A fresh break by the US dollar to under the 75 level on the trade weighted index prompted more...of the same during the overnight trading hours. Namely, fresh additions to the price of gold and oil. The price tag of the former is starting to look much like a Weimar Republic-era chalkboard; one which sees values change during the dinner at a restaurant.
The now parabolic rise in the metal, fueled almost exclusively by feverish speculation among momentum funds is now making for some very tired news writers in the financial press; their headlines for New Record are becoming hardly read unless there is a very specific time stamp attached to the story. Hard to tell whether the reference is to a week ago, a day ago, or just an hour ago. We will repeat that which should be obvious, in case you have doubts about where this writer stands: Gold is NOT in a bull market. The dollar is in a bear market. That much, you have also heard from the logical brain of Paul VanEeden, several times over the course of this past year.
Thus, we record this morning's trace on the parabola as follows: Gold opens with a $7.20 gain, quoted at $1063.90 (after having touched an overnight high of $1069.50 per ounce). It drags silver 19 cents higher, to 17.91 per ounce. Platinum plays catch-up with the yellow metal and surges $23 to $1358.00 while palladium adds $6 to rise to $332.00 per troy ounce. And, the dollar plummets to 75.80 (off 0.38) on the index. In the interim, the non-dollar factored gold value as shown on the KGX Kitco Gold Index is trading at the 807.38 figure per ounce.
The chasm between the gold market and the rest of the background situation grows wider with every passing day. To wit: inflation fell to the lowest level in seven years in the UK, crawling along at 1.1% per annum now, after having fallen from the 1.6% level in just August. A somewhat similar slowing in the US inflation rate is expected from the data to be released on Thursday.
To wit: there is a notable absence of geopolitical turmoil following the simmering down of the Iranian nuke impasse recently. Thus, absent the two key historical drivers of the gold price equation, we are left with nothing but the dollar as a catalyst here. But, as we have repeatedly warned, that is not enough to make for anything but a short-term plethora of headlines. Why take our word for it, however, when you can have the opinion of one of the two veteran statistical firms in the business? Here is what our friend Paul Walker -he of London-based GFMS- had to say this very morning, when characterizing this market:
Weak physical demand for gold raises doubts about the sustainability of high prices, although it may hold on to the $1,000 level for the next few months, a senior official at major metals consultancy GFMS said on Tuesday. Investment and jewellery demand have been key drivers behind the steady rise in gold prices over the past few years, and current weakness in jewellery demand is a worrying sign, said GFMS chief executive Paul Walker.
My concern is that this market is becoming increasingly uni-dimensional, Walker said at a seminar in Tokyo. One pillar, jewellery demand, has become eroded. The question we must ask is, is there a compelling, sustainable case for investment in gold in the short to medium term? Gold prices hit record highs above $1,060 per ounce last week, propelled by the persistent weakness of the US dollar.
Speculative net long futures positions hit an all-time high in the week ended Oct. 6, suggesting growing risks for these long positions to be cleared and putting downward pressure on prices. At the same time, gold is supported by inflation fears as central banks keep interest rates very low and leave ample cash in the global banking system, with healthy investment demand underscored by steady inflows into gold-backed exchange-traded funds.
Positive investment flows are likely to stay for the next few months, Walker said, adding that another wave of investment flows could push prices to $1,100, while a rise above $1,100 was not an impossibility. But the issue is sustainability, he said.
Another worrying trend for the price outlook is how gold prices in some currencies such as the South African rand have fallen significantly from peaks earlier this year, when prices in U.S. dollars surged to record highs. Gold prices in rand have fallen as much as about 30% from the year's peaks and increases in prices in other currencies have been more moderate compared to gold prices in U.S. dollars.
For it to be a sustained, justifiable bull rally, we should be seeing gold going up in every currency, Walker said. It's just about the dollar. Investments in gold are not just those investing in dollars ... a point indicating this is not a genuine bull rally. Scrap volumes exceeded total fabrication demand in the first quarter of this year, another worrying sign as jewellery demand performed extremely poorly in the first half of the year.
India, the world's largest consumer of bullion, holds the key to the outlook for demand and how high and sustained gold prices will be in the next 6-18 months, he said. We are starting to see stresses and strains in what consumers are willing to spend. The volume argument is starting to move against gold, Walker said.
As for those who pin their hopes on the salvation that China and Chinese gold buyers might offer to gold as we move forward, we also say: think again. We have repeatedly warned that the number of potential physical gold buyers is still rather limited on the mainland. It is a matter of income levels, pure and simple. As things stand -and as was cautioned in an earlier piece- when the appetite for gold is manifest in the country, it tends to take the shape of paper gold speculation. Meaning, buy, hold for a profit objective, and then sell. Now, Reuters informs that:
As gold prices surge to a new record, China's retail investors are trading more of the yellow metal, often using borrowed money. This is further evidence that recent high prices may not be sustained. Like investors around the world, Chinese individuals are buying gold because they are worried about inflation. After all, Beijing has already pumped an unprecedented amount of money into the system, sending asset prices higher. But Chinese retail investors are also known for their herd behaviour. Despite the recent sharp rise in gold prices, many have decided to jump in.
This is lucrative business for Chinese banks. During the first six months, mid-sized Xingye Bank, which offers gold trading business with Shanghai Gold Exchange, traded 20.9 billion yuan ($3 billion) worth of gold for its clients, almost three times as much as they did last year.
Other than earning a commission for buying and selling for their clients, the bank is also making a gamble itself. It traded 15.3 billion yuan ($2 billion) worth of gold on its own account, up 15 percent from last year.
Risks can be big for Chinese investors. Like most retail investors, they are often at a disadvantage to international institutions because they lack up-to-date information. Moreover, big price changes in global markets often happen when China is asleep. A greater source of concern, however, is that investors are placing leveraged bets. Leverage is not allowed in China's stock market, that's why people eager to maximize their returns have flocked to gold trading. At Xinye Bank, customers are allowed to borrow as much as 90 percent of the value of the gold contracts they are buying. Investors are also allowed to sell gold short, though most of them are choosing to place long bets. It is not uncommon for investors to use three to five times of leverage.
The risk does not stop with Chinese individuals, however. What happens in China can have a significant influence on world prices. China, already the world's biggest gold producer, has also become the precious metal's biggest consumer, overtaking India in the first half of this year. Chinese gold purchases for investment reached a record high of 70 tonnes in 2008. That is 6 percent of the global amount which includes the sort of bullion, official coins and metal for investment purposes, according to the World Gold Council. Globally, retail demand for investment purposes increased 72 percent in 2008.
There are plenty of legitimate reasons for investors to buy gold. It is a hedge against inflation, and the ultimate store of value. But gold is just as prone to speculative bubbles as other asset classes - particularly if investors are leveraging their bets. China's bullish retail investors are another reason investors should be wary about the latest gold price surge.
Quite the opposite of what you hear on the infomercial hours that gold-selling firms have now hijacked in the US and via which they are screaming Buy NOW! Beat the RUSH! to uninitiated investors. The kind of gold market that all of the above has brought into being, and could further shape, is one in which reporters will surely be busy with. But, it is also one that will see some serious blood being spilled by trend-followers making the wrong bets, at the wrong time, in the wrong proportion, for the wrong reasons. Enjoy the ride, if that is your cuppa. We will resolutely stick with the two keywords offered up by GFMS today: UNsustainable and UNIdimensional.
Until later,Jon Nadler Senior Analyst