A look at the gold market over the last few months
shows that the pattern of price movements has changed from the traditional
patterns. If you take the time factor out of charts on the gold price, the
becomes simple. It is a strong rise followed by a narrow, short consolidation
pattern before a further move forward. This is unlike the saw tooth pattern
we are used to as buyers and sellers reassess price prospects constantly,
giving rise to more extended consolidation patterns over longer periods.
June of this year, the gold and silver prices appeared to be following the
more traditional pattern that tended lower. Then between $1,530 and $1,550,
the price turned and headed upwards. It was then that the day-to-day pattern
changed. A closer look at the long consolidation period that sent the gold
price from $1,930 to $1,530 over the last year and more shows a changing
pattern of large movements followed by narrower consolidations holding round
a central price that held for a long time.
Quantity, Not Price
clear is that there were buyers who came in on the fall and restrained those
falls to a narrower trading range. These buyers did not simply say,
“Buy at a certain price” but appeared to ask their dealers for
offers of gold and probably large ones too. Then these buyers took all that
was offered to them. Their interest lay in the quantity of gold and not the
price to be paid. What sort of buyer
would not be concerned at the price but only at the quantity?
Traditional Market Buyers
are just a little longer-term buyers and sellers than dealers. Dealers are
there to make money too, not just to sell or buy gold and not simply to
a dealer can’t avoid, at the end of the day, finding he has some stock
on the books that must be held overnight. This will always make a dealer
concerned with his ‘book’ as well as his profits. By his very
nature a dealer is not particularly concerned with fundamentals, apart from
knowing, at times, when he would prefer to be caught ‘long’ and
when to be caught ‘short’ overnight. So a dealer will respond to
the news he sees daily and move his prices in line with how he feels the news
should affect his prices. It’s only when the market reacts differently
that he will change his direction. That’s why we often see pieces of
news that appear irrelevant to the gold price being labelled as price
are unlike dealers in that they take positions for themselves and don’t
have an on-going ‘book’ to maintain. The trader, likewise,
isn’t too concerned with the fundamentals over the longer term, but
adopts a similar attitude to the dealer. They are both working for profits,
to be taken away from the market.
are following prices and very short-term trends with making a profit at the
heart of their dealing. The fact that they are dealing in gold or silver
makes little difference to their thinking except the relevance of short-term
information. Both are therefore buying or selling constantly; opening
positions and closing them as soon as they have their targeted profit. If
they felt other markets, such as pork bellies, were profitable they would go
in there too.
dealer friend of ours told us that the best traders are successful on 52% of
their trades. This can wear a man out quickly. Certainly, he’s relying
on his skill as a trader and not on the longer-term move of precious metal
prices. He is not an investor. He
is primarily concerned with price leaving quantity an indicator of profit
buyers who have been targeting quantity and not price are not in these
categories. For them, we have to look elsewhere.
a buyer is unconcerned about price but only quantity, he must by his dealing
method, be a long-term, large buyer.
institutions, whether they are Pension Fund Managers or Wealth funds and the
like, do target profits. Many hedge funds too, aim to achieve a certain
percentage profits return, per month, per quarter or per annum to earn their
management fees and profit bonuses. This implies taking profits and using
trading methods. Even the long-term Pension funds sometimes place part of
their fund into a trading portfolio to get more income for their
contributors. Some of these institutions may have a yearly view or take a
position for the long-term, but always with a dollar profit in mind. They
have to for the sake of their future Pensioners. Again to these type of
investors price is important, critically so.
there are some investors who are prepared to hold for the very long-term
until conditions change and make gold investments poor ones. Only then will
they sell, but again, price is important to them. For instance, many of the
buyers of the shares of gold ETF’s have held them since the funds were
formed and intend on holding them for as long as the economic and monetary
future remains dark. But they don’t have a pattern of buying that repetitively
goes into the market to buy quantity irrespective of the price. That Takes us to Asian Buyers…
investors are thought to hold in the region of 20,000 tonnes and keep
returning to the market to buy more annually. Driven by religion and family
financial security, they will continue to buy gold in line with their
disposable income. Right now they’re holding back outside of the
festivals, such a Diwali, the Festival of Lights, that happens in October.
This is when religion and family overrule price. But where they can, they
make sure that they don’t buy when they believe the Rupee gold price is
likely to fall. They like to enter the market when the Rupee price has
dropped substantially or held at a particular level forming a
‘floor’ price, reassuring them that the next move will be either
sideways or up.
has complicated their lives is the performance of the currency they measure
gold’s price in. The Indian Rupee has been extremely weak over the last
few months. It was not much more than a year ago that the Indian Rupee traded
at Rs.42 to the USD. It fell heavily since then to a low of over Rs.57 to the
USD. This changed the Rupee price of gold significantly giving the appearance
of a rising gold price. This deterred their buying.
the last month the Indian Rupee has strengthened to Rs.52 giving the
appearance of a falling gold price when in fact the dollar gold price was
rising. This has turned Indian buyers, ahead of Diwali, back into the gold
market to buy.
Indian buyers are price- and quantity-conscious, limited by their available
disposable income. As the gold price rises, so the quantity of gold they are
able to buy falls, unless their income is rising at the same pace.
retail buyer out of China has often come into money for the first time in his
life. Before that he was toiling in the countryside hoping to just get by.
With China’s phenomenal growth, he has been lifted up financially to
the point where he can now save considerably more than he could before. The
second type of retail buyer reached that level much earlier and has long past
covering his needs and some savings. He is growing wealthy, so able to buy
much more gold. His own government is encouraging him to do so. By nature,
the Chinese man is a saver, saving up to as much as 40% of his income. Seven
per cent of his income is targeting gold investments. Inflation is high in
China and eats into the income he can gain from any fixed deposits that he
has at the bank. By matching the total return on deposits to the total return
on gold, he is seeing gold’s performance continue to recommend itself
he is limited by his disposable income and is concerned that the price he
pays is one that he feels will not fall back after he has bought.
The buyer we’re looking to
identify is unconcerned at the price and is not limited by it and has
sufficient money to spend to buy all that is offered to him.
central banker is the one gold buyer that fits the bill of the gold investor,
unconcerned at the price he pays and interested in acquiring quantity.
all, he’s diversifying the foreign exchange reserves of the nation when
he buys. Gold has been pushed to one side for over forty years and has been
always considered as a very important reserve asset. That’s why the top
four wealthiest nations hold more than 70% of their reserves in gold. But
they’re not current buyers. It’s those central bankers who have
too little gold as a percentage of their reserves in gold that are buying
now. They don’t want to have to depend entirely on the currencies they
hold in the national portfolio when hard times hit.
acts as a ‘counter’ to these currencies and has done so
throughout history. But for the last forty years, it has not been recognized
as such despite the fact that since the late sixties, it has risen in price
over 50 times.
bankers are wiser than that. They have always known that gold is money that
will act to measure the real value of currencies. It is currencies that are
the weakening link in the money system. So when a central bank is buying
gold, it knows that it’s simply changing one form of money for another.
And that’s why, relative to the available quantities of gold in the
market place, he has endless funds. That’s why he wants quantity. He
has far too little so wants as much as he can get without upsetting the