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Recently the economics site: www.FinanceandEconomics.org
published an article on "Precious
Metals and the validity of Technical Analysis”. We completely agree
with the thoughts expressed there and in this piece would like to expand on
their thoughts here. Over the last eight years or so we have seen the
Technical Analysis approach to the gold price give incorrect signals, when
seen in isolation. Many times the technical picture pointed down on the gold
price in the face of a strong fundamental picture. We know that this has
wrong-footed many gold investors who found themselves
waiting for a fall only to see it consolidate then rise. Over the last few
years it has done this more frequently until we find at the Gold Forecaster
we approach technical analysis in a way that allows for this and complements
the fundamentals. Of late some analysts had identified a 'head and shoulders'
top and forecast the end of the 'bull' market in gold and silver, but it has
not come, nor do we expect it to come. The reason the charts have failed so
often to correctly forecast the gold and silver prices has been due to the
change in the nature of the market, the change in the type of investors, the
change in the number of investors and the change in the location of
investors.
The Change in the nature of Gold Markets
and those that are not Gold Markets
The
traditional gold market comprised central banks and wealthy institutions and
individuals in the days of the Gold Standard. Then 'officially' central banks
left the gold market and started selling their gold in the market. The market
was left to wealthy individuals in the main as miners and central banks
worked together to undermine the gold price, taking it back from $850 to $275
from the early 1980' to 1999. Then the central banks of Europe agreed to
'cap' sales under the 'Washington Agreement' and the subsequent 'Central Bank
Gold Agreements'. Since the start of the sale of 403.3 tonnes
of gold by the I.M.F. [now completed] European central banks have ceased
selling gold, to all intents and purposes.
The
inception of the gold Exchange Traded Funds was another dramatic market
change allowing a cheap and easy way into gold by institutions and wealthy
individuals.
The
result of these two changes was to remove the central bank overhang from the
gold market and to bring institutions and individuals into the gold bullion
market in such as way as to affect the gold price.
What
is often not understood is that buyers of gold shares in mining companies
could never affect the gold price or bullion market. These shares were simply
another set of equities. Many have and still do believe that the COMEX
futures and options gold market affects the gold price. COMEX themselves will
tell you that only 5% of the transactions lead to a movement of physical gold
and where they do, the investor must clarify that he wishes to take or give
delivery at the time of dealing. These two markets represented a huge amount
of money involved in the 'gold' market that did not affect the gold market.
To illustrate, a hedge fund recently closed $850 million's worth of positions
because COMEX kept increasing it margins payable. The fund is only a $10
million fund.
Any
gold price linked or indexed fund, likewise does not involve the purchase of
gold. Indeed funds that offer shares 'related' to gold but not actually
resulting in the purchase of gold bullion itself do not affect the gold price
and are off the gold market. Let's be clear on this, if all these gold
related investments were poured into bullion buying of funds or trusts that
actually purchased gold against the purchase of its shares or certificates,
the gold price would by now be far north of $2,000.
The Change in the Types of Investors
In
the early 1970's investors in gold were wealthy individuals, institutions and
the central banks. Individual buyers were limited to coins such as the Krugerrand, the Gold Eagle and the like. Over the years
until now there has been a dramatic change.
- In the U.S.
individuals were permitted to own gold from 1974 on. Record volumes of
gold coins were bought in 2010.
- In India the
gold market reforms did the same there and the Indian market burgeoned.
Last year we believe they imported between 500 and 600 tonnes of gold. Their record was 850 tonnes in one year.
- Central Banks
have changed from sellers of gold to either holders or buyers, with the
likelihood of them selling again fading into the distance.
- When the gold
Exchange Traded Funds were launched, U.S. Fund Managers [Pensions, et
al] jumped in to buy more than Switzerland and China hold in their
central banks. Currently these funds hold more than 1,600 tonnes all told.
- Physical gold
funds popped up in Europe, the Bullion Vault in the U.K. and dealt for
the small man. Gold buyers increased in number across the world.
- When China
lifted the restraints on individual ownership of gold just over three
years ago, the Chinese market exploded quietly in line with the spread
of the distribution capabilities of the banks. Now the Chinese
government itself [itself, we believe, a buyer of gold for its reserves]
has increased the number of banks allowed to import gold. Chinese demand
is set this year to overtake India as a gold market. We expect their
imports to add to their local production and account together for 550 tonnes of gold bought there. In 2011 we would not be
surprised to see this increase to 800 tonnes
altogether.
- Even in the
developed world jewelry market, the home of low caratage
jewelry, demand has recovered in the face of record gold prices to reach
previous peak levels. [In the emerging world low carat gold jewelry is
generally not deemed real gold.]
Change in the location of gold buyers.
In
the last few years demand has spread from the developed world across through
the Middle East to India, eastwards through to China to become a truly global
physical gold market centered on the London Gold Fixing.
The
drop in the purchase of gold mining shares to the shares of gold Exchange
Traded Funds saw the developed world's institutions become indirectly
physical gold buyers too. The market has realized that it is the physical
gold market that counts. The added joy of this is that the corporate and
mining risks do not accompany gold bullion itself.
So
today we are looking at a global physical gold market that is growing fast, but
at its fastest in China and India where the development of those countries is
leading to a rapidly growing middle class that favors gold as an investment,
but with a different attitude than found in the developed world.
Julian D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
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