Gold is inching closer to an upside breakout building good technical support between US$1650 and US$1690. Sooner or later $1700 will become the new floor instead of the old ceiling.
In the short run, the institutional speculators and trading desks at the big banks and hedge funds are making good money trading the range based on technical trading models and the latest bit of news — economic or political — out of Washington.
At the same time, most professional gold watchers in the U.S. and Europe seem to have their eyes focused on prospective Fed policy and fiscal policy disarray in Washington.
But, meanwhile, many buyers in China, Hong Kong, India, Turkey and elsewhere in Southeast Asia and the Middle East could hardly care or even know the daily economic and political news out of New York, London and other Western financial centers. They just know it’s a good time to buy.
Similarly, the official sector — principally the central banks of the newly industrialized emerging-economy nations — are substantial net buyers . . . and will continue to be!
As a result, unbeknownst to most gold analysts and traders, the physical market is becoming increasingly tight with bullion going one way to the Asian markets (as evidenced by the high bar premiums in China) and to a number of central banks. Put another way, gold is moving into strong hands — and recent buyers, be they the “man in the street” across Asia or the reserve managers at central banks — are unlikely to sell anytime soon, even at much higher prices.
Contrary Thinking
Perhaps the most bullish news for gold so far this year has been the spate of downward revisions to the price forecasts proffered by many of the major banking firms, dealers, trading houses, and other institutional participants in the gold scene.
My observation over the years, indeed over the decades, has been that these large institutional players often fail to correctly anticipate the future medium- to long-term direction of the gold market. They forecast looking at the world through a rear-view mirror and extrapolate recent past performance into the future.
By contrast, the “man in the street,” - the retail investor in Europe and North Americas and the typical customers at the souks across the Middle East, India, and the Far East where physical gold in the form of small bars, coins, and high-karat investor-grade jewelry is treasured and held in high esteem - has an enviable track record as a gold-price forecaster.
Good News for Gold
Over the years, these small-scale investors and personal savers have demonstrated an uncanny sense of the market . . . and their track record has been a far-more reliable indicator of the future price of gold than that of the professional analysts, institutional investors, and derivative traders sitting in New York, London, Zurich, and other major financial centers.
The good news today is that these small-scale players, the man in the street and at the souks, are buying gold - especially at moments of price weakness. They are underpinning the market and setting the stage for the next big advance.
Indeed, physical demand - from China, Hong Kong, and elsewhere in Southeast Asia - has been remarkably strong in the past few weeks, so much so that gold bar premiums in these markets have been unusually large.
Some of this recent demand reflects Indian buying ahead of the January 21st increase in import duties on gold and some reflects traditional seasonal buying ahead of the Chinese New Year . . . but much is simply a desire by many to own more at prices perceived to be attractive for long-term investors and savers. And, despite the six-percent import levy, my friends in the Indian gold souks say imports will remain firm during the February-May wedding and festival season. Moreover, imported gold will never leave the country . . . so sellers in the domestic market will simply recoup the import tax in the form of higher domestic prices.
ETFs - Coming to China
Although a few large hedge funds have recently liquidated their investments in gold exchange-traded funds, thanks again to the retail investor, global gold ETF holdings have remained near their all-time record highs over 88 million ounces - another sign that the man in the street is bullish on the yellow metal’s prospects.
The fabulous growth in global gold ETF holdings in recent years has been an important feature of the market, especially in so far as these equity-like instruments have attracted and facilitated gold investment by many who might not have considered direct investment in physical bars and bullion coins.
What could soon prove to be a really big deal for the world gold market and the metal’s price is the anticipated launch of two new gold exchange-traded funds on the Shanghai Stock Exchange. The central government has already approved the introduction of gold ETFs but officials must still promulgate regulations before these funds may be offered to the public.
Although the typical Chinese investor will likely prefer direct ownership of small bars, coins, and investment-grade jewelry, these new gold ETFs will be an attractive addition to gold portfolios rather than a substitute for the real thing.
The People’s Bank of China has encouraged private gold investment and orderly growth in the country’s gold market since legalization of gold investment little more than a decade ago - and this has been an important factor in gold’s stunning rise in world markets. Now, with the opportunity to invest via ETFs, the Chinese “man in the street” could become even more important to the world gold price.
