Gold: Demand Vacuum Has Silver Lining

October 3, 2017

Since I issued my “book profits now” call for gold several weeks ago, the price has declined relentlessly from the $1360 area high.

Investors want to know if I see signs that a fresh rally could begin. The good news is that gold/silver stocks and silver bullion look better than gold bullion. Some stocks are rallying strongly while gold oozes lower.

This is the main problem for gold right now; a collapse in Indian market demand.

Prime Minister Modi has acted more like Prime Minister Napoleon over the past year. He’s lorded over a collapse in manufacturing, anemic jobs growth, and tanking GDP. He has essentially devolved into what I call a “taxaholic”. He’s maniacally obsessed with expanding government size at the expense of the economy.

Modi has ordered jewellers to file what he calls “Know Your Client” forms on gold jewellery purchases of 50,000 rupees or more. That has helped hammer demand by about 50%. It coincided with major flooding that prevented buyers from going to the stores.

Over the past few weeks, Indian gold imports have been negligible. Commercial COMEX traders have sold into that demand vacuum, pushing the gold price down by about $90 an ounce.

Dhanteras marks the start of Diwali on October 17. I expect some pick-up in demand then. Unfortunately, that doesn’t happen for another two weeks.

The Chinese “Golden Week” holiday is also in play. Gold markets in China close for the holiday. Western gold bugs are finding the holiday is anything but golden for them, as the price seems to melt lower on a daily basis.

Fear trade selling tends to produce violent price sell-offs. Love trade demand vacuums tend to produce the current “oozing” in the price. It’s not frightening for investors, but it’s disappointing and disheartening.

The bottom line: Physical demand in both China and India is weak, and while buying in the SPDR fund (GLD-nyse) has been solid, it is nowhere near enough to overwhelm total supply.

This is the gold chart. The technical picture reflects the fundamentals. Gold has a head and shoulders top pattern in play. Unfortunately, the target of the pattern is about $1215.

As the price rallied towards $1360, I noted that key Indian dealers were adamant that they would only be buyers in the $1200 area. At the time, that price seemed impossible to most Western investors. How impossible does it seem now?

A closer look at the price action. The H&S top pattern is just plain “nasty”, but gold is now near a key Fibonacci line that sits at about $1268 on this December gold futures chart.

The next US jobs report is scheduled for release on Friday. Gold has a rough general tendency to rally after the report is issued. A rally from either $1268 or the 76% retracement line at $1245 is likely, but a sustained move higher is unlikely to begin until Dhanteras ushers in Diwali on October 17.

A crash in the stock market could jump start the rally. Chinese regulators just cut the amount of reserves banks need to hold. That’s pouring liquidity into the stock market. It happens just after a great US manufacturing activity report yesterday. So, a stock market crash soon is possible, but unlikely.

Gold market fear trade enthusiasts should focus on the December debt ceiling issue, rate hikes, and QT (quantitative tightening).

Because government lunatics keep borrowing money, it takes very little in the way of rate hikes to create a bear market for general equities.

The Fed is on track to raise rates three times in 2018, and to launch accelerated quantitative tightening. It will be very difficult for the stock and bond markets to keep rising in that environment.

I suggested that the 2014 – 2015 period would see gold trade sideways with a slight downward bias, and 2016-2017 would see it trade sideways with a slight upwards bias. That’s exactly what has occurred.

2018 should see gold begin a trending move to the upside. The fundamentals auger for that, and so do the charts. The current vacuum in love trade demand is creating needed right shouldering symmetry on the long-term gold chart.

I expect Trump to continue to essentially do what he promised to do in his election campaign. His most important promise is to give government bond market creditors a haircut on what they get paid.

The US government bond market will collapse if the debt ceiling isn’t raised. Trump will get the bulk of his tax cuts platform passed, in return for raising the debt ceiling. He’ll then “finance” the rising deficit by attacking foreign holders of US government debt.

This will occur as China launches its new oil for gold contract, which is optional for oil exporters. I doubt it creates the price parabola that many investors envision, but it should be generally supportive for the price of gold. It should help launch the price up and out of the huge inverse head and shoulders bottom on the long term gold chart. For the time being, the right shouldering process rolls on and investors should be eager accumulators.

Both silver bullion and GDX look better than gold. Investors should focus on these assets during the final accumulation phase, and prepare for blast-off during Chinese New Year in early 2018!

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Stewart Thomson

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Pure gold is so soft that a strong man can squeeze it and shape it.