Past week marked another V-type move in the gold price and silver price. The good news though is that the previous low has not been broken, but we rather saw a higher low. Especially in gold, a remarkable bounce occured intraday on Wednesday, after the trading session started with a sharp price drop.
It seems that the gold price is not allowed to move lower, at least for now. We’ll need to watch the price action over the coming weeks. Tensions over Europe are increasing and the faith of the European currency and banking system is in the hands of the politicians. The speed and type of their decisions will determine to a great extent the effect on the economy, stock markets, the gold and silver price but maybe even more important on the psychology of investors worldwide … at least in the short run.
Investors keep on expressing their incertitude in a way that surprises many of us. It seems like they cannot control their emotions as they switch from “risk off” to “risk on” almost on a daily basis. At the same time, they keep on respecting the historic negative correlation between the US dollar and dollar gold. This of course does not make sense in the current environment, where the dollar strength is purely the result of the euro weakness and where the (US) economy is fundamentally not healthy.
On the other side of the trade, there are some market participants who are gratefully using the current weakness in the gold price to add to their positions. In particular past week, we saw another confirmation of Central Banks worldwide adding to their stock of physical gold. Central Banks purchased over 450 tonnes of gold in 2011 (which is a record high for the last 50 years), while 2012 is on track to add another 400 tonnes to those positions. While these figures indicate a strong move, Mineweb reported that “some countries – of which China is thought to be the major entity – for political reasons do not report their total holdings to the IMF, but hold new gold purchases in accounts that are not reported until it is considered politically expedient to do so. Last time China reported an increase in reserves was in 2009.” Furthermore, as a reason for this massive gold buying, Mineweb indicates that “the continued buying by Central Banks does continue to indicate an underlying unease about the sovereign debt situation and its impact on the value of some key reserve currencies- not least the dollar and the euro.”
Now one week earlier, China came with the “shocking” news that they increased their reserves from 19 million ounces of gold in the first quarter of 2011 to 135 million ounces in the same quarter this year. As Eric Sprott pointed out, this kind of incredible increase in demand with a flat supply cannot come without a massive increase in price. That’s simply the natural law of supply and demand in action.
It seems like there is enough demand for physical gold to keep the gold price above the 1.520 dollar level, even with this bearisness in the paper market. The paper market indeed gives another signal. As explained by Dan Norcini on the most recent King World News Weekly Metals interview, the COT reports still show bearish positions not seen since the collapse of late 2008. For a couple of weeks now, the commercials have the lowest net long positions while the SWAP dealers have the smallest short position. Dan Norcini adds to it that this bearishness is healthy for the markets because a simple spark can send the price quickly up.
In closing, we would like to add two final notes. First, with this strong uptake in demand for physical gold (and silver) and a flat supply, how much more will it take until we get to the point of failure of delivery ? That’s a rhetoric question indeed … Second, for the owners of physical gold and silver that could be discouraged in this bottoming process, listen to what David Morgan has to say during his last audio interview: the fundamentals have never been better for gold and silver, make up with conviction your plan and stick to it.