Unbalanced gold situation signalling upturn in prices.

“Sentiment in the gold market – especially among the hedge funds and institutional speculators – is already EXTREMELY NEGATIVE” says specialist U.S. precious metals analyst and cautious gold bull, Jeff Nichols in his latest posting. He reckons market psychology can’t get much worse, but comments that contrarians feel this unbalanced situation could be signalling an approaching upturn in prices. 

Gold prices driven “insanely lower” – Nichols

His analysis is interesting in that he comments that the volume of selling – particularly out of the gold ETFs, which continues to occur at relatively high levels, although peak selling may have eased a little, has largely been from hedge funds switching from gold to equities.

These have been boosted by QE in the U.S. and elsewhere, despite there being little sign on the economic front that such higher stock prices are justified in any way.

Economies are not really improving – indeed the Eurozone is firmly in recession – even Germany is suffering.  Unemployment in the U.S. which is said to be coming down, is only doing so at a minuscule rate, and figures are seen as not truly representative of the real situation with, for example, John Williams’ ShadowStats calculations showing the true figures to be many degrees higher, while in the Eurozone unemployment figures, particularly among the younger element, are truly horrendous.

Corporate earnings are not increasing to any significant extent, manufacturing output is not rising for the most part while China, which has been perhaps the main engine of global growth, appears to be stuttering.  Yet stock prices are rising and rising like there’s no tomorrow.  Not surprising therefore that many market analysts are extremely nervous that a serious stock market collapse may be imminent. Already Japan’s Nikkei Index has crashed over 13% from its peak in the past week.

 Is this a portent of things to come in other markets?

We have seen charts which suggest the latest market movements are analogous with those which occurred in 1929.  When people feel the only way is up, prepare for a crash!  Indeed there are perhaps parallels with the gold market in 2011, although a general stock market crash sends investors into a selling frenzy, while the gold market crash, or correction as it is seen by many, just seemed to open the floodgates for buying at lower prices.  Perhaps there is a lesson to be learned here.

Nichols goes on to comment that “with all the selling that has knocked gold to the mats over and over again in recent months – preventing price advances above $1600 from sticking – it’s just possible that there’s not much left for gold bears to dump.”

“It may be”, he avers, “that those who want to reallocate investment assets from gold to equities have already done so. This alone could be enough to turn the market around, if not in the next few weeks, then soon thereafter.”

Those who have been writing gold off in the West seem to have been discounting the huge volume of physical metal purchasing seen in the East.  A frequently referred to cartoon by the gold bug element pictures westerners chucking gold over a wall one way while easterners throw dollars back at them in return. This certainly paints a picture that seems to have huge relevance today.

Central Banks – notably Russia, Kazakhstan and Turkey on the latest IMF-published figures – are continuing to increase their gold reserves and Nichols comments that the Chinese Central Bank, the People’s Bank of China is doing the same, although one has yet to see any concrete evidence that this is the case over and above the enormous gold flows into the Middle Kingdom.  China has denied that it has been increasing its central bank gold holdings (never believe anything until a politician officially denies it!) and technically this could be so if, as last time it announced an increase – around four years ago – it said it had been holding the gold, which miraculously appeared in its reserve figures overnight, nearly doubling them at a stroke, in a different government account.

Nichols muses on gold past, present and future.

Nichols’ views are strongly supported by analysts from the Sprott group – although one needs to take into account that the Sprott organisation is notably bullish on gold and silver which may colour their views.  Earlier this month the Canadian group commented as follows:

“We also believe China’s current gold reserves are significantly more than the stated 1,054 tonnes. Given that the entirety of China’s domestic gold production remains held in-country, the escalating level of gold imports through Hong Kong (which have totaled a cumulative 1,051 tonnes since 2010), and the sheer size of China’s US dollar reserves, it seems highly probable that a large portion of that gold is making its way to the PBOC. The fact that Chinese officials seek to deny this should not be surprising, as any suggestion to the contrary has the strong potential of moving the gold price higher. Investors will remember that China’s 2009 gold reserve announcement propelled gold above US$1,000 shortly thereafter, which it has traded above ever since.

“Given the way their announcement affected the price for gold, we doubt China will reveal how much gold it has accumulated until it is satisfied it has accumulated enough. The question now is how many tonnes “enough” will represent.

“When it comes to China’s gold reserves, watch what they do – and don’t believe everything they say.”

Nichols reckons that the PBoC may in fact be increasing its reserves at a fairly conservative rate of 10-20 tonnes per month, which, if true could mean that the country’s reserves have increased by some 360-720 tonnes since it last updated its reserves figures to the current official 1,054 tonnes.  Others suggest the amount being taken in could be much higher – even a figure of 4,000 tonnes has been suggested recently.

Nichols thus recommends “that most investors hold at least five-to-ten percent in physical gold as a long-term insurance policy against risk.  Some may wish to hold more.  Regardless, with equities up sharply in value and gold off considerably from its September 2020 all-time high, many investors will find they are underweighted – and in need of readjustment to bring their gold holdings back to their desired allocation.”

Overnight, and this morning, we have seen gold back above $1700 an ounce.  It will be interesting to see if this level can be maintained, or whether it creates sufficient selling on COMEX to knock it back again.  If it holds this could see a start of a steady climb from its recent depths given the huge recent purchases of physical metal which has been denting supply availability.

By Alexandre Laurent

Alexandre Laurentl is working in the jewelry and investment gold since 2002. Alexandre graduated from The Normandy School of Business and from the University of Perpignan a Bachelor of economics in 1995.

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