Bearish Factors Weigh but Clouds Empty
- IMF Gold sales threat
- Approach of CBGA selling season
- COMEX Bulls foiled again
- ECB keeps rate cut to 25 bps
- Talk of draining excess Reserves with SDR's and other means
Several factors ganged up on Gold Bulls this past week - in addition to the unfolding rally on Wall Street and the weight of historically stretched Gold/Commodity ratios - to push the market price through the $885 level, where Gold found support during March. It could be construed as a Bullish failure and the Gold price Chart says lower until we see some life in the Bulls again.
How much lower... is the question. Anything can happen, as we have seen.
The fundamentals - those that impact Investment demand - are rock solid. Gold continues to be relatively misunderstood, absolutely undervalued, and is getting cheaper each day! The World Economy is caught in a whirlwind of progressive interventionism, of which Inflationism is just one kind. The best reason to sell Gold, fundamentally speaking, is the least likely outcome: Deflation.
The $885 level was technically important for the short-intermediate outlook, which means that anyone running trading programs off the October-March trend is leaving the market. The break began to unwind Thursday, when one of the announcements coming out of the G-20 meetings was that the International Monetary Fund (IMF) was prepared to sell the 403.3 metric tonnes of Gold that it threatens the market with - around this time each year. Notwithstanding, it is always good for a one or two day bout of selling, especially when Wall Street is looking to rally on the potentially bullish effects of a change in accounting regulations on Bank earnings. Normally, this action has presented a buying opportunity and this time may be no different. Investors could be note that this sale of IMF Gold still requires approval from Congress, and that one of the conditions of that approval is that the sales are done without hurting the market. Besides, there are other facts that dilute the importance of this announcement. For one, the IMF is bound by the Central Bank Gold Agreement (CBGA), which means that no more Gold is coming on the market than was expected under the CBGA. It is also well known that the sellers under the agreement are increasingly shy about selling their Gold, so the IMF sales would only fill the void so to speak. In the first quarter alone, we have read that three non-CBGA central banks (Russia, Venezuela and Ecuador) had bought over 60 tonnes of Gold - the CBGA has sold 80 tonnes since October. At best, for the bears, the IMF sales might breathe new life into the CBGA but many non-CBGA Central Banks are underweight. Thus, the news is but well timed rhetoric, already discounted in the market. However, we are approaching peak selling season for the CBGA. Historically, the second quarter is when they like to take aim at the Gold market and concentrate their annual sales. The effect on the market tends to vary, but at these prices, we do not see this as a bearish factor, ceteris paribus.
Perhaps a more psychologically relevant development upsetting the Bulls this past week was the failure of another Bullish raid on COMEX's apparently shrinking stockpiles - when Deutsche Bank (DB) made a last minute delivery of about 850,000 ounces on March 31st (coincidentally, the ECB sold about the same amount of Gold the same day...to DB, according to one Market related speculation). The demand for delivery has been rising month to month as the Bulls are speculating that the Exchange's stocks of 1kilogram Gold bars are depleting. The fills likely unnerved their confidence. Chalk it up to month end!
In addition, the smaller than expected ECB rate cut and hawkish talk from U.S. Authorities about eventually draining Reserves back out of the Banking system (deflationary) gave the Bears added impetus. But not only is this talk premature and probably rhetorical, but also, it just does not have legs. Even if the Federal Reserve, by some miracle of courage, was genuinely going to try to drain those Excess Reserves, its planned purchases ($1 trillion) in securities on the open market this year will be Inflationary on the whole. In fact, it could be argued that draining Reserve Bank credit may not necessarily impact money supply while the open market purchase of securities sure will.
Effectively, by draining those idle Excess Reserves from the supposedly broken Banking system, and monetizing Mortgage and Government Debts instead, the Federal Reserve is reallocating the funds it has already created in such a manner that they will more likely expand the money supply. The realist in us says that they will not unwind their temporary facilities and drain Reserves, and that combined with other "programs," total money supply is set to grow substantially this year. This is fundamentally bullish for the Gold market in light of the Economic outlook.
While current Bearish factors are unlikely to have any lasting impact on the underlying trend, we see a 25% chance of further downside to about $795. The most likely scenario in our mind (and opinion) is a test of support at the $850 mark, perhaps a bit lower, in order to complete the right shoulder of a 15 month Bullish head and shoulders formation, setting up for a May-July advance to $1000 (U.S.), which has an implied objective to about $1500 (U.S.) per ounce - following a likely October breakout.