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Julian  D. W. Phillips

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Global Watch: The Gold Forecaster covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a…

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Have the Gold and Silver Prices Resumed the Uptrend and If So Why?

Gold is now above $1,330 and setting a pattern of short consolidations up against overhead resistance before breaking through and moving higher. This seems to contradict the popular opinion that gold should be sold and funds invested in equity markets.

In 2013, the hope that the economic recovery would gain traction in the U.S. caused a persistent trend of selling gold from U.S. based gold Exchange traded Funds. In April 2013, after Goldman Sachs forecast a heavy fall in the gold price, together with their clients and J.P. Morgan Chase, they unloaded around 400 tonnes of physical gold into the market in short time. The gold price buckled as a result. It pulled back to $1,180. It recovered over $1,200 over time in the face of many forecasts that it would fall to $1,000 an ounce. During the rest of the year the persistent heavy selling from Gold Exchange Traded Funds amounted to 880 tonnes by the end of the year. Institutions sold gold from these funds to turn to what appeared to be a far better prospect of profits. How do we know that it was financial institutions that were sellers? Because it was at the creation of these gold ETFs that allowed financial institutions to buy gold almost directly at cheap normal brokerage rates. Before that, they could not own gold bullion. With the gold ETF issuing shares against purchases of gold bullion, suddenly this market was opened to them. The tonnage sold through the year was around 20 to 30 tonnes a week.

In total, the U.S. supplied around 1,300 tonnes over the course of 2013. With total newly-mined gold supply at 2,969 tonnes and recycled gold supply at 1,371 tonnes, totaling 4,340, the additional 30% supply from the U.S. took supply up to 5,640 tonnes.

But at the end of 2013, the supply from the U.S. slowed to a trickle and looks like drying up now. While the focus of U.S. investors in the gold market has been switching out of gold and the expectation it would fall further in price, most overlooked the fact that these funds would have a finite amount of gold to sell. Many investors in these funds are very long-term holders and will not contemplate selling their gold. The profit-seekers appear to have completed their sales now, and we're seeing U.S. investors starting to buy gold back into these funds. The conclusion is that we're very close to if not at the point where the gold market has lost a 1,300 tonnes line of supply -that is huge for any market. This fact alone is changing the structure of the gold market and taking the gold price back to the uptrend.

Please note that we haven't mentioned what's happening on the demand side and what's expected to happen on that side in the near future. In future articles, we will look at these reasons and why the gold market has changed to the positive and will stay there.

 


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