Friday, September 13, 2013

Why GOLD can Bounce from here
~~Suman  Mukhopadhyay
Gold futures fell to a four-week low as upbeat U.S. labor-market data reinforced expectations that the Federal Reserve would curb its bond-buying effort.

The most actively traded gold contract, for December delivery, fell $33.20, or 2.4%, to settle at $1,330.60 a troy ounce on the Comex division of the New York Mercantile Exchange, the lowest since Aug. 13, 2013.

Meanwhile, the number of U.S. workers applying for jobless benefits last week fell to 292,000, the lowest level since April 2006. Economists had forecast a reading of 330,000 claims. A government official however cautioned, that the drop was exacerbated by faulty reporting by two states. But, still GOLD traders took the data as an opportunity to sell.. This shows that the SELLING IN GOLD in the INTERNATIONAL MARKET is basically due to SPECULATION and is hinged on two main factors:
(i) Syria Factor
(ii) US Fed QE3 tapering.

Positives for Gold:
(i) Nothing on the ground suggest that the escalation of conflict in the middle-east would not take place. Also, Secretary of State, John Kerry underscored that U.S. military force may still be necessary if diplomacy fails. "This is not a game," Kerry said in an appearance with Russian Foreign Minister Sergei Lavrov after opening talks in Geneva aimed at fleshing out Russia's plan to secure and dispose of Syria's stockpiles of chemical arms. The United States and its allies say Syrian President Bashar al-Assad's forces carried out the attack with sarin nerve gas that killed about 1,400 people, including 400 children. Russia and Assad blame rebel forces. Now, while the United States warned Syria against stalling tactics to avoid military strikes, Assad told Russian state television in an interview broadcast on Thursday that he would finalise plans to abandon his chemical arsenal only when the United States stops threatening to attack him. Also, official Xinhua news agency expressed concern that “handling its chemical arms will pose serious technical, logistic and security challenges to the war-torn country”. “The on-going battle between the government and opposition forces will further complicate the process,” the commentary said, “even raising the concern of these weapons falling into the wrong hands”. In July, Chinese officials expressed fears that around 100 youth linked to terror groups in the western Xinjiang region had travelled to Syria for training with rebel outfits, and had subsequently been involved in carrying out violent attacks. Therefore, nothing happened on the ground as of now and it seems the unrest in the middle-east is here to stay. So, war premium would continue to haunt yellow metal after some profit booking.

(ii) Since, there is ambiguity in the unemployment data, and hence this does not bode well for the camp who says, that the US is looking to taper, QE3.

(iii) There could be large sentimental push from the Asian markets, as festive season commenced. September, is often a good month for gold bulls, when traders in the northern hemisphere return from their summer holidays with a refreshed appetite to make money. Except in the crisis year, 2008, during the past five years, gold tracked upwards in August to September, period. Following this trajectory, this year gold has risen from a low of $1,180/oz in June to as high as $1,433/oz late last month. But it has faded from there, dropping back below $1,370/oz as eyes remained fixed on the US Federal Reserve’s quantitative easing (QE) programme. Gold’s weakness is despite reports of heavy buying of bars and coins in China, and even illegal buying in India, where the government has tried to cap gold purchases to strengthen its currency. But physical gold buying provides more of a floor than an impetus to the market, as it tends to happen on price dips.

(iv) QEs, which flooded world wide markets with liquidity, could fuel hyperinflation. India and China are already battling the same, soon the Europe and the US could come under its grip. 
Moreover, Peter Schiff, CEO of Euro Pacific Capital said early this moth, "So the problem is, the physical gold is disappearing and ultimately the short sellers have to be able to deliver the commodity they are shorting and they are not going to be able to do that". If he's right, this will be where the 'scarcity' part comes in to play, and gold's recent rebound will seem like nothing. "I think (the speculators and shorts) won't be able to buy it back," he says. "I don't think that gold is for sale, at any price, because I think it is in strong hands and I think there's going to be a spectacular rise when these forces try to work themselves back out."

(v) DundeeWealth Economics chief economist Martin Murenbeeld in the end-August Gold Monitor, reiterated his view that gold was in a long-term bull market and is going through a mid-cycle correction. Mr Murenbeeld said there were some positive signals. Substantial selling from gold exchange-traded funds of about 685 metric tonnes, between December and August, has abated.
The emerging markets currency crisis strengthens the gold market as it is encouraging citizens in those countries to buy physical gold. While it could also prompt their governments to sell gold reserves to prop up their currencies, which is negative, those governments might sell US treasuries, too. This would push up the yields on US treasuries, forcing the US government to extend quantitative easing, which would be good for gold, Mr Murenbeeld said. His view of a long-term bull market is appealing to investors who bought gold above current prices.

(vi) Sprott Asset Management market strategist David Franklin  Franklin pointed to a growing global supply shortage in the gold market. Despite this, the gold price was not reflecting that. He said the East was currently seen importing significant amounts of the yellow metal, resulting in significant amounts of bullion moving from west to east. This had resulted in Comex gold inventories to drop steeply.
Hong Kong gold imports had also in recent times risen sharply, and China could very well be the largest gold importer and consumer this year. Further, the Shangai premium over the London-fixed gold price had also risen in recent times, pointing to increased demand, as a result of lower inventories.
Another significant pull on the demand side was the fact that Germany’s central bank had determined at the start of the year to relocate about 300 t of its gold reserves to own turf from the US and France. Franklin said the US does not have the inventory for this available, most likely having rehypothecated Germany’s reserves.
Despite India, the world’s top gold importer and consumer having declared war on gold imports, and having effectively cut imports to nil, there still remained a growing inventory deficit, without the gold price moving in correlation, leaving space for price correction. “In today’s global economy, the price of gold does not resemble the true price of gold,” he said, echoing Morgan’s outlook for a potential bullion bull run in the not-too-distant future.

(vii) Before, the start of the current rally on gold, we were told by the high priests of finance that the gold bull market was over last April. Gold fell all the way to the $1,100 range, and the gold bugs were officially declared legally insane for hanging on. But it clawed its way back to $1,410 range… and the bombs aren’t even dropping yet. Imagine what will happen if Iran makes good on its promise to strike Israel in response…

(viii) All investing involves opportunity costs. If the markets experience an interest rate related 1994-like event as the Fed tries to back away from unprecedented stimulus, stocks and bonds could fall simultaneously. Under those conditions, gold could be the “nowhere else to go” beneficiary as money looks for a safe haven.

(ix) Last month, there were media report that central banks across the world have been stocking up on the precious metal. The central banks of Russia, Azerbaijan and Kazakhstan returned to the gold market once again in July, 2013, topping up their stockpiles of the precious metal as prices traded near three-year lows.
Russia, one of the world’s largest owners of gold bullion, increased its holdings by the most since April, adding more than 200,000 ounces of the metal to its official reserves, which now stand at 32.2 million ounces, according to data from the International Monetary Fund. Central banks, largely in developing economies, have increased their gold holdings over the past few years as debt crises have helped put pressure on reserve currencies, such as the U.S. dollar and the euro.
"The emerging market central banks will continue to accumulate gold as an important cornerstone to reserves, this is one of the factors that will continue to underpin gold demand in coming years", said analysts at ANZ.

(x) Chartically, Gold is now in the oversold region and bounce could be expected either this week or the next week. Meanwhile, seasoned commodity investor and publisher of The Morgan Report, David Morgan, told attendees at the Toronto Resource Investment Conference 2013 on Thursday morning, "Another big precious metals bull run might lie just around the corner",  pointing to chartical analyses suggesting the precious-metal bears might be headed for hibernation soon.
“Gold could even touch $1 000/oz and it would still be considered in an up trend,” he said. Gold had for decades been trading between about $300/oz and $400/oz before the bull run started at the turn of the century. Gold’s bull run would not be considered done until the price pierces the up-trend line, as had, unfortunately, recently happened with silver.
Morgan, who had been investing in precious metals since his teenage years, said he believed the decline in precious metals prices, especially that of silver, were over. He pointed to June 28 as being the day the ‘key reversal’ took place for silver, when, in a single trading day, the grey metal recorded a lower low price of $18.17/oz and a higher high price of $20.08/oz than the previous trading day. “This triggered investors to start buying, some thinking the timing was right for new buys, and others buying to lock in short profits,” he said.

Conclusion: The legendary investor and Daily Reckoning contributor Jim Rogers spoke recently to Tara Joseph of Reuters, noting that gold will go “much higher” due to market panic over Syria and the “end of free money.” Says Rogers:

“I own oil, I own gold, I own things like that, and if there is going to be a war, and it sounds like America is desperate to have a war, they’re gonna go much, much higher. Stocks are gonna go down, some of the markets that I’m short are already going down, commodities are gonna go up. I mean, yeah, some of the things I own all make a lot of money. I’m not particularly keen on war, I assure you, but it sounds like they want it.”

The lesson here for investors: If you think gold is over with, you have evidently forgotten about politics. No matter how bad it looks, someone in Washington will end up making gold investors wealthy again.

(i) BD Live
(ii) Reuters
(iii) The Hindu
(iv) Mining Weekly
(v) Wall Street Pit 
(vi) Wall Street Selector Selector
(vii) The Wall Street Journal
(viii) Yahoo Finance