Edited and updated version of an article I published on the Sharps Pixley website at the weekend following the North Korean hydrogen bomb test confirmation.
When the world’s largest gold ETF – SPDR Gold Shares (GLD) – adds gold into its holding, the gold price usually rises – and vice versa, and perhaps the second most bullish pointer for gold is that between June 8th and August 7th, some 80 tonnes of gold were liquidated out of GLD with only a limited overall impact on the gold price. For the first month of the two month sell-off period, gold did fall back, but in the second month of sales out of GLD the gold price reversed and actually rose. OK, so without these sales perhaps the gold price would have risen more sharply. Since August 7th though we have seen purchases into GLD and the gold price has indeed risen fairly substantially, despite what look like big ‘flash crash’ sales of paper gold knocking the price back sharply, but only succeeding to do so for a very short time.
Another factor which has been apparent is that the trading volumes seen over the past few weeks have been particularly high for the end of what is a holiday period. This suggests a raging battle under way between gold bulls and gold bears which the bulls appear to have been winning. But – and it’s a big but – the holiday period is now coming to an end with the Labor Day holiday and the serious players will be back at their desks. As we have pointed out before, major U.S. holidays seem often to provide inflection points in the markets, and observers will be keen to see whether Labor Day 2017 will prove to be one of these and see the gold price either take off strongly upwards, or be knocked sharply back yet again.
But the No.1 bullish factor for the gold price this week is probably the fact that North Korea is confirmed to have tested a new, more powerful, nuclear weapon (50-60 kilotons according to reports – some put it at 100-120 kilotons) over the weekend, and the claim by North Korea that it could be fitted to one of its inter continental ballistic missiles (ICBMs). This may well sway any likely post-Labor Day inflection point towards the likelihood of a serious gold price boost this week, although initial upwards price movement has been limited – the powers that be have obviously been successful so far in damage limitation!
GLD liquidations or purchases may also provide a strong pointer to market direction for precious metals. It tends to be bank and/or fund purchases or sales which account for major moves in GLD, so whether the ETF’s gold content bleeds or grows should be an excellent guide as to where the gold price may be headed. Weak U.S. economic data has effectively removed the Fed’s prospective rate rise scenario from the gold price equation – at least for a couple of months although may have an impact again in November as speculation will reign over whether the Fed will implement another small rise in December, or kick the can down the road once more. The U.S. dollar is looking weak and a weak dollar tends to see the dollar gold price rise. And it is the dollar gold price which the market judges to be the most important indicator, even though the gold price in other currencies, like the euro or the yen, should perhaps be just as relevant to the gold investor.
We have ignored silver in this scenario, but silver continues to be tied to gold. The gold:silver ratio (GSR) has fallen back below 75 again and will undoubtedly fall further should the gold price get a boost after Labor Day and the latest North Korean bomb test. We see the GSR coming back down into the 60s which would make silver a far better short term buy than gold, but beware silver’s volatility. However neither would be much good in a nuclear wasteland!
While North Korea’s Kim Jong-Un may not be as unstable as the media makes him out to be, the bomb test is yet another serious escalation in the DPRK/US confrontation and the big danger for further escalation here is that President Trump may be forced into military action, having backed himself into a corner with his rhetoric. Unlike Iraq it looks as though North Korea’s weapons of mass destruction (WMDs) are real and the U.S. may now feel it has to make a move, however costly this may be to the U.S. itself and its Asian allies within easy range of North Korea’s missiles, before the threat to the U.S. itself escalates further. If North Korea has indeed developed a nuclear warhead for its ICBMs and they are capable of targeting U.S. mainland cities, the U.S. may feel the necessity to strike and try and curtail the programme before the threat grows to an uncontrollable level.
The seemingly increasing threat of war between North Korea and the USA, could well give the gold price a huge boost in the days and months ahead with safe haven demand escalating worldwide – and particularly in Asia and the U.S. itself. It could also persuade those banks holding big short positions in gold and silver to cover and reverse their policies. A gold price reset could be on the cards even sooner than those like Jim Rickards and Eric Sprott have suggested – see $5,000 gold – then $10,000. Gold bulls sing from same songbook.
Thus be prepared for fireworks when North American markets re-open this week, although one suspects the big institutional holders with enormous short positions in gold and silver amy do their best to limit rises while, perhaps, unwinding from these. The latest North Korean bomb test is probably favouring gold moving upwards – perhaps strongly – once the markets are back in full swing.