The Gold Triple Play - Volatility, Currencies and Europe

Resurgent investment lifted global gold demand 6 percent from the previous year to just over 1,000 tons during the third quarter of 2011, according to the latest Gold Demand Trends Report from the World Gold Council (WGC). The ­­­potent cocktail of inflationary pressures in the emerging world and the European sovereign debt fiasco left investors searching for a safe haven—they looked for it in gold.

In an uncertain era where many asset values are declining, gold has thrived. Gold prices averaged $1,700 an ounce during the third quarter of 2011, 39 percent higher than the same time last year and 13 percent above the previous quarter, according to the WGC.

 

 

While investment demand thrived during the third quarter, jewelry demand fell victim to the quarter’s economic fragility and price volatility—falling 10 percent on a year-over-year basis. Only four markets—China, Hong Kong, Japan and Russia—saw jewelry demand increase.

The WGC says a shift toward high-growth economies is “undeniably conspicuous in the gold market.” Nowhere in the world is this more evident than in China, where consumer thirst for gold appears unquenchable. China’s total demand, around 612 tons year-to-date, has already eclipsed that of 2010. In addition to domestically consuming every speck of gold mined in China, it’s estimated that the country’s gold imports could reach 400 tons in 2011. That’s roughly equal to the combined tonnage of gold demand for the Middle East, Turkey and Indonesia in 2010—and that’s just imports.

Consumer demand for gold in China increased 13 percent (year-over-year) during the third quarter as the country continues to close the gap on India. Chinese jewelry demand, also up 13 percent, eclipsed India for only the fourth time since January 2003. Combined, the two Asian giants account for over 50 percent of global jewelry demand.

The WGC says, “China’s increase in demand is being fueled by rising income levels, a by-product of China’s rapid economic growth.” This growth has given birth to more than 100 million gold bugs in China’s rural areas. China’s smaller third- and fourth-tier cities were responsible for the bulk of the increase in jewelry demand, the WGC says. In addition, the Gold Accumulation Plan (GAP), a joint effort from the Industrial & Commercial Bank of China (ICBC) and the WGC which allows investors to purchase gold in small increments, reached 2 million accounts in September. The WGC says GAP sales have already exceeded 19 tons so far this year.

Things weren’t quite as rosy for demand in the world’s second-largest jewelry market. Indian jewelry demand took a 26 percent hit as volatility in the rupee shook investor confidence. The rupee decreased 9 percent against the U.S. dollar during the third quarter, more than double the currency’s average quarterly move over the past five years.

Historically, Indian jewelry demand bottoms in July-August, before picking up heading into the Shradh period of the Hindu calendar. That didn’t happen this year because Indian consumers were discouraged by high and volatile prices. The WGC says:

 “Consumer confidence in India has been knocked by the persistence of high domestic inflation rates. Inflation of almost 10 percent, as measured by the Wholesale Price Index (WPI), adversely affected jewelry demand, through its impact on both disposable income levels and general consumer sentiment.”

Currency Effect on Gold Prices

The weaknesses of the rupee against the U.S. dollar also negatively affected India’s demand. This chart illustrates the dramatic effect currency fluctuations can have on gold prices.

 

The gold price in Indian rupees has appreciated over 31 percent since June 30, more than three times the price appreciation denominated in Japanese yen. This means that a consumer looking to buy gold in Japan would have three times the purchasing power to buy gold at their local dealer than an Indian counterpart.

The gold price in yen terms has lagged due to the currency’s strong appreciation against other global currencies. It’s a similar story for the U.S. dollar and Chinese yuan (pegged to the U.S. dollar), which investors have favored since fleeing the euro.

Gold’s Volatility

Chaos in the currency markets amplified gold’s volatility to roughly twice historical levels during the third quarter, the WGC says. Our research also shows that gold’s recent roller-coaster ride is an anomaly. We sorted through 10 years of data to capture all of the 10 percent (plus or minus) moves selected assets have had over a one-month period. The results show gold experiences plus/minus 10 percent moves 7 percent of the time; about the same as the S&P 500 Index. In comparison, crude oil sees moves of this magnitude 30 percent of the time.

 

Gold equities have been more volatile than gold bullion. The NYSE Arca Gold Bugs Index (HUI) experienced these swings 33 percent of the time. In a market with gold prices trending upward, this beta provides a potential boost for miners. However, this can also have a negative effect during volatile markets as investors overreact to downside swings.

Gold and Silver Charts Point to Further Consolidation - Get Ready

Last week’s free fall in both gold and silver spot prices was enough to get investors into a panic. More on this in a minute though...

The fall was triggered by three key factors which caused the powerful move down. The first factor is based on pure technical analysis (price and volume patterns). Because the metals had such a strong run up this summer and prices had moved to far too fast, it is only natural so see price correct back to a normal price level. In general any investment that surges in one direction in a short period of time almost always falls back down shortly after. As I stated in my weekly report on August 31st, “gold is forming a topping pattern and all investors should take profits or tighten protective stops (exit orders)”. Three days later gold popped to the new high completing the pattern and was quickly sold off which continues to unfolding as we speak from $1920 down to $1532 in only a couple weeks.

The second factor which I think had the most power behind the drop were the margin requirements changes. This new rule literally overnight caused traders and investors holding to much of the metals in their account to liquidate (sell) their positions without having any say in the matter. That is when the most damage was done to the price of gold and silver.

The key factor was the US Dollar which rocketed higher and adding a lot of pressure to the metals. I also covered this in my Aug 31st report in detail. Overall, past few years we have seen both gold and silver move in opposite direction of the dollar. I don’t expect that to change much going forward. Back in August the US Dollar was coiling (building power) and it was only a matter of time before it would explode to the up side and rallied. This high probability move in the dollar was what triggered me to exit our long gold positions shortly after. I expected the dollar rally to last a month or more and that means we would see a lot of pressure on equities and metals going forward.

Now keep in mind, if Greece or other countries continue to get worse then we could see the dollar and gold move higher together as they are seen as the safe haven at this time. But with the nature of the two I am anticipating a rising dollar and sideways trading range for gold.

Ok, so back to precious metals investors...



Let’s take a look at the charts...

Silver Spot / Futures Price Chart

As you can see on the hard right edge silver is forming a very similar pattern which happened this past spring. I would like to note that this type of pattern is typical with extreme market selloffs as to how they generally bottom. I am anticipating silver trades in this range for a couple months and that we could see lower prices in the near term. But my upside target for silver in the coming few months is the $35-$36 level.

Gold Spot / Futures Price Chart

Gold is doing much the same as silver but I have noticed that when gold falls hard the second dip generally does not make a new low as often. If we do get a new low, all the better for buying on the dip but overall I feel gold should trade sideways for a couple months. My upside target for gold is the $1750-$1775 area.

US Dollar Index Price Chart

The Dollar index is looking ripe for another bounce and possibly another rally to new highs in the coming week. If this happens then we should see the SP500 short position (SDS) which we took Tuesday afternoon (Sept 27th) to continue rocketing another 5-8% in our favour again.

In short, I feel the US dollar is going to continue higher and that will put the most pressure on stocks, oil and silver. Depending how things evolve overseas gold could hold up and possibly rise with the dollar.

How High Will Gold Go in 2011?

After stellar years for both gold and silver, what prices will precious metals hit in 2011? First, take a look at the annual percentage gains that gold has registered since 2001 (based on London PM Fix closings): Excluding 2001, the average gain is 20.4%. Tossing out the additional weak years of '04 and '08, the average advance is 24.8%. So we can make some projections based on what it's done over the past 10 years. From the 12-31-10 closing price of $1,421.60, if gold matched… The average rise this decade, the price would hit $1,711.60 The average rise excluding the three weak years = $1,774.15 Last year's gain = $1,858.03 The largest advance to date (2007) = $1,875.09 But what if global economic circumstances continue to deteriorate? What if worldwide price inflation kicks in? And what if government efforts at currency debasement get more abusive? Here's what price levels could be reached based on the following percentage gains. 35% = $1,919.16 40% = $1,990.24 45% = $2,061.32 50% = $2,132.40 1979's gain of 125.7% = $3,208.55 It thus seems reasonable to expect gold to surpass $1,800 this year, as well as reach a potentially higher level since the factors pushing on the price could become more pronounced. Here's a look at silver. As you can see, silver had its biggest advance in 2010. The average of the decade, again excluding 2001, was 27.5%. And also tossing out the '08 decline, the average gain is 34.3%. So, from the 12-31-10 closing price of $30.91, if silver matched... The average rise this decade, the price would hit $39.41 The average gain excluding 2008 = $41.51 Last year's advance = $56.22 The 1979 gain of 267.5% = $113.59 So, $50 silver seems perfectly attainable this year.  And that's without monetary conditions worsening. It's titillating to ponder these advances for gold and silver, especially when you consider we might be getting close to the mania. And if we are, that should do wonderful things to our gold and silver stocks, too. I would add one caution: the odds are high that there will be a significant correction before gold begins its march to these price levels. In every year but two ('02 and '06), gold fell below its prior-year close before heading higher. And here's something to watch for: in every year but one ('08), those lows occurred by May. In other words, a buying opportunity may be dead ahead. And if you buy on the next correction, your gains on the year could be higher than the annual advance.

Silver hour chart with falling wedge pattern

• Silver hour chart with falling wedge pattern.
• Above 25.86 bulls will get good upward momentum and may hit 26.50 and 27 in the short term.
• Below 24.98 things will turn negative again and bears will gain momentum.

Gold Weekly Technical Outlook

Gold jumped to new record high of 1424.3 last week but formed a short term top there and pulled back. Initial bias remains mildly on the downside this week for deeper fall. Though, strong support is expected at 1315.8 support, which is close to 38.2% retracement of 1155.6 to 1424.3 at 1321.7, and bring up trend resumption. On the upside, above 1395 minor resistance will flip intraday bias back to the upside. Further break of 1424.3 will target 161.8% projection of 1084.8 to 1266.5 from 1155.6 at 1449.6 next.

In the bigger picture, rise from 1155.6 is treated as the fifth wave of the five wave sequence from 1044.5, which should also be fifth wave of the rally from 681 (2008 low). Such rally is still expected to continue towards 161.8% projection of 931.3 to 1227.5 from 1044.5 at 1449.6 before completion. Though, we're aware of long term projection target of 100% projection of 253 to 1033.9 from 681 at 1462 and we'd anticipate strong resistance from there to bring medium term correction finally. On the downside, however, break of 1315.8 support will be an early alert of medium term reversal and will turn focus back to 1155.6 support for confirmation.

In the long term picture, rise from 681 is treated as resumption of the long term up trend from 1999 low of 253. The anticipated correction didn't happen and gold will now likely climb further to 100% projection of 253 to 1033.9 from 681 at 1462 before making a top.

Silver Weekly Technical Outlook

Silver soared to 29.34 last week but formed a short term top there and pulled back since then. Initial bias remains mildly on the downside this week for further decline to correct recent up trend. Though, strong support is expected at 24.95 cluster support (38.2% retracement of 17.735 to 29.34 at 24.907) and bring rally resumption. On the upside, decisive break of 29.34 will target 261.8 projection of 14.65 to 19.845 from 17.735 at 31.336 next.

In the bigger picture, silver's up trend is still in an acceleration phase. Current rally from 8.4 is treated as resumption of the whole rise from 2001 low of 4.01. 100% projection at 25.84 is already met. And Silver would now be targeting next key projection level at 161.8% projection of 4.01 to 21.44 from 8.4 at 36.6 level. On the downside, break of 20 psychological level is needed to signal medium term reversal. Otherwise, outlook will remain bullish.

Is the U.S. Economy So Bad It Can't Get Much Worse? - Business - The Atlantic

New and existing home sales are at drastic lows. Consumer sentiment is extremely weak. Auto sales in August hit a floor not seen in decades. The unemployment rate remains close to double-digits. It's easy to go on and on about some of the grim features of the current U.S. economy. In fact, things are so awful that you could ask: are things so bad already that they can't get much worse?
This claim was made by a Bank of America economist in a Bloomberg article on Thursday. It says:

The sectors of the economy that traditionally drive it into recession are already so depressed it's difficult to see them getting a lot worse, said Ethan Harris, head of developed markets economics research at BofA Merrill Lynch Global Research in New York. Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 30 percent below five years ago.

His point is well-taken. Some of these figures are already so brutally low that it's hard to imagine that they could sink much further. And if the economy keeps even its current sluggish pace, then the U.S. won't double dip -- it will just endure a painfully slow recovery. But is Harris right -- are things so bad that it's actually unrealistic to imagine they could get much worse?
One way to determine this would be to look at sales data. But that's not enough. There are lots of moving variables that can affect sales like population, wages, taxes, etc. So let's look at the ratio of personal consumption expenditures to personal disposable income. That should provide a good measure of how willing consumers are to spend. The ratio serves as a sort of economic comfort indicator based on the amount of the money people have they can and are spending. If the ratio is already at a very low level historically, then the thesis above is correct, and it would be very unlikely to see it fall much further.

This is a trailing three-month average of the ratio, which helps get rid of some of the noise. As you can see, consumption spending-to-disposable income has fallen recently, but still stands at 0.907 -- well above its 2009 low of 0.894. That variance might not seem like a lot, but it's a difference of $130 billion in annual spending.
So how big a change is that in terms of the entire U.S. economy? Let's imagine that consumer confidence fell further and drove spending to match that 2009 ratio low, with everything else remaining constant since the end of the second quarter. That $130 billion decline in spending would bring down GDP by 0.9%.
You may notice from the chart that there's an even deeper low that was hit in 1992, when the ratio was at 0.892. If spending dropped to that point, GDP would decline by $155 billion and GDP would drop 1.1%. Certainly, such outcomes are clearly within the realm of possibility, if consumers felt renewed uneasiness about the economy.
And what happens if GDP declines due to consumption? Businesses would sense weaker demand and would respond with additional layoffs. That would then reduce GDP even further. The dominos could continue to fall after that, pushing consumer confidence down even more.
Of course, if such a negative GDP move persisted for a few quarters, then the dreaded double dip would be upon us. So things aren't so bad that a double dip is out of the question. But even if the U.S. did double dip, considering how weak the economy is already, the dip would probably be a relatively shallow one, compared to the deep GDP declines we saw in late 2008 through early 2009.

India's Gold ETF Assets May Soar 17 Times on Refuge Demand, Executive Says

Gold held by exchange-traded funds in India, the world’s biggest buyer of bullion, may surge as much as 17 times in the next three years as investors seek a refuge from financial turmoil and inflation.

Assets may reach “100 tons to 200 metric tons” from 12 tons now, said Rajan Mehta, executive director of Benchmark Asset Management Co., which runs the nation’s first and biggest goldexchange-traded fund. “The growth will definitely be faster than what we have seen in the past.”

Investors globally bought 291.3 tons of gold in ETFs in the second quarter, the second-highest amount on record, as prices climbed to an all-time high of $1,265.30 an ounce during the sovereign-debt crisis in Europe, the producer-funded World Gold Council said on Aug. 25. London-based researcher GFMS Ltd. and Goldman Sachs Group Inc. expect gold to advance to $1,300 this year as the metal heads for a 10th straight annual gain.

India’s seven bullion-backed funds had 19.7 billion rupees ($420 million) in assets on July 30, more than double the amount a year earlier, according to the Association of Mutual Funds in India. Increased inflows may help support prices.

Investment demand for the yellow metal in India more than tripled to 92.5 tons in the six months ended June 30 from 25.4 tons, the council said.

“These are significant numbers and these are beginnings of trends that one will see and hopefully these trends will be long trends, mega trends,” Rujan Panjwani, president at Edelweiss Capital Ltd., said Aug. 27.

Popular

Exchange-traded funds have become popular worldwide since their creation in 1993 as they widened investors’ access to different type of assets. Gold ETFs allow investors to trade bullion without taking physical delivery of it.

Holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, expanded to a record 1,320.44 tons in June, and were at 1,298.56 tons as of Aug. 27, according to the company’s website.

“Today the industry has only 12 tons, which is very small compared with volumes all over India,” Benchmark’s Mehta said in an interview in Goa. “There is a lot of room to grow.”

Benchmark’s Gold Bees had 9.85 billion rupees in assets on July 30 and has returned 19.6 percent annually since its launch in March 2007, according to its website.

Indian gold funds have gained an average 19 percent in the past 12 months, compared with a 25 percent jump in local prices, Bloomberg data show.

Futures in India reached an all-time high of 19,198 rupees ($410) per 10 grams on June 8. The metal for October delivery advanced as much as 0.2 percent to 18,928 rupees on the Multi Commodity Exchange of India in Mumbai.

“Gold has delivered good returns, so normally many advisers feel safer in advising gold as part of asset allocation,” said Mehta. “Gold as an investment theme is gaining ground.”

Gold and Deflation

I have been speaking and writing about gold’s appeal in a deflationary environment – this is a concept that opposes the conventional opinion that the gold price will not rise without inflation.

Those who cling to that singular gold-inflation relationship have not examined the history of gold as money. Whenever there is substantial inflation or deflation, governments tend to either be too slow to react or they overreact with policies, and this is typically good for gold.

Interest earned on 90-day Treasury bills below the inflation rate is a signal for governments to try to stop deflation and reflate the economy. When this happens, gold becomes attractive. We are in such an environment now.

During these periods, governments usually need to increase their deficits by escalating their borrowings to support the economy. This also supports gold as safe money in addition to its beauty as jewelry.

The twin engines of negative real interest rates and government deficits tend to make gold a very attractive investment. Recent research supports our historical findings on what drives gold.

This chart from Deutsche Bank shows that for the past four decades gold (and silver) have performed well in a country’s currency when that country has low or negative real interest rates.

The Federal Reserve’s main interest rate is near zero and inflation is a little over 1 percent, so we now find ourselves in a negative real interest rate situation. The Fed has made it clear that it has no plans to tighten money by raising that key rate any time soon because of the sluggish economy and soft housing market (mortgages are now at a 21-year low), so this condition is likely to endure.

“The decline in core inflation from 2.5 percent two years ago to under 1 percent today will sustain market fears of deflation and hence a more rapid depreciation of the U.S. dollar to arrest any deflationary pressures,” Deutsche Bank’s analysts wrote. “We believe that the road map to resolve deflation is therefore bearish for the U.S. dollar and another factor which will propel gold prices to new highs.”

The Fed this week plotted part of that road map – it said it will pump more money into the system to try to kick up economic activity. As the 2010 midterm election draws closer, there is also a growing call for another round of stimulus spending to try to pull down the 9.5 percent unemployment rate.

Such a move would widen the federal budget deficit, which is already estimated at nearly $1.5 trillion for this year and will roughly be the same in 2011. The U.S. dollar is not only our currency, it is also the world’s reserve currency. Deficit spending puts downward pressure on the dollar, and when the dollar falls, investors tend to turn to gold.

When you add the interest rate and deficit scenarios to the gold seasonality trend – September is historically the best month of the year for both bullion and gold equities – the conditions now appear promising for gold.

Gold Readies For A Major Price Thrust To $1,325-$1,375 This Fall

This is the time for real action by real men. Instead we have a bunch of stupid, wimpy, inexperienced, academic children playing with matches and gasoline. There is zero leadership, so get ready to run.

Technically, weekly gold is supported at $1,207 and capped at $1,265, (chart below) the former recent high price. However, by using more elaborate and technical charts (not shown) we find the new gold support on December, 2010, gold futures to be $1,175. Seasonally, gold should sell mildly once more to that projected number and then rebound in a new fall rally taking prices much higher.

Other more dominant market forces in bond credit and international stock markets could create unmeasured mayhem depending upon the ability of central bankers to keep things under control. These people are riding a bucking bronco and we think they are about to get tossed-off this horse. If in fact this occurs, our $1,325-$1,375 gold forecast could just be a door-opening beginning.

There is really no way to measure Black Swans, particularly when a whole flock is now flying in large formation. It only takes one slip like the Long Term Capital (LTC) multi-billions mistake back in the 1990’s. That mess scared the wits out of a lot of people as the Big Black Nasty Bird was an unexpected failure in Russian Bonds. This time the stakes are much higher on several fronts. No one can tell me Chopper Ben and Timmy “The Kid” Geithner really have a grip on this mess.

This markets’ dilemma is an impossible dream. The manipulators still have tools and they will do anything legal or illegal (Witness Former Treasury Secretary, Hank Paulson’s TARP Robbery) to keep it all glued together with bubble gum and bailing wire.

As we have said so many times, when the bond markets renounce Chopper Ben’s bond Games, it’s all over. In our view, we are very near to that date but of course cannot pin-point it exactly and neither can anyone else. As they say, this is when the rubber meets the road. This is the time for real action by real men. Instead we have a bunch of stupid, wimpy, inexperienced academic children playing with matches and gasoline. There is zero leadership, so get ready to run.

Be very careful in any stock or bond market. We like physical gold and silver, select senior and junior precious metal shares, very specific property locations (by nation) and top flight management. Further, they better not be under any severe pressure to raise more operating capital in this weird credit environment.

For trading, we are recommending gold and silver spreads, grain, and certain other futures and options spreads. For the primary stock market there are several select choices among more than one country for going short and staying short. Remember, it can take weeks or months climbing up the hill on the long side. But, coming down on the short side it’s many times faster and much more exciting.

To put it bluntly, we think bonds of all kinds just stink. Can they be traded, you bet. However, you better be a very fast screen watcher with your hand on the mouse to avoid getting ripped. We think this kind of trading is for the pros and there are easier ways to earn money without a heart attack.

Watch out for faster markets, more volatility and surprises in all directions. One example: We think the Euro is a goner but China is shedding US Dollars for Euros. Obviously, they think the Euro is safer than the dollar for now. We think the opposite is true but the Chinese own way too much US currency, bonds and bills.

Both gold and precious metals shares (XAU) are squeezed in triangles. Before price hits the triangles’ apex, we suggest they both break-out through top channel line resistance and take-off in new fall rallies from the end of this month to nearly Thanksgiving. After that holiday, expect even more buying after a normal, technical, profit-taking pullback.

Note the end of summer gold rallies just before the “O’s” for October many years in a row.

What ever happens to foreign economies, credit and banking along with the American vote in November… could be a major turning point in world affairs affecting all citizens world-wide. This is a generational changing series of events. It might be prolonged but we think not. Prepare for several smashes and crashes from later in this month of August through nasty springs and falls all the way to 2012 when I predict World War III begins over energy, economics and settlement of several old grudges; some of them being 5,000 years old.

The US Dollar and American standard of living shall be cut in half over the next few years.

Now, more than ever, it is important to take the immediate necessary precautions to protect yourself and your families and friends. Traders and investors should be buying precious metals and select shares right now. In our newsletter we have a great list of trading and investing ideas for you. Meanwhile, you can never go wrong buying physical precious metals and holding them for security. We’ve had a constant run of nearly ten years in gold rising 15% per year so this remains a good trade. In the last twelve months, gold rallied over 34% and is going ever faster.

It’s not going to stop any time soon. In fact, we predict those annual percentages will rise even more and this offers a chance, arriving only once in 25 years on the historical cycles. Good trading! -Traderrog