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Gold Charts: False Signals

Technical analysis of Gold Price charts isn't working like it did. Why not...?


JUST RECENTLY the economics website published an article on "Precious Metals & the Validity of Technical Analysis", writes Julian Phillips at GoldForecaster.

We completely agree with the thoughts expressed there, and in this piece would like to expand on their thoughts. Because over the last eight years or so we have seen the technical analysis approach to the Gold Price give incorrect signals, when seen in isolation. Many times the technical picture on the gold charts pointed down in the face of a strong fundamental picture.

This "false signal" has wrong-footed many investors looking to Buy Gold, who found themselves waiting for a fall only to see the price consolidate and then rise. Over the last few years, gold has done this more frequently. Now we find here at the Gold Forecaster that we approach technical analysis in a way that allows for this, and complements the fundamental analysis instead of superseding it.

Of late, for instance, some analysts identified a 'head and shoulders' top on their gold charts, and forecast the end of the bull market in gold and silver. But it has not come, nor do we expect it to come.

The reason the charts have failed so often to correctly forecast the gold and Silver Prices has been due to the change in the nature of the market, the change in the type of investors, the change in the number of investors and the change in the location of investors.

Why the change in the nature of gold charts? Back in the days of the Gold Standard, the traditional gold market comprised central banks and wealthy institutions and individuals. Officially, central banks then left the buy-side and started selling their gold in the market. That left the open market to wealthy individuals in the main, as miners and central banks worked together to undermine the Gold Price, taking it down from $850 to $275 per ounce from the early 1980s to 1999.

At that point – and planning to continue their sales – the central banks of Europe agreed to cap sales under what became known as the 'Washington Agreement' and the subsequent 'Central Bank Gold Agreements'. Since the start of the global financial crisis, however, plus the sale of 403.3 tonnes of gold by the International Monetary Fund (IMF), European central banks have ceased selling gold, to all intents and purposes.

Also starting early last decade, and again working to change how the technical analysis of gold charts works, the inception of the gold Exchange Traded Funds (Gold ETs) was another dramatic change, this time allowing a cheap and easy way into gold for institutions and wealthy individuals. Together with the end of European central-bank sales, the result of these two changes was to remove the central bank overhang from the gold market and to bring institutions and individuals back into the Gold Bullion market in such as way as to affect the Gold Price.

What is often not understood, however, is that buyers of gold shares in mining companies could never affect the Gold Price or bullion market. These shares were simply another set of equities. Many have and still do believe that the Comex Gold Futures and options affects the price directly. The Nymex exchange themselves will tell you that only 5% of the transactions lead to a movement of physical Gold Bullion, and where they do, the investor must clarify that he wishes to take or give delivery at the time of dealing. But the gold-producer and futures markets represented a huge amount of money involved in 'gold' that did not affect the physical gold market. To illustrate, a hedge fund recently closed $850 million's worth of positions, because the US futures exchange kept increasing the margins payable. The fund is only a $10 million fund. Likewise, any Gold Price linked or indexed fund, does not involve the purchase of gold. Indeed funds that offer shares 'related' to gold but not actually resulting in the purchase of gold bullion itself do not affect the Gold Price and are off the gold market.

Let's be clear on this – if all these gold-related investments were poured into Gold Bullion buying, whether by funds or trusts that actually purchased gold against the purchase of its shares or certificates, the Gold Price would by now be far north of $2000. The gold chart would look very different.

In the early 1970s, investors choosing to Buy Gold were typically wealthy individuals, institutions and, of course, the central banks. Individual buyers were limited to coins such as the Krugerrand, the Gold Eagle and the like. Over the years until now there has been a dramatic change.

  • In the US individuals were permitted to own gold from 1974 on. Record volumes of Gold Coins were bought in 2010.
  • In India the gold market reforms did the same there and the Indian market burgeoned. Last year we believe they imported between 500 and 600 tonnes of gold. Their record was 850 tonnes in one year.
  • Central banks have changed from sellers of gold (1989 to 2009 as a group) to either holders or buyers, with the likelihood of them selling again fading into the distance.
  • When the gold Exchange Traded Funds were launched, US fund managers (pensions et al) jumped in to buy more than Switzerland and China hold in their central banks. Currently these funds hold more than 1,600 tonnes all told.
  • Physical gold funds popped up in Europe, and BullionVault in the UK, dealing for the smaller investor. Gold buyers increased in number across the world.
  • When China lifted the restraints on individual ownership of gold just over three years ago, the Chinese market exploded quietly in line with the spread of the distribution capabilities of the banks. Now the Chinese government itself (itself, we believe, a buyer of gold for its reserves) has increased the number of banks allowed to import gold.
  • Chinese demand is set this year to overtake India as a gold market. We expect their imports to add to their local production and account together for 550 tonnes of gold bought there. In 2011 we would not be surprised to see this increase to 800 tonnes altogether.
  • Even in the developed world jewelry market, the home of low caratage jewelry, demand has recovered in the face of record Gold Prices to reach previous peak levels. (In the emerging world low carat gold jewelry is generally not deemed real gold.)

There has also been a change in the location of gold buyers. In the last few years demand has spread from the developed world across through the Middle East to India, eastwards through to China to become a truly global physical gold market centered on the London Gold Fix.

The drop in the purchase of Gold Mining shares, and the switch to the shares of Gold ETFs saw the developed world's institutions become indirectly physical gold buyers too. The market has realized that it is the physical gold market that counts. The added joy of this is that the corporate and mining risks do not accompany gold bullion itself.

So today we are looking at a global physical gold market that is growing fast, but at its fastest in China and India where the development of those countries is leading to a rapidly growing middle class that favors gold as an investment, but with a different attitude than found in the developed world. This has changed the way gold charts develop for technical analysts everywhere.

Buying Gold for your private reserves today...?

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

See full archive of Julian Phillips.

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