformance episodes? Silver skyrocketed higher to catch up!
Even if the silver/gold ratio merely returned to normal-year average levels, and gold stopped rallying, the coming gains in silver will be big.
The bottom line is silver is deeply undervalued today relative to prevailing gold prices. Traders fled silver as gold languished this year, battering silver to anomalously-low levels compared to gold by all historical standards. After similar past episodes, silver soared as investors and speculators returned thanks to gold recovering and rekindling interest. Silver has a long way to go on the upside!
About the author
David Levenstein is a leading expert on investing in precious metals. Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. Rand Refineries, the largest gold refinery in the world use his daily and weekly commentaries on gold.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.