It’s an understatement to say that gold is a mysterious commodity. There are wars in the Mid East and we have Russia and the United States verbally battling each other over Russia’s invasion of the Ukraine. The natural resource boom of 2011-12 is taking a breather, affecting the economies of Australia, Canada, South America and Africa. International conflicts usually drive investors to seek haven in precious metals. This time, however, they are running away from them with gold making new lows in the month of November. It is extremely difficult to make sense of these cross currents and come up with a rational sense of where gold is headed. A look at the fundamental and technical factors affecting gold trading will give us some insight about the market.
First, we must look at Central Bank buying and selling. They set the gold fix and are the biggest players in the gold market. Central banks trade in 400- ounce bars. A recent quote was $489,950.64. One bar weighs 12.4 kg or 438.9 ounces. By comparison a one- ounce bar weighs 32.5 troy ounces and was last quoted at $1189.74. It is obvious that Central Banks control the market. So to get a handle on the fundamentals of gold we need to look at whether or not Central Banks are buying or selling. The best source for this information is the World Gold Council website. Central Banks were net sellers of gold from 2004 through 2009. From 2010 to date they have been net buyers. In Q3 of 2014, they were net buyers of 92.8 tons.
Russia’s Central Bank was the biggest buyer in Q3 snapping up 59% of all purchases. It now has overtaken China for the number 5 spot, behind the United States, Germany, France and Italy. Switzerland may schedule a referendum to decide whether or not to raise their gold purchases above 20%. India’s jewelry purchases amounted to 189.2 tons in Q3. Nevertheless, with all this activity December gold futures made a new yearly low at $1130.40 on November 3, 2014. This plus the international turmoil has confused and confounded the best gold analysts.
Using a 5year continuation chart for December 2014 gold futures we note the following lows. (A continuation chart uses each month in succession instead of just one month.) Lows were made as follows: June 1, 2013 at $1182.60- a low of $1185 on December 1, 2013- a low of $1160.50 on October 1, 2014 and a new recent low on November 3, 1130.40 Note that we had a double bottom low holding at $1185 on December 1, 2013. This gave gold bugs a reason to celebrate and proclaim that a new leg in the bull market had started. This euphoria was short lived- only to be followed by three successive lows. Suddenly on Friday November 14, the price shot up to $1185.60 for a one- day gain of $24.10. This was a classic one- day short squeeze. For chartists, it did signal a weekly turn to the upside. The price did not confirm on the monthly charts that are key to a longer- term bullish move. We would need a monthly close above $1,200 and holding for any hope of a true upturn. What often happens is that we have a short squeeze for a few weeks followed by a resumption of the bear move. This is strictly a trader’s play. For investors, wait this one out.