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A Most Unusual And Interesting Gold Market

September 21, 2018

This is one of the most unusual and interesting gold (GLD) markets that I can remember in well over a decade. There are several factors at play that include:

  • Trade war with China becoming a currency war.

  • India's tax situation.

  • Commercial traders are net long for the first time in 17 years.

  • Gold sentiment at extreme lows.

  • Kinesis, a new gold-backed cryptocurrency.

  • Year-end is approaching, which is often volatile for gold prices.

  • Gold stocks cheaper than 2015 bottom.

In January, the Trump administration began imposing tariffs on various products and countries that intensified a trade war. On July 6, when the U.S. imposed tariffs on China the trade war escalated further and started to become more of a currency war. The yuan to US$ exchange rate was already falling in 2018 and dropped further after the July 6 announcement (I have July 4 highlighted on the chart). In essence the devaluation offset the tariffs.

Simultaneously, China has been using its US$ reserves to buy cheaper US$ priced physical gold to maintain the CNY to Gold peg. This helps facilitate yuan-based oil purchases because oil producing states can immediately convert their yuan to gold through the Petro/Yuan futures contract. This is resulting in more physical demand for gold from China that will rival the 2013 highs. This graphic using World Gold Council data shows China on track to hit 1,000 tonnes this year and with demand picking up in the second half of 2018, it should come out above 1,000 tonnes.

While demand from India, the second largest consumer, looks soft, it does take into effect smuggling and a tax loophole. Gold is subject to a 10% import tax, but if doré bars (not pure or refined) are imported, the tax is avoided is how I understand it. The import of doré bars removes supply to refineries elsewhere. In 2016, the World Gold Council estimated smuggling into India amounted to 120 tonnes.

Many gold traders, including myself, watch the weekly COT Report. Typically the Commercial traders are short gold and Managed Money is long when gold has rallied. Commercials will typically trigger gold to fall through support levels and as Managed Money sells, the Commercials buy to cover their short position. Once the Commercial short position is very low, gold rallies and the process repeats. Some call it the rinse and wash cycle. It is very unusual to see Commercials with a net long position, but we have that now for the first time in 17 years. This is very bullish as the Commercials are considered the smart money.

On the gold chart, noted with the arrows, the COT is more bullish than the December 2017 low and even the bear bottom low of December 2015 (not shown here). I also note with the circle an almost perfect morning doji star reversal pattern. These are strong reversal signals and I would now like to see a break above $1225 as further confirmation of the August bottom.

Ron Struthers founded Struthers' Resource Stock Report 23 years ago. The report covers senior and junior companies with ample trading liquidity. He started his Millennium Index of dividend stocks in 2003 - $1,000 invested then was worth over $4,000 end of 2014 and the index returned 26.8% in 2016. He retired from IBM after 30 years in customer service, systems and business analyst, also developing his own charting software. He has expertise in junior start-ups and was a co-founder of Paramount Gold and Silver.

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Charts and images provided by the author.

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