Small volume sales can move markets dramatically in thin trading periods and perhaps the post-Christmas week’s fall in gold and silver has been overdone.
Author: Lawrence Williams
Posted: Friday , 30 Dec 2011
LONDON – Those who have long predicted a collapse in the gold price will be saying ‘I told you so’ as it has, counter to its performance in most of the past ten years, dived between Christmas and the New Year. At one time it had looked as if it might be heading down through $1500, but has since been making a reasonable recovery moving back up to over $1550 overnight last night. As ever, more volatile silver has been following gold on its downward path, and is now also recovering some of its lost ground, but unlike gold, which has risen around 11% in the calendar year, silver is actually down by a similar amount.. To compare, ahead of today’s final closing the S&P 500 is down 0.7% over the year to date and the UK’s FTSE 100 is down just over 7%.
But gold’s detractors may well be winning the battle but still losing the war. In the time between Christmas and the New Year markets are thin and little money can have a strong impact. What seems to have had an undue effect in the past month or so this year is weak demand in the Asian markets – perhaps the biggest price drivers at the moment. In large part this has been because the weakness in the Indian rupee has still made gold particularly expensive there which is showing itself in a number of ways. Buyers are thin on the ground, while high gold prices mean that many Indian jewellery manufacturers are reducing gold content in their products to try and maintain sales levels.
See chart below from kitco.com showing the big discrepancy in gold price performance in the rupee and the dollar over the past six months due to the weakness of the Indian currency. This shows that gold actually reached its rupee high as recently as earlier this month and that has been weighing on Indian gold purchases. The recent gold price fall in rupee terms may well see a return in purchase volumes.
In China, the other really big Asian market, demand has also been muted because of high gold prices and the combination of the weaker demand in the two Asian buying powerhouses has meant that any fall-off in the price in the West is not seeing counter purchasing to bring the price back up overnight from the East.
True, there are a number of other factors at play here too. Year-end book balancing will be responsible for some sales as over the year gold has been one of the market sectors where real gains have been seen (at least in most parts of the world) while stock markets in general have been in decline, or barely doing better than break even as noted above.
There remain worries about the future of the Eurozone which has meant the dollar has been seen as a safe haven of choice and is perhaps artificially strong against the Euro, which has also had an impact on the gold price – strong dollar means weak gold (in dollar terms at least)and vice versa.
However, as in India, the gold price in Euros has not fallen nearly as far as the dollar gold price – see kitco.com chart below – so perhaps gold has done rather better than it is given credit for given that the price, and price movements, are invariably quoted in U.S. dollars. While gold has fallen to a six-month low in dollars, in Euros it is only back to the level of late October.
But has the gold price fall in dollars been overdone and will it continue? The answer still could be yes and yes. We could see even more of a shakeout if the recent gold price rout returns and becomes a panic and leads to major liquidation in ETF holdings in particular, but even so this does not necessarily mean the end of the gold bull market. Gold could retrace as much as 30% from its late summer peak without destroying the overall bull market pattern, and this could take it down to around the $1340 level. But one suspects a fall of this magnitude is not on the cards yet. At some stage in the future gold will indeed peak and enter a bear market, but we don’t see this happening yet. The global economy is in a far too precarious state, and does not look like coming out of its downturn for several years yet.
But the U.S. economy is showing signs that the recession may be over, you may say. However this ‘growth’ has been artificially stimulated and as subsidies fall away – some subsidies to companies to buy U.S. capital goods will halve at the end of 2011 – the seeming growth pattern could well yet reverse. Unemployment remains at unacceptable levels – and is almost certainly higher than official statistics claim. The stock market has been shaky despite the various stimuli – and as growth slips again in 2012 some additional form of Quantitative Easing from the Fed looks almost inevitable and if this is seen to come about we are likely to see renewed dollar weakness and gold strength.
Short term too there could be a bit of a kick in the gold price as the Chinese New Year, due this year towards the end of January, draws near. It is an auspicious time to buy gold in the Middle Kingdom. Demand will likely pick up there in the weeks ahead which could give the gold price another stimulus, although perhaps not as much as in the past two years.
Meanwhile, Europe moves from crisis to crisis. True the situation may seem a little easier at the moment (although yesterday’s dire Italian bond sale is distinctly worrying) but this could well just be the calm before the storm. Civil unrest is brewing in several European countries as austerity measures bite and the economic cure for the massive debt situation most of the European countries find themselves facing may well be more that the general populace can stomach. In particular the volatile youth element, where the employment situation is truly horrendous, could prove to be a powder keg on the point of ignition.
One suspects government by ‘technocrats’, whatever they may be, as is being seen already in Greece and Italy, rather than by democratically elected leaders, will not survive for long. From this angle the Eurozone common currency experiment seems doomed to failure sooner or later and the economic chaos which will result from such a collapse will have global repercussions.
Sooner or later as stagflation bites, which again seems inevitable given the enormous growth in QE-generated money supply on both sides of the Atlantic leading to serious inflation while the economy continues flat, will bring gold back into focus as the safe haven of choice. But, as long as the US dollar is seen as the strong choice this day may be postponed – but not indefinitely.
In the words of true gold believer Jim Sinclair “Gold is coming up on a tight group of four very major support areas that will hold the price from which the next advance is to take place. We have reached a point in terms of the depth of despair in the gold community that was never reached in the 1968-1980 reactions. That is all this is. Just another reaction in a gold price headed for Alf Field’s target of $4,500.” (Alf Field is a retired gold market analyst who has made perhaps the definitive Kondratieff Wave theory study on gold price movement – see Gold price going to $4,500: Here’s why – Alf Field)
That may be an overoptimistic viewpoint for the gold bull, at least as far as the next couple of years are concerned, but Sinclair, like many other gold believers, has history on his side. Gold probably will get to $4500 some day, but perhaps not quite yet.
iPad Version – Picture: Gold and silver bars are pictured at the Austrian Gold and Silver Separating Plant ‘Oegussa’ in Vienna: REUTERS/Lisi Niesner