Gold: A Short Covering Rally Does Not A Bull Market Make. But …

By Ross Norman, CEO – Sharps Pixley

A couple of weeks ago, gold touched the 50% retracement at $1087 between the 21 year low in 1999 at $254 and its all time high at $1922 in Sept  2011 and has since then showed some impressive gains.

The initial rally to $1124 looked to be based upon short-covering in the wake of the yuan devaluation as bears caught fright as it dawned upon them that their four year reign of terror may be ending … markets can indeed go up as well as down. It has proven hitherto highly profitable to follow the narrative of the Fed but there are alternative dialogues too.

The likely delay in Fed rate tightening seems to have prompted a further bout of short-covering.

Gold has done impressively well in breaching overhead resistance between $1132 and $1142 and is now on its way to challenge the $1170 level which marks not only an important downtrend but also the 100 day moving average.

There are a number of reasons to be cautiously bullish …

Firstly COMEX traders hold record short positions for the first time since data was collated in 2006 – being short gold is looking like a very crowded trade …

Secondly, gold is trading at a small backwardation which suggest tightness in the market (possibly because of the red hot physical demand or possibly as a pre-amble to a market squeeze to the upside ???). Backwardation is a rare and un-natural phenomenon in gold and certainly indicates something is afoot of a bullish nature…

Thirdly physical demand is looking good – Sharps Pixley’s parent company Degussa, which is said to be the largest in Europe in retail physical coins and bars, is seeing volumes in Germany and Switzerland up about 50% in H1 2015 over the corresponding period in 2014…

Does the German market matter ???  You betcha – it’s third behind China and India and roughly twice the size of the US market.

Fourthly, there has been good buying in the options market of the $1200 strike calls (which clearly suggests some players see considerable upside from here )…

And lastly the bullion banks seem, almost in lockstep, to be universally bearish – which as a contrarian tells me this must be a great time to buy.

We did however suggest cautious optimism … gold prices have been horrifically elastic these last 3 years and “momentum fade” has deeply eroded the confidence of the most die-hard bull. We don’t yet have a bull market in place in our view but a figure above the $1240 level will certainly give many renewed confidence – which could potentially be self-reinforcing, just as it was between 2000 and 2008 when the market clipped along at a 12% year on year gain well before any of us had heard the words “sub-prime” even.

The current price is an extension of the gains we saw before the economy took a turn in 2008 – in other words it is based around supply/demand fundamentals… and gold had been effectively saying the economic crisis is behind us … it’s not. Global debt is 40% worse than we had in 2008 and arguably the economy is even more fragile and precarious.

Whether the current price action is sufficient to draw in new investors remains to be seen. Certainly for investors in non-dollar terms gold has performed as expected – down in 7% in US dollar terms but up 6% in Canadian dollars, up 9% in rouble terms, up 4% in euro terms etc etc… in short, gold has done precisely as ordained for those who most need it.

Ross Norman, nowadays CEO of London bullion dealers and specialists, Sharps Pixley, started his career with business guru Sir Clive Sinclair of Sinclair Research in Cambridge, before joining Johnson Matthey as Gold Refining Manager (then the world’s largest gold refiners), then as a gold trader at NM Rothschild & Sons (the Chairman of the London Gold Fixing) and later Credit Suisse, where he was a Senior Dealer in physical bullion trading.

Ross has an enviable record within the London Bullion Market in forecasting the gold price over the last decade and is frequently sought by the media for commentary on the bullion markets. Ross has made frequent appearances on TV (BBC, CNBC, CBC) in newspapers (FT. Wall Street Journal) as well as in the newswires (Reuters, Bloomberg and Dow Jones).

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