Can confidence return to gold?

One doesn’t know yet if it’s just stale bulls clutching at straws or if something else is afoot, but there certainly seems to be a renewed confidence in the precious metals markets arising during the opening weeks of the current year – an element that was mostly lacking throughout 2013.

Friday saw reports of big gold and silver flows into the major precious metals exchange traded funds; by all accounts Chinese gold demand remains extremely strong – indeed gold movements through the Shanghai Gold Exchange are running at near record levels – and gold and silver related stock indices are showing signs of revival. Whether this is a real sea change, or just another false dawn, remains to be seen.

As we pointed out recently, the timing of Goldcorp’s Osisko bid could also suggest that the big gold miners are also beginning to see an upturn in confidence with the gold major putting in a pr-emptive strike before a rising gold stock sector would make such a bid hugely more expensive.

See: Is Goldcorp’s Osisko bid just the start of a gold M&A rush?

There have also been reports circulating that China has officially confirmed a big increase in its gold holdings, more than doubling them from 1,054 tonnes (last uprated officially five years ago) to 2,710 tonnes, but until there is official confirmation of this from both China and the IMF, one has to remain at the very least a little sceptical. 

The total new gold reserve figure quoted in the reports ties in EXACTLY with some recent Bloomberg estimates. And estimates are just that – estimates – and however good the Bloomberg analysts are it would seem unlikely that their figures would correspond to the same ‘official’ level purportedly now announced by China down to the exact tonne. 

It’s not that our view is that China is not surreptitiously building up its gold reserves. We assume that it is in some form or another (although perhaps not directly in PBOC accounts, but in those of the China Investment Corp. sovereign wealth fund as suggested by CPM Group) but that the figures recently quoted as ‘official’ are just the Bloomberg estimates being taken as reality and as now coming from Chinese government sources. The writer’s personal view is that if, and when, China may announce an official reserve increase it could well be at a level sharply higher than the 2,710 tonne Bloomberg estimate  – quite possibly in excess of those held by world No. 2 gold holder, Germany, of 3,390.6 tonnes – a level which, assuming the Bloomberg estimates are reasonably close to the true position, and taking into account recent gold movement figures into China – could well be achieved by the Asian giant sometime this year.

Coming back to Germany’s gold reserves, much is also being made of the fact of the country’s avowed intent of repatriating nearly 700 tonnes of its gold reserve held in vaults in the U.S. and France to vaults in Frankfurt. At the time this policy was announced back in February last year surprise was expressed that it was then stated that it would take seven years to achieve what is in effect the transfer of a comparatively small amount of gold, with speculation arising that any gold that remained in the U.S. and French vaults may have been leased out to third parties and thus might not be available for immediate delivery to Germany. This has been followed by unprecedented take downs in the gold markets stimulating huge offloading from the big gold ETFs, thus increasing physical gold supplies – some suggesting that this has been to free up gold to enable some of those who have leased bullion to be able to return it to the central banks. The fly in the ointment here, though, has been China where demand for physical gold has soared soaking up all the gold which has flowed out of the ETFs – and more.

So is the German gold really there? So far only a paltry 5 tonnes has been repatriated from the U.S. (32 tonnes from Paris) due, so a Bundesbank spokesman told German newspaper Die Welt, that this was because repatriations only commenced in the Fall due to delays in organising contracts with transportation and  remelting companies – an excuse met with some scepticisim by some elements of the press. Even if this is correct, the planned slow pace of repatriation overall still raises more questions than answers.

We do keep coming back, though, to Chinese demand for physical metal. Anecdotally demand has been particularly heavy ahead of the Chinese New Year which comes in at the end of this month – indeed China gold expert Koos Jansen has noted that physical gold deliveries through the Shanghai Gold Exchange amounted to some 79 tonnes in the second week of January alone. This is an enormous amount given total global newly mined gold output is currently running at only about 54 tonnes a week.

But what does all this mean for the gold price in the short term? It’s hard to tell. In theory all this should be hugely positive for gold medium to long term, but there are an awful lot of short sellers out there who could concertedly try and move markets in their favour – particularly once the Chinese New Year holidays begin which could see an at least temporary halt to the surge in Chinese buying. However, if the sales out of the gold ETFs are at last beginning to reverse, then this could put further strain on COMEX gold inventories, but this won’t necessarily prevent more of the huge paper gold sales which have been such a key element in depressing the gold markets over the past year.

So we do feel there is a positive mood appearing in the gold space – but then we have seen this before only for the market to crash again. The volatility in gold may not be over yet, particularly with such heavy hitters as Goldman Sachs’ Jeff Currie seeing further weakness ahead, basing his view on a positive move in the U.S. economy, which he sees as bad for gold with investors preferring to put their money in the general stock market than into precious metals. He sees the onset of Fed tapering, and its likely continuation through the year, as putting further downward pressure on gold prices.

See: Goldman’s Currie still looking for $1050 gold, bearish on all commodities

Only three years ago – it seems longer – gold was booming and the bank analysts were all predicting upwards strength. Even two years ago most bank analysts were still bullish on gold’s price prospects, even though it had come back around $200 from its peak. How wrong they were as gold continued on a downward path until it reached its most recent nadir late last year. Now most bank gold analysts are bearish, but as we’ve noted here before they tend to be reactive in their assessments. Gold has seen price weakness over the past year in particular so that’s the way they continue viewing it – and will only likely change their views once it has shown strength again over a good few months, so perhaps their assessments can largely be disregarded – or perhaps even seen as a contra-indicator.

So is gold going to take off again? – Undoubtedly!  But the timing of such a move remains obscure. This year, next year, sometime? Those who have an interest in the gold price remaining weak still have ammunition left, but it may be beginning to run low at last. Even so, as we’ve pointed out that although the overall gold price trend may start to move upwards this may not be achieved without some quite serious volatility both up and down. Gold seems, at the moment, to be struggling to break out upwards without counter moves coming in to bring it back down again so do not necessarily expect this situation to change much soon unless there is a major breakout taking it back above $1300 or higher.


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