Gold: A Great Buying Opportunity Approaches

Gold has officially entered a bear market, declining more than 20% from the September 2011 peak of US$1,924/oz. I warned in December last year and in March this year that gold was likely to fall further, even though I was optimistic on the long-term outlook. The reasoning was that gold had gone up every year for 12 straight years, a feat achieved by few assets, and that a sharper correction seemed inevitable at some point. After all, most bull markets have several corrections of +30% and gold had only experienced one steep fall of 29% in 2008. Also, the March-July period is traditionally weakest for gold prices as seasonal demand slows.

Now that gold is falling, what should you do? Well, the technical picture suggests that gold will move to US$1,300-1,400/oz. At these levels, gold would have fallen 27-32% from its peak. Remember that during the 1970s bull market, gold fell 47%, before rising 8x to peak in 1980. So no-one can rule out gold declining a lot more. But there are still good reasons to believe that the gold bull market is far from over. If you think that’s right, accumulating gold below US$1,400/oz makes sense.

But we’re getting ahead of ourselves. Let’s go through Friday’s events and what to expect from here.

What triggered gold’s steep fall on Friday?

Gold was smashed on Friday, down 4.7%. It wasn’t alone as silver finished down 5.3% and other commodities were also sharply lower.

Gold’s fall was largely technical. It breached May 2011 lows of US$1,536/oz. This triggered stop losses. Then the psychological US$1,500/oz was breached and further selling kicked in.

Silver hasn’t yet broken through its key technical support level of US$26/oz. But it should do soon enough.

Beyond technicals, are there other reasons for the sharp fall in gold?

Some have pointed to the European Central bank forcing Cyprus to sell its gold. This is nonsense though given Cyprus’ gold holdings were tiny.

The fact is that gold’s price action has been a concern for the past six months. Despite QE4 and Japan‘s monstrous stimulus package, gold has shown few signs of moving higher. Prior to this, stimulus had always stimulated the gold price too.

So what gives? Well, I think supply and demand for gold may offer a more plausible explanation for the recent price weakness. In 2012, gold demand fell 4%, the first decline since 2009. This was driven by a 12% decline in demand from India, the world’s largest consumer of gold. A rising rupee, making gold more expensive, as well as higher import tariffs, took a toll on Indian demand.

The decrease in gold demand was all the more remarkable given that central bank gold buying reached 48-year highs.

With India imposing higher tariffs on gold this year, there are good reasons to believe that Indian demand will continue to remain soft. Also, retail demand for gold exchange-traded funds has clearly been in sharp decline of late. Lastly, seasonal demand for gold is weakest in the second quarter of the year. It only ramps up in the second half in the lead-up to India’s festival of lights, Diwali.

The decline in gold demand has come while gold supply remains muted. While gold demand is likely to pick up in the second half of the year, supply should stay relatively flat. This is because it takes at least five years to get a gold mine up-and-running, and the 2008 financial crisis delayed a lot of investment into new mines.

Long-term, the supply picture looks poor as gold companies are cutting back investment spend, after it got out of control in the lead-up to 2008. More than a quarter of CEOs at the world’s top 25 gold companies have been replaced over the past 18 months as boards demand better returns on capital.

Therefore, though the near-term outlook is challenging, the picture beyond 2013 appears brighter.

How much further could gold fall?

The truth is that no-one knows. You can monitor supply and demand, the technical and so on, but putting a bottom on the price is impossible.

The 1970s can offer insights, though history never repeats. The gold price from 1974-1976 corrected 47% before it rose 8x to peak at US$887/oz in 1980. Extraordinarily, the price increased 4x in the 13 months before the peak.

All bull markets have sharp corrections. You should expect them and that way there’s not much to panic about when they do happen.

Does gold’s fall signal anything about the broader economic environment?

The different markets are sending mixed signals. Strengthening in bonds and the commodities sell-off would seem to indicate investor caution, or so-called risk off. But stocks are still at or near record highs in most markets, which indicates risk-on.

What’s clear is that economic data have deteriorated of late. In the U.S., poor retail sales numbers were the latest in a line of data which were below expectations. In Asia, export figures from countries dependent on global trade such as South Korea, Taiwan and Singapore have been abysmal.

My take on this is that stocks are the odd man out due to printed money flowing through to them. What I’m seeing is that deflation appears to be defeating central banks’ best efforts to produce inflation to reduce their debt loads. The prices of gold and copper (Dr Copper is used as a sign of economic strength or weakness) indicate that inflation isn’t on the horizon.

Whether these commodity price decline indicate a larger deflationary event is on the way is an open question. Let’s wait and see.

Is the gold bull market over?

Ah, the key question. I think there is a strong likelihood that the bull market isn’t over. History is my guide on this. Commodity bull markets have averaged 18 years over the past century, with 14 years as a minimum. We’re into year 13 of this gold bull market. If the bull market is over, it would be the shortest one in recent history.

More importantly, all bull markets have a so-called parabolic stage, where prices go up in a straight line. You see that in the gold chart of the 1970s. Same for the Nasdaq in the 1990s and so on. We just haven’t seen such a spike in this gold bull market.

Moreover, bull markets require significant public participation. I certainly don’t see the average person in most countries having participated in the gold bull market. It certainly isn’t reflected in the fund allocations of fund managers either. In the U.S. for instance, gold represents less than 1% of institutional fund portfolios.

Finally, history suggests that global currency devaluations favour precious metals. And as mentioned in my newsletter last week, the current expansion of central bank balance sheets is unprecedented.

What about gold stocks, which have been obliterated of late?

Gold stocks are at more than 10-year lows versus the gold price, as measured by the HUI index in the U.S.. They have been significantly underperforming gold for some time.

One key reason is that gold companies have seen mine cost blowouts, investment overspend and silly merger and acquisitions prior to this year. Shareholders did not get the benefits of higher gold prices through better company earnings and dividends.

As mentioned above, the cowboy culture of many gold companies is now changing. Boards are holding managements to account. CEOs are being more disciplined about investment spend, focusing on returns rather than getting bigger just for the sake of it.

In the end, gold stocks are leveraged plays on gold prices. But you need to be able to pick the right companies.

This post was originally published at Asia Confidential:http://asiaconf.com

Gold to be a lousy investment in the next decade

The Indian price of gold has risen six folds in the last decade, fueling a record speculative import spree. Soaring gold imports have hit $42 billion in the first ten months of 2012-13 , pushing the current account deficit to near-disaster levels. The finance minister is wringing his hands in distress, while housewives say that buying gold was the best thing they ever did.

Sorry, but the party is over. The notion that gold is the finest investment, whose value can only go up, is dead wrong. History shows that gold fluctuates crazily, so it can look a fabulous investment for some time and then become a total disaster. There's nothing safe about it.

The Indian price reached a peak of Rs 33,000 per 10gm in late 2011. It has since fallen steadily to just Rs 29,000. Global trends suggest we have entered an era of falling or stagnant gold prices. Housewives and all other buyers beware: gold will probably be a lousy investment in the next decade.

After the US went off the gold standard in 1971, gold shot up from $35/ounce to $835 in 1980. It looked the best investment in sight. But then its price crashed and stayed down till 2001, at around just $250/ounce. Gold investors lost their shirts (and sometimes underpants) for two decades.

However, after 2003 gold zoomed again. It reached a new peak of $1,890 in late 2011. But it has fallen steeply to just $1,501 last Friday. It may bounce back temporarily , but will then fall again.

The fall in price has been less dramatic in India because the rupee has depreciated against the dollar. Even so, gold in rupee terms is down 10% from its peak. Goldman Sachs estimates that the world price will fall sharply to $1,270 by the end of 2014, and other analysts are almost as gloomy.

--> Gold is a safe haven to which people rush in troubled times, so speculators hoped its price would rise in today's troubled conditions. North Korea is threatening nuclear war and Japan seeks to double its money supply. Cyprus has set a dangerous precedent by confiscating uninsured large deposits in its top banks, and this could have prompted a rush into gold. Why, then, has gold fallen instead of rising?

First, fears of a Eurozone breakdown took gold to a peak in 2011, but those fears are mostly gone, so gold is less needed as a safe haven. Second, the US is finally set, after five years, to end its quantitative easing of money supply, reducing the monetary fuel of speculators.

Third, as part of its bail-out package, Cyprus may have to sell its gold reserves to raise 400 million euros. Not only will this glut the market, it stokes fears that similar gold sales may be forced on other troubled Eurozone countries that may also go bust. Troubled Italy has the fourth largest gold holdings in the world of 2,452 tonnes, worth a whopping $95 billion.

Speculators had poured $26 billion into gold-linked securities in 2010 and 2011. But after mid-2012 , when fears of the Eurozone's survival ended, many speculators (including George Soros, the most famous of all) decided that the gold boom was over and got out of the market. Money fled from gold-linked securities. SPDR Gold Shares, the biggest exchange traded fund linked to gold, has seen net redemptions of $7.7 billion in 2013 so far.

Indian speculators and housewives, please read the writing on the wall. The special reasons driving the gold boom of the last decade have gone. It's time to sell gold, not buy.

To discourage gold imports, the finance ministry has increased the import duty on gold. Unfortunately this has raised the domestic price correspondingly, rewarding instead of penalizing speculators. It has also led to increased smuggling.

In decrying and trying to suppress gold imports, the finance ministry has unwittingly given the impression that gold is a great bet. Moreover, government banks today are aggressively pushing sales of gold coins to customers as a must-have investment. They should be obliged to warn customers of the risks too.

The finance minister should warn people, in speech after speech, that gold has already fallen a lot and is likely to fall much further. Every time the gold price falls, he should come out with advertisements saying "I told you so".

Last but not least, he should announce that the import duty on gold will be abolished by the end of the financial year. This will induce people to stop importing now, and wait for next year, by which time speculation may be ebbing anyway. The balance of payments will improve magically.

Why gold and silver are in the dumps

By Nigam Arora

Over the last month, if one could simply watch the news but not know the price of gold and silver, the logical conclusion would have been that this is the glory time for precious metals. After all, from every direction, news was coming that should have driven precious metals higher.

The Bank of Japan got a new chief who started running printing presses faster than Bernanke. Cyprus came close to confiscation of bank deposits, by taxing the deposits. Central banks bought $3 billion worth of gold in the first two months of 2013. North Korea threatened to fire nuclear missiles at U.S. targets.

Based on all of this news, gold should have gone to new highs, but instead gold and silver are in the dumps.

There are outflows from the popular SPDR Gold Trust GLD -3.55%  and iShares Silver Trust SLV -4.33%  . Gold and silver miners have been hard hit. Several components of popular miner ETFs Market Vectors ETF Trust Market Vectors Gold Miners GDX -4.59%   and Market Vectors Junior Gold Miners ETF GDXJ -6.39%   have been hovering near recent lows.

To understand what is happening, take a look at the long-term weekly chart and the medium-term daily chart of GLD.

Click here for the long-term weekly for chart.

Click here for the medium-term daily chart.

The long-term chart shows that about a year after I gave a signal to aggressively buy gold in the $600 range, gold started moving in a smooth channel with a slope of about 45 degrees. Smooth channels with a 45-degree slope are often sustained for a long time. Such was the case with gold.

As the chart shows, in 2011, gold broke out of the smooth channel in a parabolic move that resulted in exhaustion. Such a parabolic breakout from a smooth channel is often a medium-term top, and this was the case with gold. After exhaustion, gold traced a symmetrical triangle, which is shown on the chart. A symmetrical triangle indicates a battle between bulls and bears, with neither side able to prevail. Then came the break on the downside, bears won the battle.

The chart also shows Fibonacci retracement levels. Retracement of 50% to 61.8% also coincides with the target on gold based on the Quantitative Analysis Screen. This is the same target zone that I set when I gave a call to sell gold at $1904 after being a mega bull for a number of years.

Over years at The Arora Report, we have refined algorithms that detect footprints of different types of market participants from trading data across the world. The chart shows the zone where we believe the majority of buying was being done by the momentum crowd. The momo crowd buys gold and silver simply because everyone else in their social circle is buying gold and silver, they think it is going up, and they are scared of monetary policy pursued by the Federal Reserve.

The gold momo crowd keeps up the ruse that they understand inflation and history, but in reality, my experience is that unlike gold bugs, their knowledge is superficial. Further, the momo crowd misunderstood QE3 mortgage-backed security buying as inflationary, when in reality, it was not likely to have any impact on inflation.

The chart also shows the zone where Smart Money has been consistently selling, according to our algorithms.

Now look at the medium-term daily chart on gold. Please pay special attention to the down-sloping trendline. Gold bulls failed to penetrate this line on the upside in a meaningful way in the last six months. Every time gold approached the trendline, the Smart Money was selling to the unsuspecting momo crowd. Recent events caused only a weak bounce that did not even touch the trendline as shown on the chart. The last bounce on news from North Korea and Europe was even weaker. In the meantime, the chart shows that gold made a lower low.

Astute investors know the difference between short-term trades and long-term investments. We had downgraded gold and silver on Feb. 11, just before the recent drop in various timeframes based on our algorithms. These are the same algorithms that called for allocation of 20% of assets to silver for a long-term investment at $17.73, and then called silver to be sold at $45.00 - $50.00. Here are our current ratings on gold and silver.

Negative in the very short-term.

Negative in the short-term.

Negative in the medium-term.

Negative in the long-term.

Positive in the very long-term.

Negative psychology in the gold miners is evident from the fact that Barrick Gold ABX -5.46%   fell 8.36% Wednesday on relatively minor news, compared to the scope of this company, to halt work on the Pascua-Lama mine in Chile. Our favorite silver-miner short at this time is First Majestic Silver AG -5.24%  . We have recently taken profits on short positions in Silver Wheaton SLW -5.17%  and Hecla Mining HL -4.81%  .

Disclosure: Subscribers to the Arora Report are short SLV and silver miner AG.

Gold sinks over $60 to lowest since July 2011 Prices hit by technical selling; silver drops 5.3%

By Myra P. Saefong and Carla Mozee, MarketWatch


SAN FRANCISCO (MarketWatch) — Gold futures sank Friday, poised to settle at their lowest level since July 2011, as recent cuts to price forecasts continued to hurt sentiment, prompting investors to lose confidence in gold as a safe-haven investment.

Gold for June delivery GCM3 -4.28%   extended losses after downbeat U.S. retail-sales data, dropping $67.30, or 4.3%, to $1,497.60 an ounce on the Comex division of the New York Mercantile Exchange, on track for a weekly fall of nearly 5%.

“It’s pure panic bedlam on enormous volume,” said Gene Arensberg, editor of the Got Gold Report.

Based on most-active contracts, prices haven’t settled at a level this low since July of 2011.

Gold also fell along with other commodities as the dollar rose on a weak batch of U.S. data and as the psychological impact of potential selling of the precious metal from Cyprus continued to take a toll.

Gold these days “does not seem to respond adequately to the current financial and geopolitical situation,” said Frederic Panizzutti, senior vice president at MKS Group. “The rumors yesterday about Cyprus possibly selling some gold from its Central Bank reserves had a psychological impact resulting in some selling despite the fact that the amount of gold being mentioned could easily be absorbed by the market.”

Cyprus remained in the headlines Friday amid speculation the government was going to ask for more bailout money, which rattled commodities and underpinned the dollar. The country denied it would seek more help.

But despite the troubles in Cyprus, which are usually supportive for gold as a safe haven, investors have focused on Goldman Sachs’s cut to its gold forecast for 2013 to $1,545 an ounce, down from a prior forecast of $1,610. And minutes of the latest Federal Reserve meeting showed members were at odds about when to stop quantitative easing.

“The speculative funds are near-record short gold futures, so it is easy to understand why Goldman would make such a call, but with the trouble heating up in Europe again, and bonds being bid higher today, the move in gold is somewhat counterintuitive,” said Arensberg.

Overall, gold investors have now created an illusion that the metal is no longer a safe haven and that more declines are in the offing, said Chintan Karnani, an independent bullion analyst based in New Delhi.

More pressure

Also weighing on the dollar-denominated metal Wednesday, the dollar got a bid after poor U.S. economic data. Retail sales dropped by the biggest amount in nine months, falling 0.4% as Americans spent less at gasoline stations and many other stores in March, and exceeding the 0.1% drop that was expected. Oil prices also fell after that data was released.

The dollar index DXY -0.0024%  , which measures the greenback against a basket of six major currencies, rose to 82.267 from 82.153 seen in North American trading late Thursday.

Other data showed producer prices falling sharply in March.

Silver futures down 0.63% on lower global trend

NEW DELHI:

 Tracking a weak global trend, silver prices moved down by 0.63 per cent to Rs 51,450 per kg in futures trade today as speculators offloaded their positions.

At the Multi Commodity Exchange, silver for delivery in May moved down by Rs 325, or 0.63 per cent to Rs 51,450 per kg in business turnover of 5440 lots.

Similarly, the white metal for delivery in July declined by Rs 313, or 0.59 per cent to Rs 52480 per kg in 342 lots.

Market analysts said speculators offloaded their positions in tandem with a weak global trend, that mainly pulled down silver prices at futures trade.

Meanwhile, silver fell by 1.18 per cent to $ 27.65 an ounce in New York last night.

Silver futures down on weak global cues

NEW DELHI:

Silver prices fell by 0.76 per cent to Rs 51,280 per kg in futures trade today as speculators offloaded their positions in tandem with a weak global trend.

At the Multi Commodity Exchange, silver for delivery in May month fell by Rs 394, or 0.76 per cent to Rs 51,280 per kg in business turnover of 18,304 lots.

Similarly, the white metal for delivery in July declined by Rs 397, or 0.75 per cent to Rs 52,285 per kg in 1,256 lots.

Market analysts said speculators offloaded their positions, tracking a weak global trend mainly pulled down silver prices at futures trade.

Meanwhile, silver lost one per cent to 27.37 an ounce in London.

The math gets skewed for large commodity traders

Monday, Apr 1, 2013, 6:01 IST | Agency: DNA

Vijay Bhambwani

CTT can change trend in volume growth as impact costs rise.

Today will see the advent of turnover tax (0.01% or Rs1,000 for every Rs1 crore of trade initiated) for the first time on all non-agricultural commodities.

Prima facie, the amount may seem negligible for a retail investor as his / her turnover intra-day is not sizable. But for high frequency traders, algo traders and arbitrageurs, the levy would cut into profits because of their modus operandi – which is to initiate trades in large to very large quantities and reverse positions on small profits or losses.

Their profit depends on the economies of large-scale exposure. Typically, the USP (unique selling proposition) of this type of trading is keeping costs down to the barest minimum. Brokers offer such traders deeply discounted rates of brokerage, while statutory charges are the only level playing field.

Ramping up volumes helps brokers too, since they command a higher component of the total exchange traded volumes, which, in turn, has its own perks.

For the markets and participants alike, there are tangible benefits as well – higher volumes invariably bring efficient price discovery mechanisms and wafer-thin impact costs.

Impact cost is one of the first things large players look for before deploying funds. It’s extremely critical as it is the difference in price between the best seller (or buyer) at a particular price point and the next best seller (or buyer).

If the impact cost is efficient, there will be ample buyers and sellers at every tick, thereby making large-sized trades an easy and inexpensive proposition. The market is then said to “have depth.”

On the other hand, if buyers (or sellers) are few and far between, accumulating large positions becomes a very expensive and undesirable exercise. It hits the take-home profit significantly.

Big players usually avoid markets with high impact costs. The commendable growth in the turnover of Indian commodity exchanges has been partly due to their cost efficiencies and partly due to the novelty factor.

With the imposition of the CTT, the cost efficiency may just take a hit as high frequency traders will face a hurdle in terms of a hit in their take home profits.

There is also another aspect to the timing of imposition of the CTT: in a trending market (bull or bear), price moves are relatively large and the percentage returns on a trade are higher compared with a non trending (sideways) market.

A trader can tweak the exit price to factor in such additional costs as the CTT.

Unfortunately, the CTT has been imposed in a market where price moves are constrained due to global fears and the markets are more unrelenting in yielding profits to the high frequency traders.

Now behavioural finance principles say markets tend to come to terms with shocks over a period of time, and the CTT will be no exception. However, the future rate of growth in turnover will be a worrying point.

There is also the factor of the parallel market trading system (called ‘dabba’ trading) wherein trades are routed through illegal and off-the-books and therefore non-exchange platforms. The parallel trading system is one of the most persistent one anywhere in the world, especially in Tier II and Tier III cities in India.

There are legitimate fears that the parallel systems may just get a boost from the imposition of the CTT, since such levies are unheard of in the illegal betting system.

If empirical evidence is anything to go by, we have seen the Nifty trading volumes shift to the Singapore markets (SGX) due to a more friendly margining system and pliable trading hours.

The revenue loss to the exchequer cannot be wished away. More importantly, the prospect of loss of future business – the most critical aspect close to the heart of any capitalist endeavour.

With the future of commodity market turnover being closely linked to the permission to institutions, NRIs and FIIs (Indian commodity exchanges are currently fairly closed trading markets), the CTT may prove to be a stumbling block since price discovery mechanism and impact cost analysis may lose efficiency.

As mentioned earlier, large players will want very high degree of efficiency in terms of impact costs before they deploy money in our commodity markets.

Bhambwani is the author of ‘A Traders Guide to Indian Commodity Markets’ – India’s first commodity trading guide and invites feedback on vijay@bsplindia.com

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http://www.dnaindia.com/money/1817666/report-the-math-gets-skewed-for-large-commodity-traders