Gold Trade Is Not Overcrowded Says UBS – The Holmes SWOT

By Frank Holmes, CEO and Chief Investment Officer, US Global Investors

Strengths

  • The best performing precious metal for the week was gold, down slightly by 1.47 percent. Current market conditions make it the perfect time to invest in gold, according to Heather Ferguson, an analyst at Hargreaves Landsown. “There is a fixed amount of this precious metal in the world so central banks are not able to manipulate the gold market like they can with bonds and cash,” Ferguson explains. “In the current environment of quantitative easing and increasingly extreme monetary policy, gold is highly sought after.”
  • UBS says the gold trade is not overcrowded, according to a note this week.  The group believes that Federal Reserve policy decisions relative to the metal are not as straightforward in this environment where global yields are under pressure ahead of a rate hike.
  • Citigroup is also positive on the metal, raising its forecast for the second half of the year. The group cites elevated levels of U.S. election uncertainty and stickiness of ETF and hedge fund flows into gold products, reports Bloomberg.

Weaknesses

  • The worst performing precious metal for the week was platinum with a loss of 3.77 percent. Platinum sold off when precious metals were bear raided on Wednesday, but did not get much of a bounce following Yellen’s speech on Friday.
  • “The past 48 hours have been an interesting period for gold…” writes Steven Knight of Blackwell Global. “As the metal has again seemingly fallen sharply following the liquidation of a $1.5 billion futures position over the course of 60 seconds.” According to Knight, given the amount of gold derivatives floating around, the fairness of the COMEX exchange likely needs an additional level of scrutiny. In addition, the timing of this “flash crash” could potentially be revealing.

holmes 298

  • Goldcorp fell the most in six months, reports Bloomberg, on the back of retreating gold prices and the discovery of a leak at the company’s mine in Mexico. Less-than-stellar news was also reported from Kinross Gold Corp this week, as it suspended operations at a mine in Chile ahead of schedule due to a dispute involving water use (causing 300 workers at the Maricunga mine to be laid off as a result). Lastly, Orezone Gold Corp told investors on Monday that it will likely slash the gold resources at its Bombore project by a staggering 30 percent, reports the National Post.

Opportunities

  • When viewed against the aggregate balance sheet of the “big four” global central banks (Fed, ECB, BoJ and PBOC), the argument can be made if we view gold as a currency, that the metal is worth closer to $1,700 an ounce (versus the spot price of $1,326 an ounce USD), says Deutsche Bank. Over the same period that the aggregate central bank balance sheet expanded 300 percent, the bank continues, global above ground stocks grew by 19 percent in tonnage terms.
  • More than 500 million people are living in a climate of negative central-bank interest rates, according to a study by Standard & Poor’s cited by HSBC this week. This represents around 25 percent of global GDP and is a clear sign of “economic and policy desperation,” – a bullish factor for gold. Francisco Blanch of Bank of America agrees, stating that central banks “are very scared of hiking rates and that is a very good story for gold.”
  • “Although we have seen a significant rally in gold, I think investors should still consider an allocation to the precious metal,” Nick Peters, multi-asset investor at Fidelity, said. He continues by explaining that gold can function as a safe haven during times of market volatility and provide strong countervailing returns to equities.

Threats

  • The Reserve Bank announced today that sovereign gold bonds issued in February and March can be traded on stock exchanges starting Monday. Four tranches of the bonds have already been issued, with a fifth likely to be issued next month. Sovereign gold bonds provide an alternative to actual gold investing, offering investors a choice to buy bonds worth 2 grams of gold going up to a maximum of 500 grams.  The bonds are denominated in gold and pay 2.75 percent interest in physical gold.
  • Are the positive changes in the gold industry sustainable? This was the point of question from Gold Fields CEO Nick Holland during a keynote presentation on Monday, reports Mineweb.com. Holland points out that not only are companies cutting “fat,” but “muscle” as well. Stay-in-business capital (as a percent of operating expenditure) decreased from 46 percent in 2012 on a per ounce basis, to 26 percent in 2015. How can companies do this? “I believe that they have merely deferred capital that is going to come back, because if you want to sustain the business into the future, you need to spend the money,” Holland said. “That for me is a little bit of a concern.”  The Industry is going to play catch up, which could yield poor capital allocation decisions, particularly if the industry errors on the side of growing production ounces versus growing profitability.
  • In a note from BMO Private Bank this week, Jack Ablin points out that historically, options investors have been able to generate reasonable income by selling options to other investors looking for downside protection and upside opportunity. However, struggling yields have created an “outsized supply of yield-seeking options sellers who collectively outstrip buyers.”  The result is that implied volatility has declined. But just because yields are low, doesn’t mean that actual risk has gone away, the note continues.

Gold and silver blasted down by HFT

Gold TodayGold closed in New York at $1,321.10 on Friday after Thursday’s close at $1,322.50.  London is closed today.

    • The $: € was at $1.1187 from $1.1293 Friday.
    • The dollar index was at 95.60 from 94.63 Friday.
    • The Yen was at 102.14 from Friday’s 100.45 against the dollar.
    • The Yuan was weaker at 6.6687 from 6.6560 Friday.

 

  • The Pound Sterling was at $1.3107 from Friday’s $1.3200.

 

Yuan Gold Fix

Trade Date Contract Benchmark Price AM Benchmark Price PM
2016  08  29

2016  08  26

SHAU

SHAU

283.32

284.19

283.68

284.44

Dollar equivalent @ $1: 6.680

$1: 6.6687

$1,319.20

$1,325.49

$1,320.87

$1,326.66

As you can see Shanghai followed New York with lower prices and the lowest Yuan we have ever seen.

LBMA price setting:  There was no gold price setting today as London was closed. On Friday the setting was at $1,324.90.

The gold price in the euro was set on Friday at €1,173.20.

Ahead of the opening in New York the gold price was reported as trading outside the markets at $1,320.00 and in the euro at €1,182.37 up from €1,175.48.  

Silver Today –The silver price closed in New York at $18.64 Friday UP from $18.56 Thursday.  

Price Drivers

All currencies are weaker today than the dollar which jumped strongly after Janet Yellen’s comments indicating that a rate hike case is now stronger. Of course, the media tries to put us back on tenterhooks for a September rate hike and will continue to do so until it is seen and then do the same before the next rate hike or the next meeting of the FOMC. It is understandable as it is the main global financial story and, as we now see, in the stronger dollar. Will the dollar rise through 100 on the Index? We think not, simply because neither the Fed nor the Treasury wants this.

But, once again, there was no physical content to the fall in the gold price. No sales took place from either the SPDR gold ETF or from the Gold Trust. This makes the fall in the gold and silver price vulnerable. On Friday the gold price did begin to recover fast and hit $1,336 after hitting a low of $1,322. But then it was slammed down again quickly in a short time back to $1,322 where it closed. All of this fall was due to High Frequency Trading. But no buyers came in to take it back higher after the expiry on the months Options and Futures. The best way to summarize the action is that dollar strength hit all currencies and gold, but not silver!

Ahead of New York’s opening while London was closed prices were marked down by the off-market traders who decided not to have a holiday. They took it to $1,316, but it rose again to $1,320 before New York opened.

This engineered fall has taken the gold price down a relatively long way, leaving it in a position where we expect some strong volatility and wide price moves this week.

We must remember that we are moving into the busiest quarter of the year for gold. This is certainly not the time to drive gold prices down unless you believe that the physical gold market is completely disjointed from the ‘paper’ gold market of COMEX.

Gold ETFs – In New York yesterday there were sales of 1.781 tonnes  from the SPDR gold ETF but a purchase of 0.30 of a tonne into the Gold Trust. This left their respective holdings at 956.588 tonnes and 224.90 tonnes.

Silver –Silver prices rose 9 cents on Friday confirming that silver prices were not affected by the ‘paper bear raid’. On Monday ahead of New York’s close the silver price held at $18.61.

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Gold and Silver Versus the Machines

By Clint Siegner*

Buying and Selling with HFTs

Investors have seen this a thousand times before. The reaction in gold and silver markets was almost as predictable as the sunrise. When markets continually respond to highly managed data from the Bureau of Labor Statistics – or some other bureaucracy – in a machine-like way, you have to assume it’s because most of the trading is actually done by high frequency trading machines (HFTs).

The algorithms calculated the Fed probably would not hike any time soon when employment missed expectations by a mile in early June. Precious metals rallied.

Gold and silver prices stumbled the following month when the same report showed much better than expected data. It was rally time again in late July when the GDP data turned out to be a big disappointment. Now there is “good news” on jobs and the machines responded by selling.

It’s been going on for years. Actual humans grow tired of the constant whipsaw around Fed policy expectations and some ask more fundamental questions. For instance, do we have free markets when what matters most is government data and how the central planners at the Federal Reserve might respond to it?

It is this kind of question that separates bullion investors from high frequency trading algorithms which dominate trading in the futures markets. Machines can scan the headlines and respond in milliseconds by placing a buy or sell order on the COMEX. They aren’t concerned about how much physical metal there is backing a futures contract. And they can’t worry about their children and order some silver bars to set aside for them.

Bullion investors ask more philosophical questions and, unlike machines, they can be skeptical of the headlines.

Friday’s jobs report is a good example. In July, the U.S. economy lost more than a million jobs versus June according to the raw data. As is often the case, “Seasonal adjustments” by government economists turned far from stellar data into “good news.”

People buy physical metal because they look past the headlines and ask more meaningful questions. They wonder what the consequences for all of this reliance on fudged data will be and why a tiny group of bankers with a dubious (and corrupt) track record is governing their money.

Unfortunately, in the short run, the superficial Fed rate hike “computer query” the HFTs are constantly running has a big impact on metal prices. The questions bullion investors are asking won’t always govern price discovery in metals until, suddenly, they are the only ones that matter.

*Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

Yesterday’s big gold price drop. Is there more to come?

Followers of the gold market will be well aware of the big drop yesterday in the USD gold price after days trading mostly in and around the $1,270s and up.  In the event the fall might not prove to have been as bad as some had feared would be unleashed by the big money on the gold futures markets but if it gives the gold bears heart we could be due for more of the same ratcheting the gold price down – but gold has been pretty resilient recently and it may well recover, perhaps up until the eve of the next FOMC meeting.

The trigger was the release of the minutes of last week’s FOMC meeting which suggested that a June rate rise was not, as many had speculated, as unlikely as the market had been suggesting but, as is usual with U.S. Fed statements messages were mixed.  We do feel that the Fed has painted itself into such a corner that at least one rate rise this year is probably inevitable, and it may yet talk itself into two more, otherwise it loses yet more credibility in terms of its ability to forecast and control progress, if any, in the U.S. economy.

From the bull camp here’s Ed Steer’s viewpoint in an excerpt from a special edition of his daily newsletter which he produced while he was otherwise taking a week off.  Ed’s newsletter is on a paid subscription so I hope he will forgive me for broadcasting this excerpt.  If you need further information or wish to consider subscribing, the link is here: Ed Steer Gold and Silver Newsletter.

Ed’s take on the gold move with supporting charts was as follows:

‘You really don’t need me to tell you what happened yesterday.  The Fed minutes were released at 2:00 p.m. EDT-‘da boyz’ spun their algos-and the rest, as the say, is history.

In gold, they got the price down to almost its 50-day moving average, with the low tick of the day coming at 3:40 p.m. in the after-hours market-and it recovered a handful of dollars from there into the 5:00 p.m. Wednesday close.

The high and low tick were recorded by the CME Group as $1,283.50 and $1,256.00 in the June contract.

Gold finished the Wednesday session in New York at $1,258.00 spot, down $20.80 from Tuesday’s close.  Net volume was very heavy at a hair over 185,000 contracts-and roll-over activity was nothing special.

Here’s the 5-minute gold chart courtesy of Brad Robertson once again.  There was decent volume between the COMEX open and the London p.m. gold fix, which is 6:40 to 8:10 a.m. Denver time on the chart below.  But the big volume came at noon MST, 2 p.m. EST, when JPMorgan et alappeared and unleashed their HFT traders on the Fed news.  Volume didn’t drop off to background until a bit over two hours later.

The vertical gray line is midnight in New York, noon the following day in Hong Kong-and don’t forget to add two hours for EDT.’  Click on the chart to enlarge it.

You may or may not not agree with Ed’s opinions but there certainly was a huge kick-up in volumes at the precise time of the biggest price fall concurrent with the release of the FOMC minutes brought on by high frequency trading on the markets.  Now whether this is just normal on such data as released at that time, or is indeed the big money using this as a lever to drive the gold price downwards we will probably never know for sure, but high frequency trades certainly have an undue influence on what is mostly a fairly orderly market.

As noted above though the big drop in the gold price appears to have been capped at around $1,255 suggesting decent resistance to a fall below this level although this morning this level is looking a little shaky.  We could be in for an interesting few days.

What’s Really Driving Gold and Silver?

Dr Jeffrey Lewis*

An interesting article on what he sees as the key price drivers for gold and silver in the current market environment from Dr. Jeffrey Lewis initially published on his own website www.silver-coin-investor.com

This week a subscriber shared with me an interesting and well-written analysis. The focus was mainly relative to gold. He wondered if I might shed light on silver – based on similar parameters.

First and foremost, I do not deny the complex tertiary dynamics with regard to the movement of physical gold. I am also painfully aware of the secondary technical indicators that arise from the short-term price action.

But the primary focus for any discussion surrounding future price must start with how we arrived at the dollar-denominated level we see today, for instance, the price of a derivative that determines the price of its underlying asset. Tail wagging the dog is the perfect analogy for this phenomenon because it encapsulates the absurdity.

Any discussion about what’s really driving gold and silver from a short-to-intermediate term starting point must include the conspiracy fact of price manipulation. The analysis below mentions price manipulation, but in an almost apologetic way. They admit it, but give it cheap seat.

Let me add to the analysis:

Secular Investor [http://SecularInvestor.com].

The ongoing narrative is that there is a positive correlation between monetary stimulus and the price of gold. However, as you probably know by now, precious metals collapsed during the Fed’s QE to infinity program. The long-term gold chart shows that gold stabilized when the Fed started tapering and around the end of QE, which is very counterintuitive to say the least. That is not to say there is no correlation, but there is definitely not a direct correlation.

This begs the question: what drives gold and the whole precious metals complex?

Both metals, but especially the silver price collapse, could be read in the commitment of traders. These are the entrails of the commercial banks and speculators trading in the futures market.

This is true whether this happens to be simply useful, or to manage perception around blatant money printing. It is simply the modus operandi for a legal mechanism (in the case of gold). Or in a highly profitable trade scheme that also happens to enable both the survival and the continual consolidation of financial power.

We have evidence of intent, mechanism, and motive. All else that follows is a loose pattern of beliefs that may be entertaining, but that ultimately obscure the reality.

…people prefer assets that are likely to have better yield. Alternatively, if an asset climbs too high and/or too long, the opportunity cost becomes high.

This is true today more than ever before and there is a reason why we are emphasizing this. The point is that all trading decisions nowadays are computer based. More than ever before, small and large investors are using chart and market analyses to make decisions.

On top of that, algorithmic trading is becoming more prevalent.

“We, just like everyone who is in some way disadvantaged by algo-based trading, are no fans of this practice. But let’s face it, algorithms have the same driver as the humans that programmed them: they search the markets in search for maximum yield.

Electronic trading is a factor that should not be underestimated. It is driving markets more than ever before, and the gold market is no exception to that. That is not to say we like it; it is simply the way things are done nowadays.

But that’s not the reality. That’s the fantasy we are choosing to accept in exchange for an even more unacceptable risk – currency.

The way it’s done ‘nowadays’ is fragile by definition. We are one little electronic (paper-trading) flash crash away from the full system panic.

On manipulation:

We can hear you thinking, dear reader, that we are not taking manipulationinto account. Manipulation works in both directions, however. When gold was going through one of the strongest and longest bull markets in history, there was also market manipulation. Just like it pushed gold prices higher back then, it has been reinforcing the downtrend since its peak. Consequently, as precious metals have been manipulated lower, there will be a point where the opportunity becomes so attractive that investors will increase their exposure to gold related investments again and we could be very close to that point.

His suggestion hints at the old, but familiar, connotation that many opponents of manipulation put forth when arguing that it can’t be manipulated when the price goes up. The above analysis takes it one step further in admitting that they are managing it on the upside as well.

Essentially it’s the ‘trader’s dilemma’ for all who own any form of precious metals – its analysis applied from the world of paper and gambler’s delight of technical analysis, where there is no place for reality or fundamentals.

What upside? The price rise that occurred over the last decade was trampled all along the way. Every rally was (and still is) either capped or reversed. Those who are truly ‘profiting’ are the ones that set the price before and after they trade it.

The problem is that allure of profit – no matter what the profit is priced in. With deep enough pockets, certainly it is possible to gamble long enough to see an upside — and then convert any gains into a more stable long term savings vehicle.

There is nothing at all inherently wrong with profit, only the vehicle used to denominate that profit. We are addicted to keeping score to the point where we lost sight of the forest. Unfortunately, many a would-be paper silver investor never quite makes it over the ‘physical’ understanding.

If gold were truly measured against the amount of fiat created over the last 20-30 years, we would be hard-pressed to recognize its price.

It would fall somewhere along the lines of what predicting $1000 gold was like in the 2000, when the price was below $300. It was considered insanity, and yet nowhere close to its potential (natural) equilibrium based on its historic role as real money.

The precious metals markets have been actively managed for decades – overwhelmingly to the downside. Paper futures trading evolved into a purely speculative affair between the big commercial banks and managed money funds – both employing either computer algorithm or electronic trading.

However, by virtue of its dominate and concentrated position on the short side, the big commercial banks wield ultimate control. This accounts for the entire range of moves going back decades.

Silver is a league all by itself. Its long manipulated price has resulted in a severely limited supply. If and when the commercials step away from the paper market, the price will be even more unrecognizable.

While the analyst is wise to point out manipulation along with the fact that at some point investors will increase their exposure…

(“…a point where the opportunity becomes so attractive that investors will increase their exposure to gold related investments again.”)

…nothing will change until the commercial banks decide it.

In the meantime, many more traders will go by the wayside, scorning the exposure, never to return again. The irony is that when these markets finally break to the upside – the chaos will be blamed on the HFT computer algos and not the commercial banks that enabled it all.

http://www.silver-coin-investor.com/

*In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical information for precious metals investors”.