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Right now the markets are really starting to wind up over the debt ceiling confrontations.
The weekend of U.S. political strife
is on the world. It is so easy for the markets and commentators to
lead us to believe that
the gold and silver prices
are rising because of this, but we emphasize that they are not!
The U.S. debt ceiling crisis has grown over the last few weeks into a drama of such proportions that the entire U.S. public is locked onto each scene of the political theater. Outside the U.S., other nations are riveted to
the drama, getting to
know politicians they
have never heard of before. The fact that the U.S. government should put on a dangerous
spectacle such as this is appalling and disorderly. After the debacle over the Eurozone crisis, the rest of the world is failing to see the shining example of government so long held up as the correct way to govern.
While we agree that the underlying structural,
political, and financial problems are driving up prices over time, the sudden drama is not. If it were the case then we would
expect the gold and silver
prices to dive once the debt
ceiling is raised. We don’t
see that happening. A closer look at prices over the last couple of weeks
shows that they have not risen in line with the shortening time limit and rising tension. Silver has largely ignored the crises on both sides of the Atlantic.
Gold has moved within less than a 1% trading range –governed
more by the €1: $ exchange rates than by the buying and selling of silver.
In this fog of spin, smoke, and mirrors, it is
important for subscribers to know what really is
driving the gold and silver
prices.
Hype or Reality
TV presenters are good at their job; they have to capture
our interest to keep us coming back for more. They would like
to think that they are the key source of
information and they often
are. But very often, selling the story overwhelms a balanced perspective. The same applies to politicians –they need to be seen
as solving major crises and should
keep their positions because of their ability to deliver their people from awful events. Over time they
have learned just how to
let a problem ferment until
it is a crisis. If they solve the problem too early they
could be guilty of interfering. So the
art is to let it mature into a crisis just as we see
lately on both sides of the Atlantic. There have been 74 such debt ceiling
crises in the last 50 or so years,
but this is the one where Congress has a split power base, so the time
has arrived for the parties to gain some kudos. The trouble is that the collateral
damage is happening now,
and the U.S. continues to demonstrate its inability to govern, highlighting the weaknesses of Democracy to the outside world.
The crisis is real because politicians are playing games with the reputation of the
country for party political reasons.
The very fact that they are doing that makes
it a serious crisis. The ability to pay or not to pay is not part of the crisis.
Gold and silver prices have not climbed on the back of the Congressional
drama. Before it caught our
attention after the latest
Greek episode, gold was at around
$1,610. As we write this it stands at $1,617. So the Congressional
crisis premium is around $7 or less than 1/2 %.
If one looks at the shares of the gold
Exchange Traded Funds in
the last two weeks, we saw one day
of buying in large quantities,
likely from one large buyer. Indeed, speculative buying on COMEX has
been large, but futures and options are financial derivatives of gold and not physical
gold buying. Only around 5% of these volumes result in physical gold deliveries. As you can see below
the major demand shift has been to the Middle and
Far East from where more than 60% of gold demand comes.
It is fair to conclude
that U.S. investors have
not been taking positions against
a U.S. debt default, so why should the market expect gold and silver prices to fall?
What’s Moving the Gold Price
We are at the beginning
of August, right at the end of the gold year. In the past this was the time gold stood at its
lowest levels. Indian farmers were busy in their fields about to bring in their harvest. These people were responsible for 70% of Indian demand, the largest demand source in the
world for gold. During the last decade
the Indian sub-continent
has urbanized to a growing
degree, reducing the dependence of Indian demand on the agricultural sector
of India. Likewise, the period of the year called the “Doldrums” has lost
a good part of its significance
to the gold price and gold seasons.
While this was
happening another non-seasonal,
but growing influence was
felt on the gold price
–that of China’s
mushrooming middle classes. Last week we also
mentioned central bank buying, which at least contributes to limiting the downside
corrections in the gold price.
These are considerable forces that make any
speculative buying on the
back of the U.S. or Eurozone debt
crisis pale into insignificance in today’s
precious metal markets.
In the quiet season of gold, have we seen the gold price hit the low for the year? No, we have seen it reach record highs in all currencies. After the long shallow
consolidation below $1,555, we
have seen it break upwards to pierce the $1,600 level.
We now move into
the heaviest demand season for gold and are keenly aware that the supplies from mines are tight and unlikely to rise. Some scrap may
come onto the market, but we
do not expect this to nearly satisfy demand. The result is almost inevitable…
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