Gold – You Better Hold It

When it comes to precious metals, April 2013 was characterized by extreme price swings, historic facts & figures, and remarkable news stories. This article is an attempt to focus on the real underlying story based on facts & figures. It should help our readers and ourselves understand what is going on, what take away from this period and manage expectations. Our focus is on gold; we will cover silver later.

Fact: retail investors search for monetary protection

Numerous are the stories coming out of all regions of the world about the surge in demand for physical gold and silver. A summary from the most recent ones:

The Shanghai Daily reported that claimed Chinese housewives spent 100 billion yuan ($16 billion) over the past two weeks, buying up 300 tons of gold. (via Marketwatch)

Surging demand for gold from Dubai to Istanbul has pushed physical premiums in the region to levels not seen in years. (via Bloomberg)

Australia’s Perth Mint said that demand has jumped to the highest level in five years after prices plunged, with the factory kept open through the weekend to meet orders. “We haven’t seen levels like this since the 2008 global financial crisis,” says Ron Currie, sales and marketing director. “Compared to March sales, April sales have doubled or tripled.” (via Bloomberg)

Savers, investors and coin collectors have been buying Krugerrands in record numbers since the recent gold price slump of mid April 2013. The Scoin Shop, the UK and the world’s only gold coin retail chain, has reported a 468 percent increase in Krugerrand sales, above average weekly sales of the bullion coins. (via The South African)

The largest wholesaler in the U.S. sold out of 100 ounce silver bars (via KWN). Precious-metals firm Blanchard & Co. said it sold 400% more one-ounce American Eagle gold bullion coins in April than it did in March because of huge demand from both new and existing clients. “We have not seen demand like this since the fourth quarter of 2008 after Lehman Brothers collapsed.” (via Marketwatch)

While it is true that the US Mint had a spike in its gold sales in the month of April, it is true as well that the figures for the first 4 months of the year are almost identical as the ones right after Lehman Brothers. Below the detailed figures since 2008.

Total gold coin sales in the first 4 months of each year: 2008 – 151 000 oz; 2009 – 499 500 oz; 2010 – 331 500 oz; 2011 – 407 500 oz; 2012 – 230 500 oz; 2013 – 502 000 oz.


What are the key take-aways?

  • It is fair to conclude that a significant number of individuals are aware of the protective monetary power of the metals. Although Cyprus did not have a direct impact on gold sales, it undoubtedly had an indirect effect.
  • It is important to note that all reports compare today’s situation with 2008/2009. There was no real shortage or paper collapse in the metals at that time.
  • It is clear that demand in Asia is higher than the rest of the world. While the reported purchases of 300 tonnes by Chinese housewives seems too stretched, it should be compared with the 6,4 tonnes of US Gold Eagle sales (as a leading indicator in the US) to get a feeling of the scale. The move of gold from the West to the East simply goes on.
  • The demand among retail investors is on fire, but no real stress or elevated premiums in the wholesale market (there are only delays).

Fact: traders are bearish

Speculators in the West continue to look at gold as a trading asset, say just another commodity. This is key to understand and accept. The bearishness surrounding gold has reached extremes not seen in years. The latest Bloomberg survey among analysts reveals that twenty analysts are short term bearish, nine bullish, four neutral. It is the biggest proportion of bears since February 2010. In the same report, the head of commodity strategy at Saxo Bank in Copenhagen comments as follows: “The fundamental picture, for now, has changed. The investment community or those trading paper gold in futures and ETPs are still heading for the exit.”


The latest Commitment of Traders report reveals the following picture (courtesy Sentimentrader):


The extended version of the graph shows that the latest time small speculators were as negative as today was in 2001, at the start of the bull market. The net long positions of large speculators are as low as in 2008/2009. We summarize Pater Tenebrarum’s view ( on how to look at the COT positions of large and small speculators.

One must keep in mind that the underlying stock of ‘strong hands’ type speculative traders remains engaged on the long side in gold. After all, the net speculative position of the big trader category remains long to the tune of 100,000 contracts (we estimate that the long term investors that have remained net long through all upheavals in the gold bull market to date hold about 80,000 contracts). These traders apparently continually roll over their long positions, regardless of short term gyrations in the gold market. We would become very concerned if these traders were to change their opinion, but it is important to note that they have not yet done so.

A flat position for small speculators is definitely a new phenomenon. So, is this an unreservedly bullish signal? We would answer this question as follows: if the secular bull market in gold remains intact, then the answer is yes. However, if either a secular change in trend has occurred or a major cyclical bear market is in train (similar to the 1975-1976 mid cycle bear market in the 1970s secular bull), then the small speculator position can be expected to either remain flat or even move to a net short position while prices continue to decline.

Like it or not, it is the trading community that sets the price primarily as futures trading has a larger impact than physical … at least for now. It is unlikely that we reached the point where a physical shortage will take over the price setting … again not yet. Bron Suchecki, Manager Analysis and Strategy at The Perth Mint, observes that there isn’t any stress in the wholesale markets. So COMEX and LBMA aren’t going to be failing any time soon.

It is not very likely that the next leg up in gold has started. Till the sentiment of traders returns to positive we can expect even more downside price action. We fully agree with Dan Norcini (a trader, so he knows what he is talking about):

I can assure you as a trader that once you are on the wrong side of a trade of this nature, and watched your trading account or investment capital been blasted into the nether regions, you are in no special hurry to plunge right back into that market. You need time to lick your wounds. There are probably people out there who are swearing out loud right now that they will never even look at another ounce of gold, much less plop down money on a gold investment. This market will thus need some sort of healing process in my view to convince the skeptics that it is for real.

An educated guess about the GLD & COMEX outflows

While it is true that the physical gold outflows from the GLD ETF (not so in the other ETF’s by the way) and COMEX warehouses are  significant, it is not likely that they will lead to one or another collapse of any type. Let’s face it: the COMEX as an investment institute is undoubtedly smart enough to foresee how to handle stress situations. Apart from that, relative data do not show any stress at all. Bron Suchecki, Manager Analysis and Strategy at The Perth Mint, writes on his blog that the important metric is to compare stocks in relation to open interest (open interest in ounces divided by stock in ounces).

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Even after that COMEX stock drop in gold, we still have a coverage ratio that is way above that which applied in the 1980 bull and which is not down much on 2012. The current coverage of around 20% also needs to be kept in context of the percentage of open interest which stands for delivery, which for gold and silver over the past five years averages between 2% to 4%. So it looks like COMEX has plenty of stock on a historical basis.

He continues: And for those who will say what about if everyone stands for delivery, well consider that while most of the shorts don’t have the metal, most of the longs don’t have the cash. We know this because of all the talk about margin calls causing people to have to sell. Think about that – if they couldn’t meet the margin calls, then it means they didn’t have the money to stand for delivery.

We believe there is another take-away related to the COMEX and GLD outflows. The key thing to watch is where the gold is going to. It is not consumed, so it remains available somewhere … From our mail conversation with Bron Suchechki:

Unfortunately, all we can do is speculate on who is buying the metal, as the precious metal markets are mostly done out of view. I think given the retail demand for coins and bars, and demand in Asia (which is ultimately going to individuals), I would say most of the metal is going into private small individual hands, which are hopefully stronger hands.

GLD I understand is about 50% institutional investors, so that may account for its reduction – just speculative money exiting. I suspect SLV has a lot more private individuals owning it, which could account for why it is going up, just like silver coin sales. For example, Perth Mint Depository has mostly private individual and we aren’t seeing net outflows.

Is the metal going to the commercials and bullion banks? There are no public figures on how much physical bullion banks hold against their unallocated liabilities. Some of the metal sold from the ETFs may also have been bought by large private investor and is just staying in the London vaults of the bullions banks.

Our conclusions

It seems very likely that physical gold is moving from weak to strong hands which is the people who recognize the monetary value of gold and chose to physically own it. They prefer to hold their metal which they consider more important than price swings. They undoubtedly have very good reasons to do so. Meantime, most of the gold is following the money; it is flowing from the West to the East.

On the other hand, the investment community is not at the point yet where they chose for the metal for its monetary protection. Things are perceived to be “contained,” so they are not in a hurry to leave well yielding ordinary investments. As soon as they jump on board, however, a lot of metal will be gone. That will be the period of the real spectacle.

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