Even Though Investor Gold Sentiment Remains Negative, Demand For Physical Metal Is Robust

Although investor sentiment remains largely negative towards gold, the price of the yellow metal seems to be carving out some support above $1180 an ounce. After the release of the July nonfarm payrolls report, gold prices managed to end Friday in positive territory, settling the week at $1,093.80 per ounce. And, so far this week they have broken back above the $1100 an ounce level.

According to some market sources, Friday’s minor rebound in prices started when a buy order for 100,000 ounces of gold hit the marketplace just as U.S. equity markets were opening. Analysts noted that the big order in a relatively thin market helped prices pop higher by more than $10 an ounce.

The highly anticipated non-farm payroll report showed that in July 215,000 individuals were added to the employment market versus expectations of 225,000. At the same time the previous month’s figure was revised up from 223,000 to 231,000. The unemployment rate was unchanged at a seven-year low of 5.3% with participation rate held at 62.6%.

Earlier in the week, the Bank of England (BOE) voted 8-1 to leave the Bank rate unchanged at 0.5% while voting unanimously to leave the asset purchase program at 375 billion pounds.

The Reserve Bank of Australia (RBA) left the cash rate unchanged at 2% for a third consecutive month. Whist this decision had been widely anticipated, the adjustment in language in the accompanying statement lifted the Aussie slightly.

Even though most banking institutions remain negative towards gold, I believe that the current levels do not reflect the true price, and are well below what they should be.

On the one hand, the paper market continues to be heavily pressured in a bearish direction by extraordinary levels of institutional short selling. On the other, the physical market is heating up with robust investor buying and increasingly bullish long-term supply/demand prospects.

These are extraordinary times for gold and silver, and while mainstream financial media continues to shun precious metals in anticipation of still lower prices, many investors recognize the extraordinary buying opportunity at hand.

While the Greek financial crisis made the daily headlines, not much has been said about Puerto Rico’s debt crisis which escalated last week.

Last Monday, Puerto Rico missed a $58 million bond payment. It was Puerto Rico’s first default in 117 years. The New York Times explained:

For years, the commonwealth borrowed too much money, trying to paper over declining government revenue and prevent deep cuts in services and layoffs of public workers. Puerto Rico easily found lenders willing to extend the government more debt. The bonds made for hot investments across the mainland United States because the interest is often “triple tax exempt,” meaning the holder does not pay state, federal or city income taxes.

A default by Puerto Rico was bound to happen. For years, the government spent more money than it snatched up in taxes. And it borrowed to make up the difference.

Puerto Rico bonds offered high returns and tax-free income. And according to many financial advisors, there was little chance that the government would default on its debt.

More indebted than any American state by some measures, Puerto Rico sold its bonds far and wide, to everyone from wealthy Midwesterners to New York hedge funds. But more than 20 percent of the government debt is owned locally. And as values have plunged, some of the most intense pain is being felt by the tens of thousands of Puerto Ricans who bet much of their savings on the bonds.

“These are doctors, stay-at-home moms, teachers, older people, young people,” said Jeffrey B. Kaplan, a Miami lawyer whose firm represents more than 150 Puerto Rico bond investors. “And now they have all their eggs in one basket.”

Governor Alejandro Garcia Padilla is seeking to restructure Puerto Rico’s $72 billion of debt, saying bondholders need to share in the commonwealth’s sacrifices.

The decision to default may add to the cash crunch by impeding Puerto Rico’s ability to raise funds, Standard & Poor’s said in a statement. Without such financing, the government may run out of money in the months ahead, the ratings company said.

Puerto Rico is set to propose a plan by Sept. 1 for putting off payments on some of its debt. The government’s officials have yet to say which bondholders may be affected or by how much.

Meanwhile, according to a Bloomberg article, the International Monetary Fund (IMF) said the yuan trails its global counterparts in major benchmarks and that “significant work” in analysing data is needed before deciding whether to grant the Chinese currency reserve status.

The report suggests that while approval by the IMF board isn’t yet assured, it’s within reach, and the decision will come down to more than just the staff’s assessment. China has been pushing for the yuan to join the dollar, euro, yen and pound in the SDR basket; while countries such as France have welcomed China’s push, the U.S. has urged the nation to keep moving toward a flexible exchange rate and undertaking financial reforms.

“The ultimate assessment by the board will involve a significant element of judgment,” the IMF report said.

The fund said international use of the yuan, officially called the renminbi and abbreviated RMB, has increased over the last five years, albeit from a low base. “Across a range of indicators, the RMB is now exhibiting a significant degree of international use, especially in Asia and increasingly in Europe,” the report said.

To qualify for the basket, currencies must be “widely used” to make payments in global transactions, and “widely traded” in major exchange markets. Key indicators include the share a currency makes up of official reserves, international banking liabilities and global debt securities, as well as the volume of use in foreign-exchange markets.

Last year, the yuan ranked seventh among currencies as a share of official reserves, behind the four SDR members as well as the Australian and Canadian dollars, according to the IMF. The yuan constituted 1.1% of official reserves, compared with 63.7% for the U.S. dollar.

The yuan also ranks outside the top five in terms of debt securities and currency trading, according to the report.

Winning the IMF’s blessing, following a rejection in the last review in 2010, would give the yuan prestige as a reserve currency that makes it more attractive for central banks to hold and potentially reduces the dollar’s dominance worldwide. From a technical standpoint, owning SDRs counts toward a country’s official reserves; the U.S. holds $50 billion worth, out of about $280 billion allocated to IMF members worldwide.

While, the paper market for gold and silver has been subjected to relentless selling there are many factors suggesting that gold prices should be going higher. Apart from the current global financial uncertainty, lower prices are pressuring the gold mining industry. There are a number of reasons for the industry’s woes, but most mines simply can’t make money selling their mined products at today’s low spot prices. 

In addition, the surge in demand for bullion coins and bars will soon have a positive impact on prices.

Even though it has been extraordinarily difficult for some investors to keep their conviction and hold on to real value while paper markets relentlessly discount it, I am entirely convinced that we are getting to the end of this current bear market.

Gold Technical Analysis

For more than two weeks the price of gold has held above the $1080 an ounce level. And, recently, it has shown signs that the bottom of this false correction has now been reached.