The recent collapse in
gold price hasn't discouraged consumers across Asia, and in particular from
China and India from buying yellow metal. Taken together, China and India
account for more than half of the total consumer bullion demand
worldwide. What we are seeing now is an exceptional phenomenon because Indian
demand for gold is up 200% from a year ago.
Gold demand in India, the
world’s largest buyer, is heading for a quarterly record as imports reach 300
to 400 metric tons, the World Gold Council said in a report last week. Again,
we’re only getting close to the mid-way point of the year and the amount
quoted by the WGC is equal to almost half of the total shipments for all of
last year. We read that banks are actually being told to discourage gold
investment and suggest financial products instead. Interesting isn't it?
It looks like Indian,
Chinese and Middle Eastern consumers are taking a long-term view on the
prospects for gold. I’m not surprised you would want something to decline in
price to buy more for yourself, but are you sure that the recent gold price
collapse is as great a buying opportunity as it seems?
Let's look at the charts
and search for some answers. We’ll start with the USD Index long-term chart
(charts courtesy by http://stockcharts.com).
In this week’s long-term
USD Index chart we see the index is still above the declining support line
and the bullish medium-term outlook has not
been invalidated here. That’s why last week’s decline has very little impact
from this perspective. We discussed the underperformance of the precious
metals relative to the USD Index several times last week beginning with
Monday’s Market Alert:
… gold is responding
strongly to the dollar's rallies but responds less significantly to its
declines. This is a bearish situation as it means that
gold would likely decline even if the USD was just trading sideways.
This underperformance
(responding less significantly to declines) was clearly taken to the extreme
on Thursday.
The situation remains
bullish for the USD Index. Does it look bullish for the general stock market,
too? Let’s find
out.
As we wrote in our essay on gold, stocks and the
dollar on May 17,2013:
The situation is
overbought on a short-term basis, but we do not expect to see an invalidation
of the breakout above the 2007 high. If anything, we could see stocks move
back to this level, which could further verify the breakout and allow them to
gather strength in advance of the next rally.
Although the last correction was
deeper than the previous one it doesn’t change the overall picture of the
market. As long as stocks are able to hold up above the 2007 high the uptrend is not threatened. That’s why we think
that the bottom for the latest decline may be in. The main buyers arguments
are certainly two support lines because price levels bounced off the
intersection of them.
This could mean that the
bottom in the stock market is in anyway.
Now that we know how the
situation looks from the perspective of the dollar and the stock market, it’s
time to take a look at the yellow metal itself.
In this week’s very
long-term gold chart, we see that the trend remains down. Despite a $20 move
up last week the outlook continues to be bearish (it’s hard to take this
small increase as a sign of improvement especially as we consider the whole
decline.
Gold could still decline
heavily based on the long-term cyclical turning point, which is due
approximately this week. In both 2008 and 2009, local tops formed slightly
after the cyclical turning point, so it is possible that the reversal in the
downtrend won’t be seen until after the cyclical turning point once again,
leaving a number of days in which further declines could be seen.
Summing up, the long-term
outlook is bullish for the USD Index at this time. As for stocks, the
situation remains bullish for the medium term, and although the last
correction was deeper than previous one we don't expect to see a bearish
trend immediately. It seems that higher stock prices will be seen without
further declines. Finally, gold’s picture provides us with bearish
indications.
Overall, it seems that
the final bottom in the yellow metal is not yet in.
We know keeping an eye on the market is very important to you, as you care
about your savings and that's why we hope you've enjoyed reading this essay
and that it will help you to decide whether or not buy gold Asian style,
anytime soon. For more information, please consider joining our subscribers
and reading today's Market Alert.
Thank you for reading.
Sincerely,
Przemyslaw Radomski, CFA