More Pain Before Gain Likely In Gold
FN Arena News - October 05 2006
By Greg Peel
Gold just seems to be moving down on its own now. It's not interested in global arms race tension (North Korea), in inflation (the oil price bounced last night) or in Indian physical orders. Gold seems to be on a mission to return to previous lows.
Is it moving down with base metal prices? Maybe. But last week it was oil, so that just seems like an excuse.
Is it moving down on central bank selling? This is a distinct possibility.
FN Arena has been closely following the situation in Europe of late, with regards to the European Central Bank Gold Agreement (CBGA), or "Washington Agreement" as it is known. We reported last week that banks had only sold about 400-420t of the 500t allowance when the hooter went on September 29. As it turns out, the exact figure, according to gold market monitor GFMS, was 393t.
What's more, only 2.5t of physical gold was sold in the last couple of days, "confounding", as GFMS puts it, rumours of central bank selling being responsible for gold's recent significant tumble through technical support. There is a degree of smugness in a GFMS press release which arrived in FN Arena's mailbox today, as GFMS persistently debunks suggestions that central bank selling of some description is often going on under cover of darkness. Many gold market observers, on the other hand, believe otherwise.
"There has been a lot of physical metal being dumped in London recently, which is presumed to be central bank selling," James Turk, founder of GoldMoney.com, said to Resource Investor yesterday. "Its intent seems to keep the price of gold under $600."
Turk is a strong subscriber of the view that central banks manipulate the gold markets, and his thoughts are constantly aired by GFMS' nemesis, GATA.
"So if the gold didn't come from Europe, where did it come from?"
GFMS has drawn its own conclusion:
"…although GFMS believe that this rise in official sector sales could have, at the margin, had some adverse effects on the gold price, its direct impact (as opposed to the rumour of high sales on sentiment) is believed to have been far less significant than that of investor liquidations which took place over September in gold and, in fact, across the whole commodities complex."
In other words, the butler did it.
The argument that investors sold out has definite merit, as there was reportedly a lot of investor buying when gold first breached the US$600/oz support level. When a subsequent rally failed to materialise as hoped, a lot of that investment would have been quickly liquidated. As the oil price slid, inflation fears were tempered, and it made sense for the gold price to fall.
There is more to consider, however. Resource Investor has noted a response from one European central bank as to whether its gold sales had been completed for the year:
"Please note also that the annual gold sales cover spot and forward sales transacted during the Central Bank Gold Agreement year."
Resource Investor's source remarked that he was unsure whether this was meant to imply that there were forward sales yet to be settled, and thus yet to show up on the official numbers. (Which would thus alter the GFMS numbers).
Jon Nadler, analyst at Kitco.com, said this is neither bullish or bearish anyway, as the central banks can start selling their next year's allowance the day after 2006 deadline. Which begs the question: what does it matter if central banks are selling or investors are selling?
It matters because as Nadler points out, investors now own more gold than central banks. Private investors have accumulated some 200 million ounces of gold over the past five years, and are in the position to drive the market.
Gold buyers have always been terrified of running into central bank selling, as it's always been assumed it would be like driving a minivan into an eighteen-wheeler. But the capacity of central banks to sell gold is rapidly diminishing, lest they actually run out. The desire to sell gold may yet remain, however, in order to finance current account deficits.
To that end, GFMS does not believe European banks have stopped selling gold. Rather they are just spreading out their sales. However, it is unlikely the 500t per annum limit will ever be reached again before the agreement ends in 2009, and unlikely another agreement will be signed, suggests GFMS. On the flip side, other central banks have shown interest in actually buying gold to diversify their reserves (away from the US dollar).
That is the situation in the official physical market. But selling physical gold is not the only way to sell gold. Another way is through gold derivatives. Such selling is difficult to monitor, is not accounted for by the IMF, and is not accounted for by GFMS as being included in official sales, if indeed the ultimate sellers were actually central banks.
(This is the "conspiracy theory", if you like. Central banks use global "gold banks" to sell into futures markets or over-the-counter markets on their behalf in order to keep the gold price down and currency values up. The weight of evidence of such practice is alarming.)
According to James Turk, there has been some "piling on in the ‘paper' market" of late (meaning futures and options). In the last few days of the CBGA agreement, Turk noted the big selling started when New York opened, and then the market rallied for the London fix (when physical deliveries are made). Investors sold off again when paper obligations were dumped on the market. Said Turk:
"It's enough to make one think that the tape is being painted for the November election" – a reference to the mid-term US congressional election.
Nadler believes the short term range for gold is US$550-600/oz, but if $550 breaks, we'll see $530. And if $530 breaks, we'll see $480. But Nadler is not concerned.
"It's working its way to more comfortable lower levels", he said, and physical demand is expected to pick up in the fourth quarter for the Indian wedding season.
Turk also makes the point that neither the US trade deficit nor the federal budget deficit is going to disappear in the near term, and that a lot of dollars will have to be printed in order to fund them. Just because the Fed no longer reports M3 (the total quantity of dollars in circulation) it doesn't mean inflation is going to go away.
Nadler is of the same opinion: "Where's the money going to come from?"
Believe it or not, James Turk is still calling gold at US$850/oz by the end of the year. His colleague Nadler is calling the 2006 average price at US$600-620/oz (currently US$601/oz).
GFMS has officially called gold at US$750 by the end of the year.
Another prominent gold observer, Peter Grandich, had this to say in the Grandich Letter last night:
"The good news is all systems remain go for new, all-time highs in 2007. The bad news is, there's not only been significant technical damage done short term, but the next few trading sessions are likely going to impact where we head for much of the balance of 2006. It will be unlikely for gold to break much below $570 on a closing basis without further declining to at least $540 (May lows). As hard as that will be to endure, it may be best so that a complete washout can occur. If the thought of $540 sickens you, then me stating gold could fall all the way to $500 but still be in a long-term bull market can only upset you even more.
"$540 and $500 have to be discussed for no other reason than being realistic on what has become an obvious trend now of selling rallies versus buying dips. Justifiable or not, this is likely to be trader's mentality until we at least close above $610, and even more importantly, above $640. Gold is in one of its more defensive positions since the bull market began several years ago. So, if you're gun shy, wait until if and when $610 is taken out to the upside. If you're ultra conservative, wait until either $640 is taken out to the upside or $500 is tested on the downside.
"Just try to remember that we remain in a secular bull market and that a four digit price target remains - even if we need to first go as much as $70 lower."
fnarena.com |
