Weekly Gold Update – Gold In Dollars Lower Despite Poor US Jobs and Other Data

Weekly Gold Update by Daniel March for GoldCore (May 6, 2018)

• US dollar strength amid weakening fundamentals and poor US jobs data Friday

• Gold buyers in other currencies see gains – gold in EUR and GBP rises 0.7% & 0.9%

• YTD performance table suggests stagflation coming as Fed eyes inflation, lower growth

• Seasonal effect – gold to bottom this summer? (see charts)

• Silver is nearly 70% below it’s 1980 high and technically looks very good (see charts)

• Speculators cut long positions, GLD holds strong

• Boost for rural India – demand to benefit in Q2

• Turkey physical demand surges as Turks are “protecting their savings” with gold

• Egyptian billionaire putting half net worth in gold

• “Case for owning commodities has rarely been stronger” – Goldman

Editor: Mark O’Byrne

Gold in US dollar terms ended the week down 0.75%. Gold’s decline was likely primarily due to a stronger US Dollar Index (USDX) which was up 1.1%.

Gold rose after the worse than expected non farm payrolls on Friday before reversing the gains and then bouncign to close the day marginally higher. US job growth increased less than expected last month with the US economy adding just 164,000 jobs in April. This was less than the 193,000 jobs expected.

The USDX started the week strong, and once it pushed past its 200 dma in early trading Tuesday, both gold and silver were unable to hold up with selling pressure in the futures market.

A stronger US dollar came despite a backdrop of weakening economic data, US Pending Home Sales, ISM PMI, and the Non Farm Payrolls on Friday all came in below expectations.

The US economic outlook is clearly deteriorating but it appears to be still outperforming it’s global peers including the struggling UK and fragile EU. This served as a reflection point, as traders recognised the relative US strength and bid up the dollar, squeezing the long standing shorts out of the market. However, while a strong dollar is traditionally not a friendly environment for the precious metals, on-going uncertainty in the stock and bond markets have served to limit the downside in gold this week.

For holders of gold in EUR and GBP and other fiat currencies, many say gains with EUR and GBP gold buyers seeing their holdings gain in purchasing power by 0.7% and 0.9%, respectively.

On monetary policy, the Federal Reserve left rates on hold Wednesday, and acknowledged building inflation pressures, signalling their willingness to allow inflation to move around their 2% target ‘symmetrically’. In addition, they removed the wording “The economic outlook has strengthened in recent months”, perhaps in response to the weaker than expected economic data.

So with inflationary pressures building, and economic growth slowing, one has to ask how long the Fed can stick with their ‘dot-plot’ for future rates hike particularly when the Central Banks of Europe, UK, China and Japan are looking to reverse the tightening course and in some cases outright ease.

Perhaps this admission by the FED on a higher inflation, lower growth environment outlook is acknowledging the fact they will need to realign to global policy sooner rather than later.

Geopolitical risks have eased since last week’s symbolic meeting between the North and South Korean leaders. The stage is now set for the US to meet with the North Koreans later this month in the Demilitarized Zone (DMZ). However, tensions still persist in the Middle East with almost daily events occurring in Syria and Iran with little or no reaction from the markets so far.

It’s almost as if the world has become slight desensitized by the uncertainty and risks in the region. However, the Middle East remains a power keg and should there be a significant escalation in the region, gold will quickly erase any short term weakness and catch a safe haven bid in a heartbeat.

There were bullish developments in the latest Commitment of Traders (COT) report, released for the week ending Tuesday May 1st. Large speculators (historically the dumb money) reduced their net long position in gold by 29,867 contracts, while the commercials (historically smart money) reduced their net short position by an almost identical amount of 29,928 contracts.

In silver, the large speculators sold into the recent price weakness, and are once again net short 7,196 contracts. While the commercials did the opposite, buying back their shorts, leaving them now net short just 11,978 contracts.

While large speculators on the Comex have been quick to sell their positions the same is not true in the GLD ETF. As of this Friday the trust held 865.595 tonnes, just 6 tonnes shy of the highest holding reported this year, suggesting ‘stronger hand’ investors moving into gold via the GLD ETF, where they are unlikely to be shaken out by short term price moves.

Physical gold buying in the worlds 2nd largest gold consumer India looks set to increase in Q2 this year from a combination of positive monsoon rains and government efforts to boost rural incomes. Two-thirds of Indian demand comes from rural areas, and in an interview this week with Reuters, the WGC India commented:

“The government’s measures to boost rural incomes by increasing the subsidized prices for food grains and the forecast for a normal monsoon rains in 2018 will bolster demand … The aggregate demand in April to December would be higher than last year’s three quarters.”

All of which provides strength to the Indian gold market for Q2, given the headwinds to demand the last couple of years, from a combination of higher levies on gold imports, and the fallout from removing high denomination banks notes from circulation.

In Turkey physical purchases are up significantly in Q1 this year. As we pointed out Friday, the Financial Times reported this week:

“Turkey’s demand for gold surged by more than a third in the first quarter as consumers flocked to the precious metal as a protection against a tumbling currency and rising inflation”.

In the article from the FT, Charles Robertson, global chief economist at Renaissance Capital, said

“After centuries of default and economic instability, Turks are very savvy when it comes to protecting their savings….Gold has always been a store of value for them…”

It’s not just general public that are taking action, Turkey’s central bank have also been aggressively buying gold as they too see the benefits in hedging against an uncertain outlook for their fiat currency and their US dollar foreign exchange reserves. Not to mention the very real geo-political risks on their border in Syria and the wider Middle East.

Looking at the seasonals the summer months are traditionally a weak period for the metals. Data tracked from the last 30 years shows that gold and silver tend to drift lower during the early summer before regularly finding a bottom in late June early July – an anomaly clearly highlighted in the chart from Dimitri Speck’s website – www.seasonax.com. However, while the summer months are usually a headwind to the metals it historically provides a good buying opportunity going into the second half of the year.

On the long term view for gold (charts courtesy of StockCharts.com) we can see a narrowing range that gold broke out of in August 2017.

The once resistance, now support line, for gold has been tested at least 3 times, and should we see the usual ‘summer doldrums’, this area will offer significant support

Looking at silver (Charts courtesy of StockCharts.com) go back 15 years to identify its key support, which is currently sitting nicely at the 200 month moving average.

What is interesting about the silver chart is the powerful setup being presented, where the price is being squeezed into a narrower and narrower range. Unlike gold however, silver is yet to breakout, but given the historically high gold to silver ratio (currently sitting near 80) and the already bullish positioning in the COT, it makes the chances for an upside breakout more likely.

Couple that with the low silver premiums right now, and the fact silver is 68% below it’s 1980 high, and 90% below this high in inflation adjusted terms, means at $16 silver could be the best opportunity of all.

Following on from a recent trend of high net worth individuals (HNW’s) and family offices looking to preserve their wealth it has been reported this week that Naguib Sawaris, Egypt’s second richest man (second only to his older brother) has invested half of his $5.7 billion fortune into gold.

Safaris has previous interests in gold mining operations, and at the moment it’s unclear how he’s put his money to work. However, If geopolitical risk is his main concern, and wealth preservation is his goal, he would be best served investing in a physical form that provides full title and access to the precious metal, and not by buying shares in a company.

This is perhaps one of the largest high net worth individuals to make such an investment, but should other wealthy individuals come to the same conclusion and follow suit, it has the potential to shift the current supply/demand dynamics for gold.

Goldman Sachs have put out a bullish commentary on the commodities sector this week. They see the “strategic case for owning commodities has rarely been stronger.”

While big bank history for making such calls is far from 100% it was interesting to hear the rationale for such a view, where they cite “building inflationary pressures associated with late cycle growth depleting global supply chains”. Considering this view from Goldman, not only echoes the sentiment from the Fed, but is also supported by the recent weak data, investors should maybe think about how a higher inflation, lower growth outlook will impact their investments, and act accordingly.

Economic data aside, it’s worth reviewing the performance of various other asset classes to see if stagflationary outlook is justified.

The below YTD relative performance (table from FINVIZ.com) seem to backup this projection, where of note the VIX is up 39.43% (fear/uncertainty), crude up 15.43% (inflationary), DJI down 2.27% (lower growth prospects), 30 year bond down 6.23% (inflationary, inverse to yields), and copper down 6.64% (possibly concerns about late cycle construction boom).

While gold and silver have been largely subdued YTD, up 0.4%, and down 3.76% respectively, we believe that once the growth and inflation prospects become a reality, risk averse retail investors will begin diversifying into precious metals providing the catalyst needed to make the next move higher in gold and silver.