Gold price fall a gift from the market

Dear investor,

Imagine getting a peek behind the curtain…

…a chance to see how the industry works from the inside…

…hearing the gears whirr away, so to speak.

Well, that’s my life now.

Ever since I made the jump from advocate to insider*, each day at the ABC Bullion office is a data nerd’s delight. If I’m in the mood to talk precious metals and their markets, I’ve got two dozen new friends keen to jabber along with me.

Though, one of those recent chats stood out more than most.

The rumblings began a few weeks ago. Basel III changes are soon to be implemented. People wanted to know, what do they mean for gold?

Rather than listen to the echoes doing the rounds on the internet, I turned to our in-house expert, Nick Frappell, Global General Manager of ABC Bullion.

Many commentators on the gold market are claiming the impending Basel III guidelines — such as the net stable funding ratio (NSFR) and high-quality liquid assets (HQLA) — will have some sort of visible influence on the gold price. 

Sure, that sounds exciting for gold. But those are the sort of comments gold ‘spectators’ make, not industry experts.

Nick was at the forefront of this discussion. His analysis revealed concerns for liquidity in the gold sector, saying:

‘The key take-away of all the above is that the Basel III provisions for NSFR and HQLA represent a potential cost to doing business along most, if not all points along the supply chain.

‘This may have unintended consequences, including reducing liquidity in a key investment asset.’

(For those new to bullion, I’ve broken down Nick’s article here and here.)

These new Basel rules for European banks are effective as of Monday next week. With British banks set to follow suit in January 2022.

The impact of Basel III is exciting and newsworthy. It changes the structure of capital requirements held by banks, though it’s worth remembering not all voices are authorities on the matter. These changes may not deliver the ‘pop’ in gold prices we want to see.

Gold expert and author John Butler recently said to me he holds a similar view.

John also sees higher costs and liquidity issues ahead, rather than an instantaneous skyrocketing gold price.

Bank of America weighed in as well. Pointing out Basel III isn’t likely to increase demand rather, ‘will lead to higher costs and lower liquidity’.

Hmmm.

It’s almost like you heard that same view here. Four weeks before everyone else started putting them out…

That’s kind of the purpose of these weekly updates. To bring you behind the curtain and into the fold.

In the months ahead, I want to show you how to better understand precious metals and their markets by listening to the experts that work inside it. 

The sort of people who know all the pockets of the industry…
…the kind of folks that ‘feel the flow’ of gold before us mere mortals are left to chew over day old news.

How? Let’s start with some thoughts from our trading desk.

Thoughts from the trading desk

Each week, treat this as your ‘go to’ for up to the minute market news. What are our top traders looking at? Do they have concerns? What do they know and what should you be watching?

This week the thoughts are:

• One of our traders says he worries US inflation figures won’t be transitory. That the Fed will by default let it run hot because they won’t tighten in time. The flip side of that is, if the Fed does let the genie out of the bottle, it’ll create a positive environment for gold.
•  For those that love technical analysis, Nick Frappell likes the look of the US dollar gold price on a weekly Ichimoku Cloud chart. He says there’s support forming at the base of the cloud around US$1,780. More on this below.

Do you buy high or low?

Filtering through some of the many reports that find their way into my inbox daily, I was drawn to a recent one from the World Gold Council (WGC) about the supply and demand of physical gold. 

One look at the data from the WGC, we can see most investors tend to buy more gold when the price is rising…

Supply and demand statistics for gold

(Click to enlarge)
Source: ICE Benchmark Administration; Metals Focus; Refinitiv GFMS; World Gold Council

The most important part to look though, is the bars in green and the gold price line — which rather cleverly represents the US dollar gold price.

The ‘investment’ bar (in green) bar increases when the gold price rises. 

Why is that? Simply put, when the gold price rises it becomes ‘front and centre’ in investors minds. Headlines — and perhaps the fear of missing out — drive investors to the yellow metal.  
You can clearly see this correlation shortly after Q1’20 on the X axis. Q1’20 marks the start of the US financial year, and the first six months of 2020 which saw the gold price rise almost 30%. Au (gold’s chemical symbol) touched an all time high of US$2,070 in early August. 

This exuberance brought more investors to gold, and the rise in investor demand is reflected in the above data from WGC. This investment demand is a mix of buying physical gold, as well as the surge into gold related exchange traded funds (ETFs).  

However, as the heat has come out of the bullion market, so has investor interest.

What does this tell you? Most bullion buyers can’t recognise a mere price dip when they see one.

After 15 years of being a gold buyer myself, 12 years of analysing and writing about the gold markets, I’m always looking for opportunities to buy gold when it dips. I consider the past week in gold, a gift from the markets.

When I see the gold price drop — coupled with a strong Aussie dollar — I’m quick to convert my fiat dollars into the yellow metal.

Learning the tricks of the trade(rs)

A couple of years ago in my former life, Nick Frappell introduced me to something called the doji in technical analysis.

Doji simply describes a cross, upside down cross or plus sign which appears occasionally on candlestick charts. A ‘doji’ is a trading session where the open and close price are the same, with a high and low spike both up and down.

A doji is a trading session where the open and close price are the same, with a high and low spike both up and down.

Generally speaking, a doji signals there’s some sort of reversal ahead in a market trend.

Look what appeared earlier in the week…

US dollar gold price
Daily price chart

(Click to enlarge)

Source: Trading View

Alright, the open and close price of gold for that day weren’t the exact same.

There’s about a buck fifty difference between the open and close on Wednesday’s trading session. But for technical analysis fans, it’s close enough to call it a doji.

The doji appeared on Wednesday — called rickshaw doji — is often interpreted as a trend reversal, does suggest a further fall in the gold price next week?

We may be in for a bumpy ride over the next couple of trading sessions. Perhaps even a fleeting retest of US$1,740-50…though any spike down is unlikely to last.

I ran my analysis past the very man who taught me about the doji.

Nick told me this morning that ‘The doji is definitely a doji, but less important than a doji that takes place on the lowest day. I feel it’s not signalling a trend reversal so much as market uncertainty. If you look at the US dollar gold price on a weekly Ichimoku Cloud, there’s a strong level of support forming near US$1,780.’

US dollar gold price
Weekly Ichimoku Cloud

(Click to enlarge)

Source: Bloomberg data; Updata Limited

With gold still yet to come out of it’s trading funk, you should ask yourself: do you buy low and take advantage of the dips? Or are you going to wait for the rally to top up your gold holdings?

Before I rush off, here’s something hot off the (digital) press.

This morning I spoke with internationally renowned gold expert, author and friend, Jim Rickards. Click the image below to watch it now.

(Click to watch)

Until next time. 

Shae Russell
Group Communications Manager, 
For ABC Bullion
*Oh, you noticed this asterisk, did you? Stay tuned. I’ll show you how you’ll get to be an ‘insider’ in a few weeks.