The yellow metal seems increasingly resilient in the face of poor current fundamentals and strange downward price spikes from which it has recovered rapidly?
Author: Lawrence Williams
Posted: Wednesday , 02 May 2012
LONDON (MINEWEB) -
Are we seeing some interesting resilience in the gold price? Despite reported continuing subdued demand from the Indian subcontinent – one of the major drivers in physical gold consumption – and yet another strange trade on COMEX on Monday which knocked the yellow metal back $14-$15 in a single minute, gold rapidly regained its poise that day and after a flat start yesterday did, at one time, breach the $1670 level, although not for long.
Of late gold has shown some interesting contrarian tendencies. When every analyst and his/her dog were predicting huge new highs in late August last year, gold repaid their optimism by crashing back a few hundred dollars between then and the year end. Again when prices started to build at the beginning of the current year and almost as soon as optimistic forecasts were again beginning to predominate, gold crashed back again – not quite as far as in September last year – but significantly so.
More recently the less bullish consensus has been taking a hold. Talk of an improvement in the U.S. economy (which may well not in reality be there), the continuing Eurozone sovereign debt problems which, at least in theory, should mean some dollar strength against the Euro, a so far small downturn in the Chinese economy – all these seem to have been reasoning behind downgrading of forecasts from the mainstream (conservative) analysts, although most do at least give lip service to a small price increase over 2012 and possibly 2013, but beyond that some see doom and gloom for gold miners as prices fall back and costs rise inexorably.
The out and out gold bulls, though, are unfazed by all this still looking for mega increases in the gold price sooner rather than later.
With no short term fix likely for the economic crises afflicting the globe – and the huge amount of money being printed to try and retain some kind of stability in what may ultimately prove to be an extremely misguided semi-Keynesian solution, reality suggests some strength in gold at least for the next few years. The money printing has to lead to possibly serious inflation at some time down the road and people will again likely seize on gold as a protection against this, even if interest rates rise as a result.
But given the apparent liquidations out of gold ETFs and of long positions on COMEX coupled with supposedly fragile Indian and Chinese demand, how come the price is even managing to remain where it is? Can Central Bank purchases perhaps be running at a higher level than seen so far – certainly the March figures when known Central Bank buying accounted for 58 tonnes of the stuff suggests that this is indeed increasing. If perhaps China is, as many suspect, adding to its own reserves significantly then underpinning of the gold price at or around current levels would not seem unreasonable. If China is indeed following a programme of quietly trading in some of its dollar assets for gold as a long term better bet, then if it is purchasing cannily on the markets it will be in there on price falls, but also be careful not to raise the price significantly either as not being in its own best interests in its longer term dollar replacement plans.
But on the sales side – what is happening here? The latest COMEX gold sell off on Monday, following on from the infamous far bigger leap day sale, coupled with some other pretty rapid declines in intra-day trading at times when gold seems to be making a strong recovery does seem to be rather more than heavy handed profit-taking. Algorithmic computer trades are seen as the reason for some of this, but it does seem unlikely any commercial institution will set its computer trades to make quite such big sales all at one time.
GATA, for example, sees gold price suppression everywhere, and has produced some remarkable evidence that this may well be the case – at least on occasion. The U.S. Fed, for instance would likely see a sharp gold price rise of the kind predicated by the gold bulls as a disastrous reflection on its attempts to mitigate a collapse in the U.S. economy – and one suspects the politicians in power would give them support in exerting at least a degree of control of the gold price (as they might with any currency), albeit surreptitiously, as the general perception that the U.S. economy is not likely to sink into oblivion would be a particularly strong aim. One knows that official statistics are indeed continually manipulated and massaged and the goalposts moved with such a purpose.
But one also doubts that the aim is to suppress gold entirely but perhaps to create a controlled ‘devaluation’ of the dollar by letting gold rise slowly, but surely. Indeed the U.S. debt problem is in reality even worse than that of Europe in terms of trillions of dollars owed. The Eurozone member problem is that they are tied to a ‘group’ currency and thus the individual member nations cannot just print their own money (and inflate) to pay their debts – they are slaves to the Euro – while the U.S. can and does. Little wonder that China, and other countries, are probably liquidating dollar assets in favour of something that, over time, has proven itself to be a constant store of value. They are not speculating in the gold price as some might see it but just protecting their assets.
Why one feels that gold somehow has a lot further to run over the years ahead is that economics tells us that the U.S. and Europe – and other significant debtor nations – cannot just keep on getting further and further in debt ad infinitum without a counter reaction arising. Some day the chickens will come home to roost when creditor nations will be looking for some kind of more secure payment.
Indeed this may already be beginning to happen. Iran for instance is talking about using gold, and other currencies than the dollar, for its imports and exports having been squeezed out of dollar trade by U.S. sanctions, while other nations may be looking at other ways of circumventing dollar payments for Iranian oil. Ironically for the U.S. the sanctions, and the freezing of Iran out of the SWIFT global payments system, may prove to be the trigger that leads others to see this as the beginning of a trend to downgrade the dollar in global trade – a small wedge in the door from which gold could prove to be a key beneficiary long term.