This week it transpired that the fall in gold and silver prices achieved the desired effect of shaking some of the bulls out of their positions. The hedge funds who recently went short, if they were in on the game, will be closing their shorts; those that were not, got lucky and will do the same. Unfortunately for those that engineered the price-drop, people all over the world took the opportunity to buy physical in what they decided was a bargain offer. Official mints and coin dealers quickly ran out of stock. Trade associations in the bullion business in India, China and elsewhere reported massive surges in demand. Never, it seems, have the hoarding desires of seven billion people been so effectively co-ordinated.
The lesson is simple. The gold bullion market is global and on our estimates amounts to about 160,000 tonnes. If you move the price down even modestly, price theory tells us you create buyers based on a 160,000 tonne market, not on one assessed on annual supply of a few thousand tonnes. For this reason buying can quickly overwhelm markets. This is indeed what happened, and we are left wondering not so much what investors and speculators are going to do, but whether or not the holders of the vast majority of the global stockpile will now try to chase prices upwards. Put another way, will the golden dog start to wag its derivative tail at last?
As is always the case with oversold markets, as soon as downside-momentum slowed the market quickly reversed and there are signs the bear squeeze is now on. Capital markets have dangerously low levels of deliverable gold bullion. Dealers stocks in the CME depositories have tumbled, and nearly half of them, about 34 tonnes, are contracted to be delivered against the expiring April contract.
If the shortage of bullion appears to have been behind the recent market smack-down, then it must be a severe problem. There is growing evidence this is the case and therefore further attempts to shake out ETF and other holders of their physical bullion, at a time of rapidly increasing monetary expansion, will prove counterproductive.
For an in-depth analysis of the market background, see my report published on Thursday.
The Week To Come
We go into next week with a failed attempt to shake out physical bullion behind us, so it is rational to expect prices for gold and silver to move higher. However, do not be surprised if the rumour-mill whispers to us that Spanish or Italian gold will be sold to raise much-needed funds.
The economic calendar kicks off with a busy Monday; otherwise the highlight is likely to be on Thursday, when the ECB is expected to cut its interest rate to 0.5%.
Monday: eurozone Business Climate Index, Consumer Sentiment, and Economic Sentiment. US Core PCE Index, Personal Income, Personal Spending and Pending Home Sales. US Treasury issues quarterly borrowing estimates.
Tuesday: Bank of England Mortgage Approvals, Net Consumer Credit, Secured Lending, BSA Mortgage Statistics, M4 Money Supply.
Wednesday: US Manufacturing PMI, Construction Spending, ISM Manufacturing, and the Fed’s FOMC rate decision (0.25% - unchanged).
Thursday: ECB Interest Rate (cut to 0.5%?). US Initial Claims, Non-Farm Productivity, Trade Balance, Unit Labour Costs.
Friday: eurozone PPI. US non-farm payrolls, Private Payrolls, Unemployment (7.6%?). Also US Factory Orders.