GLD and the GSR guides to gold and silver price direction?

Where will the gold price be heading once the U.S. institutions and traders get back from their summer breaks in the Hamptons, the Caribbean and elsewhere and the market gets fully back on track after a relatively thin trading market over the peak of the northern summer?  That is the question which many precious metals investors will be asking themselves as the end of the holiday season approaches with memories of 2011 in mind, when gold soared over the summer, reaching new highs and with the expectation that prices would continue onwards and upwards.  This was just not to be as the gold price then stuttered and started turning downwards heralding the start of a four and a half year bear market in precious metals.

I commented on this in a little more detail in an article on sharpspixley.com and an edited verison of this article, with some additional comment, is included below:

This year the gold price has been rising ever since the beginning of January, accompanied by a big rise in the holdings in gold ETFs.  This has been notably so in the biggest of them all, SPDR Gold Shares (GLD), which had added a massive 340 tonnes of gold peaking at around the July 4th Independence Day holiday in the USA at a total of 982.7 tonnes, the highest level since June 2013 – then a time when holdings were falling quite sharply.  But since July 6th this year, atlthough the holdings have fluctuated up and down, the predominant movement has been downwards and has seen sales out of the biggest ETF of 24.3 tonnes.  (It did add 2.38 tonnes yesterday so the movement has not only been downwards, but that has been the general trend.)

The overall fall in GLD has also coincided with a sharp fall in retail purchases of gold coins and bars in the U.S. in particular and the worry for the gold investor is whether this has been due to weaker seasonal demand because of the northern hemisphere summer holiday season, or whether it represents a change in overall sentiment from being gold positive to gold negative or gold indifferent!.

Recently, gold researcher Koos Jansen writing on www.bullionstar.com looked at the statistical relationship between the gold price and gold demand in the West and in Asia.  He concluded that when Asian gold demand has been strong and Western demand weak, the gold price has fallen and conversely when Western demand has been strong and Asian demand weak the gold price has risen.  We think this may be something of a misinterpretation in our being uncertain how relevant Asian demand has been at all in this respect.  Whereas strong Asian demand may well have meant that the gold price did not fall as far as it might have done without it, we would suggest that up until now it has very much been Western demand which has been influencing the gold price most strongly and the sharp fall-off in Asian demand we have seen this year has been largely irrelevant, given that it still seems to be the Western gold futures markets – notably COMEX – which have been the prime gold price drivers.

While this may be the case up until now, it seems to be becoming increasingly apparent that the GLD holdings are in a current downwards trend, although whether this is due to the northern summer holiday season when many of the big fund and institutional managers are away and markets are consequently a little thinner, remains a possibility.  We will have to wait until after Labor Day on September 5th – which is seen as the end of the holiday season in the USA – to see whether this is the case.  But while many see the return of the markets to full swing as being potentially a positive for gold, one only needs a short memory span of 5 years to recall that it was effectively Labor Day in 2011 that saw the true beginning of the recent bear market in gold after an abnormally strong summer for the yellow metal.  Could this happen again?

Unlike 2011 though, this year the gold price has also taken something of a summer holiday.  After the post Brexit surge it has actually remained in a fairly tight trading range which some see as price consolidation.  But again we will have to wait for the market to become fully functional again before we  can see a new trend developing.

With markets jittery again over the possibility of a Fed rate rise in September – perhaps still unlikely with December, if then, perhaps a more possible timing – we could well see continuing gold price uncertainty until after the September FOMC meeting which takes place September 20-21 and a volatile market for the yellow metal continuing in the meantime.  If the recent moves in price are indeed consolidation then general prospects for the precious metals could be seen as positive given that the really big drivers of unprecedented global debt and the seemingly increasing imposition of negative interest rates around the globe are well set.

At the moment gold seems to have been pressuring downside resistance at around $1,330, but riding this particular storm fairly well.  For silver it is also notable that the Gold:Silver ratio (GSR) has risen back to over 70 after falling to below 65 but some see this too as an indicator of where the gold price is headed.  We could well be in for a very uncertain month ahead for precious metals. But keep an eye on GLD movements and the GSR.  They could both be giving us a guide as to whether the medium term outlook is positive or negative.

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3 thoughts on “GLD and the GSR guides to gold and silver price direction?

  1. Koos Jansen August 23, 2016 / 8:29 am

    For the sake of debate (the gold price is complicated):

    1) If China buys 1,400 t of gold for “the West”. Is that strong demand or strong supply?

    2) How do you know the price of gold is set on the COMEX? Coz COMEX has the largest trading volume? The SHFE has the largest trading volume (globally) in silver futures. Is the price of silver set in Shanghai?

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    • lawrieongold August 23, 2016 / 8:34 am

      I suspect price setting for both gold and silver will eventually move to Shanghai, but at the moment it seems to be the U.S. primarily responsible for setting the gold price – hence my views on COMEX – but Shanghai is. IMHO, now probably a limiting factor on the downside

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