Gold market has officially slid into a bear market
Economic Background
Europe
- The 17 member states of the Eurozone agreed to a seven year loan repayment extension for Portugal and Ireland.
- The Eurozone members and the IMF have confirmed their readiness for implementation of the Cypriot bail-out agreement, to the tune of Euro 10 billion, subject to the final ratification in the various parliaments. It appears that Cyprus needs to find an additional Euro 6.5 billion in order to fund a much wider deficit than originally anticipated.
- The Central Bank of Cyprus is considering (or not) to sell approximately 10.5 tons of Gold from their reserves, in order to raise Euro 400 million. Cyprus’ total gold reserves amount to 13.9 tons.
US
- US retail sales fell in March by 0.4 per cent, while the January and February figures have also been revised downwards. The revised February number was a plus of 1 per cent. This might indicate a weaker 1st quarter GDP number than expected.
- US Producer Price Index (PPI) fell in March by 0.6 per cent, against a median expectation of a 0.3 per cent decline. The PPI number for February was a positive 0.7 per cent.
- The University of Michigan Index fell to 72.3 in April, down from the 78.6 reading in March.
- The release of the latest FOMC meeting confirmed that several members of the committee are in favour of ending, or at least cutting back on, the amount of money spent for Quantitative Easing. Some members are calling for an end of the programme towards the end of this year.
Japan
- The Bank of Japan (BoJ) has been warned by other G20 nations not to use its stimulus program as a pretext to manipulate the currency, in order to gain export advantages.
India
- The Indian Rupee finished the week at 54.53 to the US dollar.
Gold: $1480 – down $102 from last week
The price for gold is now at par with the price for platinum. This is a very difficult report to write. The gold market has, more or less, officially slid into a bear market. The popular definition of a bear market is when the commodity in question not only trades, but closes at a level of at least 20 per cent under its all-time highs. The reverse psychology indicates that only a close above $1776 would re-establish the bull market.
I am not going to list all the various reasons for the price decline (ETF outflows, stronger US dollar, stronger US equity markets, etc.), but it appears that any price rally in the near future can and will only be described as short covering rallies. Make no mistake, the official sector will continue buying gold for the purpose of risk diversification, but these purchases might also start to slow down. These purchases alone, combined with expected stronger physical demand from India and China, might not be able to stem the flow of further liquidation from longs exiting the gold market in favour of other asset classes, most likely to be investing in equities.
The other side of the coin might be, that the permanent flow of scrap gold into the world’s gold refineries will at least slow down, if not stop. That would enable the physical markets to return to accurate premiums for the refined products and for their destination. The local refineries in the UAE have traded for a long time now at par with loco London at best, and at small discounts for most of the time. It will be interesting to see how this changing sentiment will affect this business.
Gold market is likely to see some short covering next week, as the market closed on the multi-year low. The former support area of $1526 will become now a formidable resistance area.
The latest Commitment of Traders Report (COTR) (end of business day 9 April 2013) shows an increase of long positions, while short positions have also increased. This will be a very different picture in next week’s figures.
Silver: $25.90 – down $1.44 from last week
Silver has caved in and is especially in line with gold. The performance and the weekly close on the lows make no good reading for silver’s long position holders. Silver prices came under significant pressure once the US markets opened on Friday, and there was no fresh buying visible, which could have stood in the way of these waves of selling. The short sellers are seemingly controlling the price action, and exerting tremendous price pressure once small bouts of buying and short covering have finished. The outlook appears to be towards the downside with no real major support visible before the $21.50 area. The ETF holdings are still reasonably strong, considering the price action, but this also indicates danger if these long term holders decide to leave the silver market.
The latest COTR (end of business day 9 April 2013) shows that the short positions have increased, while long positions have also increased. Again, as in gold, these figures are destined to be very different next week.
Platinum: $1480 – down $56 from last week
The price for platinum is now at par with the price for gold. Platinum prices went south last Friday and closed near or at the weekly low. Platinum prices followed the lead from gold and there was no knight in shining armour to come to the rescue of the platinum market. There were bouts of selling. Most of the decline can be attributed to a distinct lack of buying from the industry and investment circles. Platinum traded during the week in a discount of up to $50 with gold, only to finish the week at least at par. However, this does not necessarily indicate some kind of strength of the platinum market, but is rather the result of lethargy and potentially fear from the purchasing (industrial) community.
The price and cost environment for platinum has shifted significantly to the upside, since we saw the tensions in South Africa and the economic results out of the resulting wage have increased. Production curtailments and mothballing of mines will come very soon into the discussion at boardroom levels in South Africa. Actually, they might have already long been there, but there might be a renewed urgency for decision making in this direction. The much talked about “supply cartel” with Russia is still a distinct possibility, but the market needs some solutions for the very short term in order to ensure some price stabilisation.
The latest COTR (end of business day 9 April, 2013) shows that the long positions have decreased, and short positions have increased.
Palladium: $705 – down $21 from last week
Palladium has sold off in sympathy with gold, silver and platinum. The price action and the close from last week indicate some more long liquidation and a “shy” build-up of fresh short positions. Palladium still has, in my view, the best long term fundamental story of all precious metals. There are buyers standing by to scoop up palladium on an opportunistic basis, should they been given the chance to purchase palladium at $680 level or below. I do expect the ETF holdings to be affected in next week’s report, but the still generally large holdings give some comfort for the longer term outlook.
The latest COTR (end of business day 9 April, 2013) shows that the long positions have decreased, and short positions have increased.
