What will longer-term investors make of the current sharp fall in Gold Prices...?
The GOLD MARKET has fallen dramatically in the last few days, writes Julian Phillips of the Gold Forecaster.
Where will the Gold Price go now? Investors will soon have a large amount of chart-based technical commentary to hand, and the bulk of this will point downwards. Is that enough to make the market follow the technical analysts' predictions?
Technical analysis is a vital part of Gold Investment information, especially amongst institutional traders. The US gold market, whether it be Comex Gold Futures or gold exchange-traded funds, have dominated the short-term trends of the Gold Price itself over the bull market to date – and these markets place an overriding emphasis on the technical picture.
Major buyers follow these short-term forecasts, carefully picking to time their own actions in the light of the short-term picture. They can dominate the short-term Gold Price through their actions.
But we need to stand back to see clearly the shape of the gold market. An analogy we have often used is that the gold market is similar to the sea shore. Because you have the moment-to-moment wave action. On a daily basis, you also have two tides indicating longer term averages that influence short-term prices. Then you have the currents that completely dominate the sea. But short term, it is the noisy reactive movements of the waves that attract the most attention. While they can become frothy in reaction to the wind and extend their moves in and out every seven or so waves they are subject to the tides and currents. Tides are simply more forceful expressions of waves but currents always dictate sea moves.
The parallel in the gold market? Traders are the short-term players chasing quick profits, with larger, weightier players again chasing the bigger, slightly longer-term profits. The very biggest players, however, don't play for profits in the gold market, but invest to retain value over the longer term.
For most of man's history, gold has served as a reliable measure of value as true money. The currency experiment of the last 40 years has been a departure from that, but in the last 10 years we have seen the return of respect for gold amongst the biggest investors in the gold market. We believe that this respect will continue to grow, and that such investors will quietly and unobtrusively dominate the Gold Price going forward. A big dip serves them well.
So what do the three sides of the gold market tell us now?
- The technical picture points down but into a large barrier of support. The short-term traders point to the strong Dollar rally, if not a turn in the fortunes of the Dollar and take the Gold Price down as far as their short-term wave actions allow.
- The bigger longer-term speculators (represented by the tide) feel the same at the moment, either closing long positions or actually selling gold short.
- Large gold investors worldwide, but particularly in the US, are presently sitting on the sidelines, with a tendency to sell small amounts into the market. Their present anemia from the deep currents of the gold market is encouraging shorter-term speculators to sell, and so a picture is presented that the market is worthy of a fall.
How far still remains to be seen. But this makes the Gold Price look weak and dangerous. And in the short-term the speculators may still have their way.
What of the big long-term investors from all over the world...the sea currents? What do they feel about the Gold Price and how will they act in this market?
To see this one has to realize that the bulk of the world's gold is not dealt inside the USA, but outside it. The US has to go there to get the bulk of its physical gold too. The loud and noisy short-term US markets such as Comex are heard all over the world, but have little real power.
For instance, if President Obama gets his way and prevents US banks from proprietary dealing (using their own money to trade markets), then their presence on New York's Comex Gold Futures exchange will have to diminish. What is that presence now? They hold an overwhelming number of "short positions" on Comex that they will have to close. Comex has always had an extremely low number of physical deliveries taking place, for each contract represents a future delivery time and so is matched against the opposite number of opposing trades disappearing before delivery must take place.
So buying and selling simply takes net profits or losses, but usually doesn't pay more than a 10% margin or so for the privilege. Yes, Comex should hold sufficient gold to deliver the net amount of selling over buying and vice versa, but this is a relatively small amount.
For a major bank such as J.P.Morgan to be made to deliver on its "short" contracts, this would mean that they would have to go out and Buy Gold first, so they could deliver it to the market. COMEX does not hold that amount of gold in stock. The fact that President Obama has put this on the table must have J.P.Morgan trying to cover itself and want to unload into the market. If long-term speculators take long positions in the hope that the huge short covering will take place and hold the Gold Price up, then the amount of short covering deals will far outweigh the de-hedging we've seen over the last few years. Is there enough gold out there for them to do that?
Now go overseas and look at the large players. Russia bought 24 tonnes of gold in December as part of a persistent buying program which we believe China is doing surreptitiously too. That's apart from individuals from Mumbai to Shanghai, in large numbers, Buying Gold as part of their long-term savings plan. The demand for physical gold is ignoring potential interest rate rises in the US; they simply Buy Gold as financial security. And this deep current of money knows nothing of technical price action, except to look for a floor to reassure them that when they buy, the price won't fall again.
Most of all, this long-term Asian gold investing does not buy for a future profit. The cultural difference between Western and Eastern investors is enormous and telling!
Just think of it – half the world is getting richer by the day and steadily buys gold. They ignore the day-to-day wave action and look at the tides, to get the right entry points. Like a current they are unstoppable. This type of demand, like a sea current, gives solid support to the Gold Price and ensures that the upward trend stays in place. It doesn't chase prices and doesn't take profits, except rarely. It absorbs supplies.
What is the future of the importance of the US futures and options markets to the Gold Price? It has to wane in the face of the current of new investment money and investment of new wealth gained from the Western developed world. Gone already are the days when it could take the Gold Price from $300 to $390 then back to $326 at their whim. Now they too, have to read the market with a vision wider than the Technical picture.
Is the gold market solid in the face of these realities? Yes, indeed, telling us that any heavy fall in the Gold Price will invite long-term investors of all shades into the gold market. Lighter falls will invite those already waiting to enter the market. The distance the Gold Price has come is relevant to a profit seeker, not one buying to hold as financial security.