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Risk On/Off, Gold Off/On

26 April 2019

Precious Metals Commentary


The gold price was under pressure the first half of this week, falling from $1,279.88 to $1,266.42 with silver breaking below $15 to get as low as $14.75.

The $6 “slam” overnight Tuesday naturally attracted much comment. There were the usual questions about “why would someone sell so much in a single trade rather than feed it into the market” implying either manipulation by institutional short sellers or governmental interference. We do note that rarely are such claims based on trade-by-trade analysis at a millisecond level, which can show a much more different picture, as Monetary Metals has done for previous price smashes.

Conventional media explanations attributed the move, and general weakness in gold, to a “risk-on” mood, long liquidation, stronger US dollar and equities, and a lack of geopolitical or economic fears. Scotiabank commodity strategist Nicky Shiels noted that there were ten long investors for every short in gold compared to one long for every short in silver, which meant more scope for fresh shorts to enter the gold market.

Alhambra Partners felt that wider market illiquidity and use of gold as collateral was a factor, noting that “the week following that local peak near $1350, FRBNY reported a noticeable increase in repo fails”, the mechanism being “an increase in gold as collateral pushes gold forward rates upward, unleashing a tide of selling that depresses gold prices”.

Gold US price chart

However, the market ignored all those factors and staged a rally over the past two days to push gold to a high of $1,282.65 even with the US dollar hitting a two-year high, although equities cooling and rising oil prices were positive for gold. Gold is currently trading just under $1,280, looking to end the week pretty much flat. Silver, in contrast, was unable to get back above $15, underperforming gold this week.

In Aussie dollar terms, the precious metals had a strong week, with gold trading in the $1,820s, up $40 and silver clearing $21 on its way to a high of $21.44 and holding above $21.30 at time of writing.

Gold AUD 

This was all due to an exchange rate that had been weak all week, breaking through 0.7080 in response to soft inflation figures (discussed further below) which reinforced prospects of the RBA easing interest rates. Our dollar briefly broke through the 0.70 level and is only trading two tenths of a cent above that currently.
 
AUD/US

The volatile nature of markets these days was noted up by Davin Hood of the Cor Capital Fund (who partners with ABC Bullion and holds a base allocation to gold of 25%) in his recent quarterly report, saying that the influence of passive investor and programmatic trading relative to more fundamental trading by slower humans means that we can expect “periods of momentum and very low volatility, followed by speedy but sizable market moves on low volume”.


Monthly Technical Analysis


Our global general manager Nick Frappell had his monthly technical report out this week (read it here) and also observed that “market psychology seems to be fairly volatile around changing data” and although the gold price has decline more rapidly than anticipated, he says that the price is trading bullishly on the weekly chart, and we will hat tip him for that call as he made it mid-week as the commentators we mentioned above were all bearish.


Bull-Market Breakout Potential


While Adam Hamilton, from newsletter Zeal, acknowledges that current stock-market euphoria is a problem for gold he doesn’t see it lasting. He had an interesting article on gold’s potential to breakout into a bull market based on his three-stage model.

Crucial to his model is the fact that gold futures operate with significant leverage, over 30 times depending on the current amount of maintenance margin required by exchanges. With such leverage futures traders can have far more impact than physical buyers, particularly when investment demand is weak, and can thus futures trading “bullies gold’s price around considerably to majorly”. This week certainly is an example of some bullying.

He sees futures as key to igniting a gold bull market, which happens in three stages:

1.         Gold-futures short covering from speculators buying to realise their profits
a. quickly becomes self-feeding, forcing other short-side traders to buy
b. quickly burns itself out after a couple months or so

2.         Long-side gold-futures speculators return based on stage 1 buying
a. have more capital but have to believe gold is heading higher to make leveraged bet
b. unfolds more gradually, typically 6 months or longer

3.         Gold investment buying based on stage 2 bringing gold back into the financial news
a. are not leveraged and have a long-term focus
b. can grow far larger than gold-futures-driven stages

His analysis is that market action so far as only been due to stage one short-covering buying but that gold “has real bull-market breakout potential in the coming months because this current upleg hasn’t yet seen much gold-futures long buying.  Stage two is underway, but the majority is likely still yet to come”.
 

Lack of Inflation


The Australian Bureau of Statistics released Australian inflation figures this week, and with them turning back down and under the reserve bank’s target (chart from Shane Oliver of AMP) it has fanned expectations that interest rates will be cut.

Lack of Inflation 

Damien Klassen (Nucleus Wealth) had an interesting article out prior to the latest figures that delved deeper into the items making up the headline number, showing that there is some divergence between the categories.
 
Inflatation
 
On the basis that “the four that are above average are generally more influenced by regulators and government policy than the ones with below average inflation”, Damien suggests that investors would be better to look at “sectors that have to convince a regulator that prices need to increase rather than sectors that have to compete with other companies and convince consumers to pay more”. Somewhat cynical but probably a fair indication how far we have moved away from a free market capitalist system to lobbying/regulatory capture.

 

Dirty Gold, Clean Cash


US detectives are progressing in their long-running investigation into money-laundering in the multibillion-dollar “blood gold” trade between Latin America and the United States. Drug traffickers and other organized criminal groups in South America have been trading gold as a way to launder cash.

The latest development comes with a non-prosecution agreement with US refiner Republic Metals who agreed to continue cooperating in the investigation. Late last year, Republic filed for Chapter 11 bankruptcy after discovering a “significant discrepancy” in its inventory. The business’ assets were acquired by Japanese refiner Asahi in February and will operate alongside its Salt Lake City refinery.

Last year US refiner Elemetal was fined $15 million for failing to maintain a robust anti-money-laundering program, having previously been de-listed by the London Bullion Market Association (LBMA) due to “falling afoul of our responsible gold guidelines” in respect of a $3.6 billion money-laundering scheme executed by three of its Miami gold dealers.

Another hot spot for questionable gold mining is Africa, with Reuters this week reporting that “billions of dollars’ worth of gold is being smuggled out of Africa every year through the United Arab Emirates in the Middle East”.

Small-scale artisanal mining occurs in Africa as individuals can often earn more that way than from farming or other work, but the mining methods used are low tech resulting it chemicals leaking into the environment. As the gold price boomed after the financial crisis, volumes increased and attracted criminals to the trade “at a high human and environmental cost”.

Unrefined gold 

Reuters says that much of Africa’s informally mined gold is imported by the UAE due to limited regulation. Few of the big name gold miners who operate in the region export to the UAE as no UAE refineries are accredited by the LBMA, which is “not comfortable dealing with the region because of concerns about weaknesses in customs, cash transactions and hand-carried gold”.

The cases highlight the importance of dealing with businesses that take social responsibility seriously. ABC Bullion, and associated companies under the Pallion umbrella, are fully compliant with LBMA, OECD and World Gold Council policies, so you can be assured that gold you buy from us does not cause, support or benefit unlawful conflict, or contribute to serious human rights abuses.

This is in addition to ABC Refinery’s accreditation with the LBMA, Shanghai Gold Exchange and National Association of Testing Authorities, which assures investors of the quality and purity of ABC bars and coins.
 

Until next time,
 
Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

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.