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LAWRIE WILLIAMS: Do sales out of GLD presage gold price downturn?

For much of the current year the rising gold price has been accompanied by a big rise in the holdings in gold ETFs.  This has been notably so in the biggest of them all, SPDR Gold Shares (GLD), which had added a massive 340 tonnes of gold peaking at the July 4th Independence Day holiday in the USA at a total of 982.7 tonnes, the highest level since June 2013 – then a time when holdings were falling quite sharply.  But since July 6th this year, atlthough the holdings have fluctuated up and down, the predominant movement has been downwards and has seen sales out of the ETF of 26.7 tonnes.  This has also coincided with a sharp fall in retail purchases of gold coins and bars in the U.S. in particular and the worry for the gold investor is whether this has been due to weaker seasonal demand because of the northern hemisphere summer holiday season, or whether it represents a change in overall sentiment from being gold positive to gold negative or indifferent!.

Recently, gold researcher Koos Jansen writing on looked at the statistical relationship between the gold price and gold demand in the West and in Asia.  He concluded that when Asian gold demand has been strong and Western demand weak, the gold price has fallen and conversely when Western demand has been strong and Asian demand weak the gold price has risen.  We think this may be something of a misinterpretation in our being uncertain how relevant Asian demand has been in this respect at all.  Whereas strong Asian demand may well have meant that the gold price did not fall as far as it might have done without it, we would suggest that up until now it has very much been Western demand only which has been influencing the gold price most strongly and the sharp fall-off in Asian demand we have seen this year has been largely irrelevant, given that it still seems to be the Western gold futures markets – notably COMEX – which have been the prime gold price drivers. 

While this may be the case up until now, it seems to be becoming increasingly apparent that the GLD holdings are in a current downwards trend, although whether this is due to the northern summer holiday season when many of the big fund and institutional managers are away and markets are consequently a little thinner, remains a possibility.  We will have to wait until after Labor Day on September 5th – which is seen as the end of the holiday season in the USA – to see whether this is the case.  But while many see the return of the markets to full swing as being potentially a positive for gold, one only needs a short memory span of 5 years to recall that it was effectively Labor Day in 2011 that saw the true beginning of the 5 year bear market in gold after an abnormally strong summer for the yellow metal.  Could this happen again?

With markets jittery again over the possibility of a Fed rate rise in September – perhaps still unlikely with December, if then, perhaps a more possible timing – we could well see continuing gold price uncertainty until after the September FOMC meeting which takes place September 20-21 and a volatile market for the yellow metal in the meantime.

At the moment gold seems to be presuring downside resistance at around $1,330 and it is also notable that the Gold:Silver ratio has risen back to 70 after falling to below 65 and some see this too as an indicator of where the gold price is headed.  We could well be in for a very uncertain month ahead for precious metals.

22 Aug 2016 | Categories: Gold

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