Sunday, 21 September 2014

Relentless slide ...

The S&P broad market index holds above 2000, within a sigh of its all time high. Bond markets suffer somewhat as rates have risen above the August lows. In the mean time, precious metals continue to slide, irrespective of whether the economic indicators coming through are good or bad, whether the stock market goes up or down or geopolitical tensions ease or aggravate.

By the Friday NY-Globex close, gold is down (only) 1% over the week, closing at $1216.2, while silver slid 4.4% to close at $17.79 due to a precipitous drop after the LME fix. By now the year-to-date gain of gold melted away to a little significant 1.6%, while silver slid down to a year-to-date loss of 9.1%. Once more the naughty metals are sticking out their tongue to investors and speculators alike, who were hoping for any long established seasonal pattern to repeat for once: it never did last few years.

Physical demand has not yet picked up the way it did at any earlier plunge of the gold futures. This only makes the shorts even more bold.

As usual, explanations for the precious metals plunge are found easily: The ECB rate-cut strengthens the USD, countering the effect of any QE policy of the ECB. The geo-political tension in the Ukraine may well cool down (?). In Iraq and Syria, ISIS meets more resistance. Even former enemies are joining forces to oppose the major evil. Explanations however fail to predict: whenever the price tendency reverses, other mantra will take the lead.

If the safe haven demand for gold were waning on account of a stronger economy, you would at least expect the precious metals with a dominantly industrial demand to outperform gold. To a certain extent that holds: palladium has set a recent post 2008 high above $900. Platinum has lagged palladium in it ascent, but it sold down in tandem with gold during the recent selling spree. Silver can't make a fist: having slid to a year-to-date loss of over 9%. The Gold-to-silver ratio rose above 68 on Friday, which is a multi-year high. What indications can we expect that the gold selling wave is about to end ?

  1. The yellow metal most likely will finalize its slide solo: for other precious metals, industrial demand is to pick up, in order to take advantage of market prices below average production cost. (*)
  2. Gold miners are no longer leveraging down the metals but engage in a counter trend rally. 

We're obviously not there yet. The relentless slide of precious metals during September is challenging the mining sector: previous gains are quickly eroding away as the HUI index drops to 208.5 on Friday, September 19. Since the beginning of the month, HUI/Gold first dropped below its 50 dma and this week the 200 dma was the next support breached. It now stands at 0.1714. In less than a month over 50% of the HUI/Gold gain from its December 2013 trough at 0.157 to its August 2014 peak at 0.190 has been lost. For this and more updated graphs, see the GoldMinerPulse page.

Miner weakness is back in town: no wonder last December's posting : Anatomy of a gold miner bear market, is once more a favorite reading item.

(*) For PGM's the above ground supplies average only a couple of weeks of consumption, The PGM market price therefore is sensitive to a meaningful uptick in industrial demand.
The above ground gold supplies are equivalent to several decades of consumption. However, much of those supplies are central bank reserves, hence not available for delivery. (That's at least how it should be.) The gold price is less sensitive to an uptick in industrial demand. The ebb and flow of investor demand and central bank net-demand make up for the rest. They often follow an entirely different logic.

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