Gold prices rallied overnight, erasing some of the losses from earlier in the week, which had at one point pushed the yellow metal below USD $1,050 an ounce. Silver, which at one point dropped below USD $14.00 an ounce has also staged a mini-comeback.

The movements in gold over the past three trading days, including the sell off on the 2^nd December and the recovery overnight can be seen in the chart below, which plots the movements over the previous three 24 hour trading windows. 

The sell off on the 2^nd December was likely sparked by Janet Yellen, whose testimony before Congress’s Joint Economic Committee re-affirmed the likelihood of a pending December rate hike. 

Whilst this hike is now more or less completely expected by the markets (UBS stated that the market is currently pricing in a 74% chance of a December rate hike), we weren’t surprised to see this last piece of downside volatility in gold, after Yellen’s comments. We actually think a rate hike could end up being gold bullish, especially if the hike is accompanied with ‘dovish’ rhetoric from the Fed, who are likely to reiterate that the pace of any rate hikes will be very slow, data dependant, and that the Fed will change course and become more ‘accommodative’ should it be necessary in 2016.

This potential for a ‘dovish’ hike was given more credence after Yellen’s testimony, with the Fed chair noting concern over the slower pace of global economic growth, with emerging market growth rates no doubt a particular concern to Yellen and other financial “elites” the world over. 

We also still think there is some chance the Fed won’t actually lift-off this month, with economic data still lukewarm, including the overnight results for factory orders and the ISM non-manufacturing PMI.

If non-farm payroll data due to be released tonight disappoints, then it will be very interesting to see how the market reprices the odds of that imminent US rate hike, and the implications for precious metals and other asset markets.

In Australian dollars, it’s been another disappointing week for investors, with the prices for gold and silver now trading just below $1450 and $20 an ounce respectively.

For that we can thank the surging Australian dollar, which despite yet more carnage in iron ore and other key commodity markets, is pushing higher, last trading at $0.735 versus the US dollar.

Part of that strength was no doubt down to the latest RBA decision to hold interest rates at 2% this week, with many in the market now expecting that will be the bottom of the interest rate cutting cycle in Australia. 

We don’t agree with that – and expect to see interest rates fall as low as 1.25% by the end of 2016, with Australia facing a handful of headwinds, including the following;

• Continued unwind of mining related capital investment

• A peak in housing related construction and activity

• A potentially volatile year for the stock-market and peak in housing prices, both of which will limit any confidence gains from the ‘wealth effect’

• A likely increase in unemployment or underemployment, and continued declines in real wages

Whether Australia falls into a formal recession or not obviously remains to be seen, as export volumes will support headline GDP, but that is largely beside the point, with the country likely to struggle through recession like conditions for years to come.

Those lower rates will no doubt feed into further physical gold demand, as investors move a portion of their portfolios from negative real yielding cash and term deposits, and into gold and silver. 

Physical Demand Strong

Despite the weakness in gold prices of late, we can confirm from our own trading records that the stories about exceptionally strong physical demand for precious metals are true.

Across our range of clients, we have seen a noticeable increase in volume in the past few weeks, especially amongst many of the jewellery shops that we’ve been fortunate enough to have as clients for the past few decades.

Many of these shops trade some of the smaller gold bars (1oz ABC Cast Bar Gold and 37.5 gram ABC Luong) amongst their local communities, and the volumes they are turning over now are running at some of the highest we’ve ever seen, a sure sign of how robust physical gold demand is at these prices.

In this, we are clearly reflecting a global trend, which is seeing record high withdrawals from the Shanghai Gold Exchange, whilst the US Mint sold 97,000 American gold eagle coins in November, up 185% from their monthly sales in October, and up 62% from the previous year. Silver sales have also hit an annual record.

Therefore, whilst I can appreciate that the pullback in prices this past two months will have frustrated some investors, I can assure you the market for physical metal remains incredibly strong, and this will be reflected in prices in due course. For those of you who already have your full allocation to precious metals, then the best course of action is likely to simply do nothing, and go away and enjoy your Xmas, knowing you already have the wealth insurance in place that so many will likely seek in the years ahead. 

For those who are looking to top up their holdings, then this latest bout of weakness might be the opportunity to capitalise, as I’m sure we’ll look back at a period of sub AUD $20 an ounce silver and AUD $1500 gold fondly in years to come.

The major headwinds for the precious metal market this year have been the surging USD, uncertainty re the first Fed rate hike, futures market activity, commodity price declines a poor technical picture, and ETF outflows.

On the ETF front (which is highly correlated to the gold price itself), we’ve seen yet more outflows in the past few days, with total gold ETF holdings now barely above 1500 tonnes.

That is over 1,000 tonnes lower than their 2012 peak, with these outflows a major contributor to the 40% price correction we’ve seen in USD terms over this time.

For a short read into the gold ETF market, and how it has added to the volatility of the gold market in the past decade, we suggest you read the following article, published yesterday by Morningstar.

We don’t necessarily agree with the findings (as we don’t expect prices to remain largely static between now and 2020) but there are couple of charts worth looking at.

Looking at the other drags on the gold price of late, it’s still too early to call “all clear” on most of them, and say that the market has definitely bottomed. There are however some positive signs. 

Technical Picture

With John Feeney

Both the USD daily gold chart for the short-term and AUD weekly chart for the long-term are saying the same thing at the moment, and that is that the precious metal market is oversold.

There aren’t too many spots throughout the year where we have both weekly and daily charts telling us that, and the AUD also looks overbought, which is another factor for local precious metal investors to factor in to their decisions. That short-term oversold precious metal position, and overbought AUD are the reason we are seeing a local gold price of just AUD $1,445 per ounce this morning, but it will be interesting to see if these levels last.

These spots where we have multiple indicators on the charts signalling oversold conditions are the ones that would historically provide better entry points for those dollar-cost averaging into the metals.

Below we see on the daily USD Gold Chart, we have both the RSI, MACD, and Williams % oscillator giving oversold signals. MACD is very close to giving a change in momentum signal.

One decent rally from now to the weekend close should see the MACD give the buy sign, and a weak non farm payroll print (should it eventuate) could be that very catalyst.

All three oversold indicators are circled below. 

In periods where the gold price has tumbled around $100 an ounce I like to take a look at the long-term weekly AUD Gold chart to put it into perspective.

One of the most reliable indicators for AUD gold investors is the Williams% oscillator on the weekly gold chart. This is indeed signalling well oversold at the moment and we can see it in the below chart.

The chart shows the last three years with the Williams at the very bottom, where I have circled the oversold indicator, which occurs at -80. We are now at -90. Looking back over the last three years it would seem that buying in at times where the Williams is oversold on the weekly chart is a fitting strategy. 

It will be interesting to see if this once again proves correct. If so, Australian dollar gold could well be very close to a bottom, something that would dovetail in with our previous analysis which has suggested AUD $1,400 an ounce would be a likely bottom for the precious metal market. 

Sentiment and Market Positioning

It goes without saying that sentiment and market positioning are at extremes when it comes to the precious metal market today. Starting with sentiment, and using the Optimism Index (Optix), which is charted below, we can see that gold traders have basically never been more bearish.

The current reading of 14 is one of the lowest in history, with traders essentially more bearish on +USD $1,000oz gold than they were when gold was under USD $300oz after a 20 year bear market. As we never tire of pointing out, that kind of bearishness is a contrarian investor’s dream, as it will be the exact opposite when gold and silver are in a bubble one day, when it will make perfect sense to minimise holdings.

If we look at the commitment of traders data, we can also see an incredible picture before us, with the current hedger net short position at its lowest in nearly 15 years.

And whilst commercials have largely unwound their short positions, speculators couldn’t be happier to punt on lower prices, with hedge fund shorts at their most extreme levels on record.

You can read more about these trends in three separate reports. 

One is a very detailed read at Pater Tanerbarums Acting man blog, which is well worth your time and contains a handful of interesting charts. You can access that one here. 

The second report is from Zerohedge, which can be found here, and also includes a chart on coin sales from the US Mint.

The final report comes from Clive Maund, who also has some great charts on silver and the US Dollar. You can find that here.

The bottom line to all of this is that the correction in precious metals is approaching its last legs. There is still the potential for further downside, and we still believe dollar cost averaging is the best approach.

For medium to long-term investors, treat this period as an opportunity to be harvested. We certainly will be.

Until next week

Jordan Eliseo

Disclaimer

This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.