|Date posted as sample
the 2nd December 2013 Weekly Update:
Although the gold price did very little last week, the price action
helped to define the two price channels indicated on the following daily
chart. Notice, in particular, that last week's intra-day low coincided
with the bottom of a channel dating back to the late-August rebound high
and the bottom of a narrower and more steeply-sloped channel dating back
to the October rebound high.
Friday's close coincided with the top of the steeply-sloped channel
dating back to the October high, so any additional price gain from here
would create a minor upside breakout. However, more important resistance
lies in the $1270s. A counter-trend rebound shouldn't do more than test
this resistance, which is why we would interpret consecutive daily
closes above $1280 as confirmation that an important bottom was in
Over the past 5 years, one of the most important gold-market
'fundamentals' has been the relative performance of the US banking
sector as indicated by the BKX/SPX ratio. Gold tends to do well when the
banking sector is weakening relative to the broad stock market and gold
tends to do poorly when the banking sector is strengthening relative to
the broad stock market. The following chart shows the performance of the
There is preliminary evidence in the market action that the BKX/SPX
ratio made a trend reversal of at least intermediate-term significance
at the end of June-2013. Taking out the early-November low would provide
conclusive evidence of such a development and would substantiate the
view that the gold market commenced a major bottoming process in June.
the 13th November 2013 Interim Update:
Inflation and nothing but
Last week's surprise interest rate cut by the ECB changed nothing at a
fundamental level. It was purely symbolic. The ECB was, in our opinion,
making the point that there are no limits to how far it will go along
the inflation path, a point that had already been made by the US Federal
Anyone who has been bearish on gold over the past two years due to a
belief that deflation was about to happen has been on the right side of
the gold market while being as wrong as they could be in their
reasoning. They got lucky, because the gold price has fallen in parallel
with considerable inflation. In essence, they got lucky because the Fed
The Fed got lucky over the past two years due to the fact that its
money-pumping boosted the 'right' prices, where the right prices are
equities, bonds and real-estate investments. It was primarily luck,
because the Fed doesn't have much control over the paths taken by the
new money it creates. We note, for example, that similar bouts of money
pumping from late-2008 through to mid-2011 gave the biggest boosts to
the 'wrong' prices, most notably gold and commodities.
Now, when we say that the Fed got lucky we aren't saying that gold
bulls, including ourselves, got unlucky. We missed some signs that the
markets had entered a multi-year period during which the pendulum would
swing in favour of the central planners and the inflation policy would
appear to work. Of equal importance, the simple fact that the 'wrong'
prices had risen so far so fast during 2009-2011 created the potential
for a substantial swing in a different direction.
In any case, that the "QE" programs and the other extraordinary measures
implemented by the senior central banks have appeared to work over the
past two years will encourage more of the same and therefore greatly
reduce the probability of monetary policy becoming prudent anytime soon.
In order to get a positive change in policy, the problems caused by
previous actions will have to become blatantly obvious. Also, from the
collective view of policy-makers, influential economists and the
financial press, deflation will have to be eliminated from contention.
Looking at it another way, there will be no limit to what central banks
will do to devalue their currencies as long as the problems caused by
earlier attempts to devalue are not blatantly obvious and as long as
deflation is generally perceived to be a realistic possibility, so
afraid are most central bankers, economists and journalists of your
money being able to buy more in the future than it does today.
Consequently, the more correct the deflation forecasters appear to be in
the short-term, the more incorrect they will end up being.
the 11th November 2013 Weekly Update:
Currency Market Update
The 'big' fundamental change last week was Thursday's surprising
decision by the ECB to cut the Refinancing Rate (the interest rate that
banks pay to borrow money from the ECB) from 0.50% to 0.25%. It seems
that 0.50% was deemed to be too high a price for banks to pay for
This rate change is only symbolic, because taking a near-zero interest
rate a little closer to zero obviously won't remove any constraints. In
effect, the ECB's message to the world is: "We can be just as profligate
as the Fed!"
The currency market's reaction to the ECB news was interesting. The euro
initially plunged and the Dollar Index moved well above short-term
resistance at 81, but the US$ then gave up most of its gains and failed
to end Thursday's session above 81.
Thursday's market action was US$-bearish, but a stronger-than-expected
US employment report on Friday reignited fears of Fed "tapering" and
caused a new wave of US$ buying.
As noted on the following daily chart, the Dollar Index successfully
tested intermediate-term support at 79 late last month and broke above
short-term resistance at 81 last Friday. It is now clear that a
short-term bottom is in place, meaning that the Dollar Index is unlikely
to trade below its October low over the remainder of this year. However,
it is not clear that the Dollar Index has much additional short-term
The following long-term weekly chart puts the swings of the past two
years into perspective. On the long-term chart, the swings of the past
two years look more like ripples than waves.
Our view is that the Dollar Index is immersed in a major multi-year
basing pattern, not unlike the pattern that formed during 1988-1995.
What we don't have a strong opinion about is whether or not there will
be one more decline to the low-70s to complete the basing pattern. A
weekly close below 79 will signal that one more decline to the low-70s
is, indeed, on the cards.
the 4th November 2013 Weekly Update:
Eric Sprott's Flawed Analysis
Great success in business or investing does not imply great
understanding of macroeconomics or how the gold price is formed. This
has been proved many times in the past by Warren Buffett. Recently, it
has also been proved by Eric Sprott in an
open letter to the World Gold Council (WGC). Sprott criticises the
hopelessly-flawed supply-demand analysis of both the WGC and Gold Fields
Mineral Services (GFMS), but not for the right reasons. He actually uses
the same hopelessly-flawed methodology, the only differences being in
some of the figures that are plugged into the analysis.
Sprott, the WGC and GFMS tally the amounts of gold bought by some parts
of the gold market and call this quantity "demand", and tally the
amounts of gold sold by other parts of the gold market and call this
quantity "supply". They then compare the two tallies to determine
whether the gold price should be rising or falling.
In this method of analysis, the gold-mining industry is by far the
biggest seller. In fact, in this method of analysis the supply side of
the equation is always represented by the 2400-2800 tonnes per year of
gold produced by the mining industry plus the amounts of gold sold by a
few relatively minor players. Over the past year the gold ETFs have
collectively been one of these minor players on the supply side
(physical gold has left the ETFs).
In the real world, however, the supply side of the equation is the total
aboveground gold inventory, which is about 150,000 tonnes. Since all the
gold is always held by someone, demand is also equal to the total
aboveground inventory of (very roughly) 150,000 tonnes. In other words,
at any given time supply equals demand equals 150,000 tonnes.
In the real world, the gold sold by the mining industry is no different
to the gold sold by any of the current holders of gold. For example, if
the gold price reaches a level at which Trader A wants to buy 1,000
ounces of gold, then Trader A's demand can be satisfied by a sale of
gold on the part of any of the current holders of gold, including the
Price is the quantity that changes to keep supply and demand in balance.
If demand increases relative to supply at a certain price, the price
will immediately adjust upward by as much as it takes to re-establish
the balance. By the same token, if demand falls relative to supply at a
certain price then the price will immediately adjust downward by as much
as it takes to re-establish the balance. Price, therefore, is the only
measure of whether the urgency to sell is rising or falling relative to
the urgency to buy.
Here's another way to look at the situation: For every purchase there
must be a sale. That is, the amount of gold sold must always be equal to
the amount of gold bought (another reason, by the way, that it makes no
sense to separately tally sales and purchases as if one could ever be
larger than the other). What causes the price to change, therefore,
isn't a greater volume of selling or buying, it's the relative eagerness
of buyers and sellers. For example, if a large number of eager
get-me-out-at-any-price sellers enter the market then the volume of
trading will increase, meaning that the amount of gold sold and the
amount of gold bought will increase by the same amount, and the price
will fall. Some analysts will look at the increase in buying that
accompanied the price decline and will be nonplussed, because they don't
seem to understand that an increase in buying MUST go hand in hand with
an increase in selling, and that the price decline tells you with 100%
certainty that the sellers were more eager than the buyers.
Over the past six months we've probably devoted too much space in TSI
commentaries to debunking the nonsensical gold supply-demand analysis
that gets put out by GFMS, the WGC, and now Eric Sprott. However, it's
an important issue, because gold bulls (including us) can't learn from
past mistakes unless they understand why they were wrong. If you were
bullish over the past year and you still believe that you were right to
be bullish, then you haven't learned anything and you will almost
certainly make the same mistake again.
the 16th October 2013 Interim Update:
The China-Gold Myth
Rather than cast doubt on the wrongheaded idea that China's buying is a
cornerstone of the gold bull market, the fact that a major 2-year
correction in gold's bull market has coincided with a large increase in
the amount of gold flowing into China has only served to fuel conspiracy
theories. After all, how could the gold price trend downward in parallel
with a large increase in Chinese demand unless powerful, unnatural
forces were at work?
The gold price is capable of trending downward in parallel with a large
increase in Chinese demand because the change in China's demand for gold
explains very little about past movements in the gold price and says
very little about likely future movements in the gold price. In more
general terms, the amount of gold flowing from one geographic region to
another or from one set of holders to a different set of holders tells
us nothing useful about gold's major price trend. The reason is that the
flow of gold is an indicator of trading volume, which can increase or
decrease in parallel with a rising or a falling price. The market-wide
urgency to buy relative to the market-wide urgency to sell is what
determines the price, and the only reliable indicator of whether buyers
or sellers have greater urgency is the change in the price itself.
By way of further explanation, consider a model of the global gold
market in which there are only two traders: China and the World
Excluding China. We'll refer to China as Trader A and the World
Excluding China as Trader B. Clearly, in order for Trader A to increase
its gold exposure, Trader B must decrease its gold exposure, and vice
versa. To put it another way, for A to be a net-buyer B must be a net
seller, and for B to be a net-buyer A must be a net seller. Price is the
force that keeps the change in A's demand in balance with the change in
B's demand. This means that if B is not prepared to part with enough
gold to satisfy an increase in A's demand at a gold price of X, then the
price will rise to (X+Y) where Y is whatever it needs to be to bring the
market into balance.
Those making the "China's buying is bound to drive the gold price to new
highs" claim are, in effect, only looking at one side of the equation.
They are looking at A's buying and forgetting about B's selling. They
seem to be making the assumption that A is increasing its buying while B
does nothing, but this assumption is patently wrong because A cannot
possibly increase its buying unless B increases its selling. The change
in price is the only valid indicator of which is the more important, A's
buying or B's selling. Moreover, a net flow of gold from A to B or from
B to A could be accompanied by either a rising or a falling gold price.
In fact, not only is a net flow of gold from B (the World ex-China) to A
(China) not inherently bullish, a net flow in the opposite direction
would not be inherently bearish.
Another relevant point is that Trader B (World ex-China) is the
proverbial gorilla in the gold market. To understand why, consider that
in very rough terms there are probably at least 150,000 tonnes of
aboveground gold in the world and probably no more than 10,000 tonnes of
gold in China. This means that when total gold supply is taken into
account, China is probably no more than 6.7% of the global market. This,
in turn, means that it would take a 30% increase in China's gold demand
to offset a 2% decrease in gold demand across the rest of the world. It
is therefore fair to say that if the overall demand for gold outside
China rises by at least a few percent then the gold price is going to
rise, regardless of what's happening in China, and if the overall demand
for gold outside China falls by at least a few percent then the gold
price is going to fall, regardless of what's happening in China.
To sum up, we aren't saying that an increase or a decrease in China's
gold demand is completely irrelevant. We are saying that a) China can
only increase its gold ownership if the World Excluding China decreases
its gold ownership, b) price is the only reliable indicator of the
importance of China's gold demand relative to the gold demand of the
World Excluding China, and c) China's gold demand is dwarfed -- in terms
of effect on the gold price -- by the overall change in gold demand
As explained in many previous TSI commentaries, the overall change in
gold demand outside China is largely determined by confidence in the
senior central banks and the stock market's valuation trend.
the 14th October 2013 Weekly Update:
The historical tendency of a market to make an intermediate-term extreme
within a certain time window provides useful clues about the future on
those occasions when the market in question trends strongly into the
turning-point window and then reverses direction. Such reversals are
usually followed by trends lasting at least 6-12 months in the opposite
The gold sector is clearly in a downward trend and is within its
traditional October-November turning-point window. This means that an
upward reversal within the next few weeks would very likely lead to a
rally lasting at least 6-12 months. Our opinion is that it would lead to
a multi-year cyclical bull market, but there is no need to look that far
ahead. First, we need to get the upward reversal.
At the end of last week the HUI was 'oversold' and marginally above its
late-June low. This means that a test of the late-June low is now
An upward reversal that marks an important turning point could take a
number of different forms. For example, it could involve a sharp decline
during the early part of the trading day followed by a complete recovery
to end the day with a gain. Like pornography, we'll know it when we see
GDXJ, an ETF proxy for the junior end of the gold sector, has dropped
back to intermediate-term support defined by its June-August lows. It
would be reasonable for long-term speculators to average into GDXJ over
the next few weeks, beginning immediately, but short-term traders should
wait for evidence that the price trend has reversed.
the 7th October 2013 Weekly Update:
The following weekly charts compare the HUI from its September-2011 peak
through to the end of last week (the blue line) with the Barrons Gold
Mining Index (BGMI) from its 1968 and 1974 peaks (the green line). In
other words, the charts compare the 2011-2013 decline with the major
bull-market corrections of 1968-1970 and 1974-1976.
For two reasons, we think that it makes the most sense to compare the
2011-2013 decline with the 1968-1970 decline. The first reason is that
like the 1968-1970 decline, the 2011-2013 decline was/is probably the
first major correction within a long-term bull market (assuming, as we
now do, that the 2008 decline was a very large intermediate-term
correction). The second reason is that prior to the past few weeks the
price action following the 2011 peak was a much closer match to the
price action following the 1968 peak.
Both comparisons suggest that the 2011-2013 major correction is complete
or almost complete.
The following daily chart shows that the HUI had a huge single-day rise
last month. That was the 'no taper' surge on 18th September. This huge
single-day rise was then fully retraced over the ensuing two days.
The chart also shows that since the frenzied price action during 18-20
September, not much has happened. The HUI has moved lower, but with very
little momentum or conviction.
As with gold, the HUI's recent lack of momentum indicates that its price
weakness could be 'corrective' in nature. In any case, we continue to
anticipate an October-November (probably October) upward reversal.
25th September 2013 Interim Update:
The US government shutdown
The US government has hit its latest "debt ceiling" and will very soon
run out of accounting tricks to keep every part of the government fully
funded. Consequently, unless a last-minute deal is done there will soon
be a "government shutdown".
As explained by Mark Thornton in the short video at
https://www.youtube.com/watch?v=Z77nmo5TbO8, the "government
shutdown" will not be an actual shutting down of the US Federal
Government. It will just be politics as usual. It is something that has
happened 17 times over the past 40 years. In other words, it is
something that happens every 2-3 years on average. Furthermore, the
"shutdown" will only affect some so-called non-essential government
services. For example, the shutdown could delay the issuing of new
passports, but it won't affect any welfare or social security payments.
It won't affect law enforcement, it won't crimp the ability of the US
government to bomb a small Muslim country if it chooses to do so, and
most importantly it won't stop the NSA from monitoring all of your email
messages and snail-mail letters. So, if a "government shutdown" does
happen it won't exactly be a Libertarian dream.
A near-total and permanent government shutdown would be one of the two
most positive things that could happen to the US economy, the other
being the elimination of the Federal Reserve. However, neither of these
things would be bullish for the stock market. The stock market, as a
whole, likes monetary inflation. In fact, if it weren't for monetary
inflation the stock market's long-term price chart would approximate a
The fake government shutdown that could soon happen is unlikely to have
a significant effect on either the economy or the stock market. However,
it could result in additional short-term volatility as senior
politicians grandstand in support of their most cherished programs or in
opposition to their most reviled programs, and as the financial news
media tries to boost its ratings by creating the impression that
something earth-shattering is going on.
18th September 2013 Interim Update:
The QE Scorecard
We suspect that Bernanke is happy with the short-term results of the
past year's QE (money-pumping). In fact, in some ways the results have
probably surpassed his expectations. To understand why you must first
understand the real, as opposed to the publicly-stated, goals of the QE.
Like anyone else who isn't a senior central banker, we can only makes
guesses about why the Fed does what it does. Considering the Fed's
history and where its loyalties lie, here is our best guess regarding
the goals of QE from highest to lowest priority:
1. Strengthen the balance sheets of commercial banks by creating
artificial demand for the banks' assets and zero-risk trading
opportunities for the banks.
2. Enable the US federal government to take on a lot more debt at a low
cost and refinance existing debt at a low cost.
3. Boost prices in the real estate and stock markets in order to bring
about a) higher consumer spending via a so-called 'wealth effect' and b)
higher tax revenues.
4. Boost the rates of economic growth and job creation.
5. Do all of the above while ensuring that most people believe there is
no "inflation" to worry about.
Although the balance sheets of the major banks would probably still look
weak if all assets were properly marked to market, there is no doubt
that the Fed's QE has been wildly successful in supporting the US
commercial banking establishment. Also, there is no doubt that the Fed's
aggressive buying of debt securities has helped clear the way for a
large increase in federal government indebtedness. The two
highest-priority QE goals were therefore achieved. Goal 3 was mostly
achieved, although the higher prices for houses and stocks probably
didn't translate into as much additional consumer spending as Bernanke
would have liked. As an aside, a good economist would view the
'less-than-expected' increase in consumer spending as a plus, not a
minus, because a good economist would know that real progress starts
with saving, not consumption. The rates of economic growth and job
creation remain sluggish, so Goal 4 proved to be elusive, but a tick can
be placed next to Goal 5 because hardly anyone is concerned about
So, from the perspective of the Fed chairman the short-term effects of
the latest QE program were probably at least as good as anticipated.
Fortunately for the current Fed chairman, someone else will have to deal
with the longer-term effects.
No "tapering", yet
According to the statement released at the
conclusion of the latest FOMC Meeting, the Fed has "decided to await
more evidence that progress will be sustained before adjusting the pace
of its purchases." The Fed has therefore "decided to continue purchasing
additional agency mortgage-backed securities at a pace of $40 billion
per month and longer-term Treasury securities at a pace of $45 billion
per month." In other words, the Fed has decided that it should continue
driving the US economy into the ground at the fastest possible pace. The
question is: Why?
Most market participants, including us, expected the Fed to announce a
small reduction in the rate of its asset monetisation this week.
Consequently, the Fed had an opportunity to begin the process of
moderating its monetary 'stimulus' without disrupting the markets. In
view of the QE goals outlined above, that the Fed chose not to grab this
opportunity suggests to us that it remains concerned about the finances
of major commercial banks and is scared that rising interest rates will
derail the housing market's recovery.
Fundamentally, there is almost no difference between an $85B/month asset
monetisation program and a $70B/month asset monetisation program (a
$15B/month reduction in the pace of asset purchases being the popular
forecast prior to Wednesday's Fed statement). Both constitute aggressive
monetary easing. In this respect, the large change in market prices
after it became known that the Fed was maintaining its previous rate of
asset purchases makes no sense. However, the sudden price change makes
some sense from a purely psychological perspective, because the US
monetary stewards have just demonstrated that they are prepared to go to
greater extremes to achieve their goals than most people previously
2nd September 2013 Weekly Update:
Gold and the Fed
There's a lot of discussion/debate in the financial press about who will
replace Bernanke as Fed Chairman early next year. However, as far as the
US economy's prospects and gold's prospects are concerned, it doesn't
The times make the Fed Chairman, not the other way around. If there is a
general belief that aggressive monetary inflation and downward
manipulation of interest rates are what's needed, then the Fed will
deliver aggressive monetary inflation and downward manipulation of
interest rates regardless of the identity of its chief. By the same
token, if there is a general belief that solving an inflation problem is
the top priority, then the Fed will deliver genuinely tight monetary
policy regardless of the identity of its chief.
Presently there is an almost total absence of political will to end the
pro-inflation policy, so more 'money-printing' is on the cards. But as
discussed in previous commentaries, more money-printing over the next
few quarters will not be required for gold to embark on the next leg of
its long-term bull market. This is because there has already been more
than enough money-printing to set the stage for such an outcome. What's
needed, now, is evidence that the Fed's QE has either not helped or done
greater harm than good. The evidence could come in the form of blatant
"price inflation", but is more likely to come in the form of data that
indicates economic weakness.
This week we get the most important monthly US economic data, beginning
with the ISM Manufacturing report on Tuesday and ending with the
employment numbers on Friday. The Manufacturing report will be
particularly interesting because the same report a month ago suggested
that the US economy was doing much better than expected. The report
scheduled for this Tuesday will tell the financial markets if last
month's strong data constituted a fluke or a true indication.
5th August 2013 Weekly Update:
This time it really is
A mistake made by almost all
'deflationists' is to conflate money and debt. Although under the
current monetary system money comes into being via the expansion of
commercial bank credit or central bank credit, money and debt are two
very different entities. The fact is that regardless of the amount of
debt within the economy, a large rise in the money supply WILL lead to
large price rises somewhere in the economy. The only question is: Which
prices will rise first and the most in response to the increased money
A mistake often made by 'inflationists' is to assume that the current
cycle is similar to the preceding cycles. The following long-term chart
of the annual percentage change in US commercial bank credit clearly
shows that this is not the case; the current cycle is actually very
different. Whereas the annual rate of increase in commercial bank credit
bottomed at around +2.5% during previous cycles, in the current cycle it
bottomed at around -5% and four years into a recovery is rising at only
2.5%. That is, although the rate of increase in bank credit has
rebounded strongly from its 2008 low, the current rate of increase
matches what would have been a 50-year low prior to 2008.
Over the past 5 years, growth in the US money supply has been heavily
reliant on the expansion of central bank credit. We think that this
unusual situation will persist, even after the Fed decides to 'taper'
its QE. In other words, although the pace of the Fed's QE will probably
be scaled back ('tapered') within the next few months, we think that the
Fed will be monetising assets at an unusually fast pace for a long time
29th July 2013 Weekly Update:
Gold and the relative performance of the banking sector
Anyone who understands the main fundamental drivers of gold's
intermediate-term price trend won't be surprised by the implication of
the following chart. The chart shows that on an intermediate-term basis,
gold tends to trend in the opposite direction to the BKX/SPX ratio (the
Bank Index relative to the broad stock market). In other words, the
chart shows that gold tends to do well when bank stocks are relatively
weak and poorly when bank stocks are relatively strong.
On a relative basis, bank stocks bottomed during the final few months of
2011 and have since been trending upward. This period of relative
strength in the banking sector has coincided with a major correction in
the gold price.
Unfortunately, the BKX/SPX ratio doesn't work well as a real-time
indicator of intermediate-term trend changes in the gold market. This is
partly because the lead-lag relationship isn't consistent and partly
because in real time there won't be any way of differentiating the start
of a short-term trend change from the start of a longer-term trend
change. Its usefulness is in showing what's important to the gold
If the gold market is near the end of a major correction then the BKX/SPX
ratio should be close to a multi-year top.
17th July 2013 Interim Update:
Major corrections happen
Gold is immersed in a major, or primary, correction. The correction is
probably almost complete in terms of both time and price, with a
sustained turn to the upside perhaps waiting for October-November of
When a primary correction (a cyclical bear market within a secular bull
market or a cyclical bull market within a secular bear market) begins,
there will be no way of knowing exactly how it will unfold or even that
it is, indeed, a correction of the primary variety. This is because the
first couple of months of a primary correction will often not look very
different from a routine short-term correction and because the first
6-12 months of a primary correction will often not look very different
from an intermediate-term correction. In the real world it can therefore
be quite late in the day before you know, for sure, that a primary
correction is underway.
The point we want to make is that long-term bull markets ALWAYS contain
primary corrections, so although such corrections can be difficult to
identify in timely fashion we can be sure that they are going to occur
at some stage. Is it really so strange that gold, after rising for 10
years without a primary correction and performing well enough that by
August-2011 it was as expensive as it had ever been relative to
commodities in general and the average US house, commenced a primary
correction in August of 2011? Is it so strange that we need to concoct
elaborate manipulation theories to explain it? And are we supposed to
believe that the central banks and bullion banks, after failing dismally
in their attempts to suppress the gold price for many years, suddenly,
in August of 2011, not only figured out how to do it, but figured out
how to do it in the face of sharply rising demand for physical gold?
Yes, according to some commentators, we are supposed to believe exactly
During the secular gold bull market of the 1960s-1970s there were two
primary corrections in gold and gold-related investments, neither of
which appeared to be justified by the obvious fundamentals at the time
it began. Actually, at the beginning of these primary corrections the
obvious fundamentals appeared to be getting more bullish. That's what
often happens in markets, with or without manipulation.
Knowledge of market history is important because it helps put primary
corrections into context. Common sense also helps.
Current Market Situation
Since some commentators on the gold market are obviously unaware of the
most basic laws of economics, we'll reiterate the irrefutable fact that
a rise in commodity demand relative to commodity supply MUST result in a
rise in the inflation-adjusted commodity price. A corollary is that the
inflation-adjusted price of a commodity cannot fall if the demand for
that commodity is rising relative to the supply of that commodity. For
example, that the price of physical gold fell sharply during April-June
of this year tells us, with 100% certainty, that the demand for physical
gold fell relative to the supply of physical gold during this period. It
doesn't matter how hard you try to show otherwise and how complex and
convoluted you make your arguments, you cannot get around this fact.
Gold is having trouble getting above
round-number resistance $1300, but the more important resistance lies at
$1320-$1350. Getting above $1350 wouldn't prove that gold's major
correction had ended, but it would be a clear sign that the character of
the market had changed and that a bottoming process was underway.
20th May 2013 Weekly Update:
Gold demand and "paper" versus physical
When you read breathless commentary to the effect that the demand for
physical gold is rocketing upward even as the gold price declines,
1. Physical demand cannot be satisfied by paper supply.
2. Everyone making the claim that the demand for physical gold is
surging relative to the supply of physical gold is fixating on one small
part of the physical gold market.
3. At any given time, the total demand for physical gold equals the
total aboveground supply of gold. This is basic economics. It has always
been the case and will always be the case.
4. The gold demand numbers and charts that are often contained in
articles and analyses, including the numbers/charts published by Gold
Fields Mineral Services (GFMS) and the World Gold Council (WGC),
represent flows of gold from one part of the market to another. These
numbers/charts say nothing about overall demand and nothing about price.
For example, the Zero Hedge article posted
HERE includes a "gold demand" chart that actually provides no useful
information about gold demand, as well as some hopelessly flawed "gold
demand" analysis from the WGC.
5. If there really were widespread difficulty obtaining sufficient
physical gold to satisfy demand it would be evident in the term
structure of the gold futures market (there would be substantial and
sustained "backwardation" in the futures market).
At no time over the past month has there been any market-wide inability
of physical gold sellers to meet the demand of physical gold buyers;
there has only been a temporary inability of sellers in one part of the
market to meet the demand for certain items manufactured from gold (the
coins and small bars favoured by the retail investor). Moreover, it's
very unlikely that there will ever be a bona fide shortage of physical
gold. This is because the mining industry's contribution to total supply
is so small as to be almost irrelevant (gold mines shutting down
wouldn't have a big effect on overall supply) and because most of the
world's gold is held as a store of value. It should therefore always be
possible for a change in price to bring the total demand for physical
gold into line with the aboveground supply of gold.
Now, we admit that at some point in the distant future the US dollar
could become so devalued and disliked that the existing holders of
physical gold won't sell for any amount of dollars. But in that
situation it wouldn't be possible to use dollars to buy anything of
value. In other words, in that case the problem would be an inability to
use dollars to buy any useful resource, asset, good or service, not just
gold. However, it will always be possible to use something of value to
buy physical gold.
We are effectively saying that the real price of gold is what gold can
be exchanged for. The gold price could eventually become infinite in US$
terms due to the US$ becoming worthless, but the real price of gold will
never become infinite. If it did then someone with a single ounce of
gold could buy everything in the world.
The real price of gold is likely to remain in a long-term upward trend
while the current monetary system remains in place, but it will probably
never be more than about three-times its present level. The reason is
that the real price of gold must bear some relationship to the real
prices of everything else that people want to own/consume.