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LAWRIE WILLIAMS: Gold’s post Labor Day positives but does conflict loom?

We think the post Labor Day market patterns are getting established and the overall moves look as though they may be favouring gold despite what look like strong attempts to keep the yellow metal’s price under control.  Why do we think that?  Every time gold looks to be making a significant upwards move huge volume sales hit the futures (paper gold) markets keeping the price pretty well rangebound after the North Korean H-bomb test raised the price around $20.

Yet where the money for physical, rather than paper, gold is going is shown up again in strong physical gold backed ETF inflows, although these stuttered yesterday.  The biggest of all, SPDR Gold Shares (GLD) added another 8.87 tonnes of gold over the U.S. holiday long weekend bringing the total increase in the ETF’s gold holdings over the past month to a massive 53.2 tonnes, but saw nearly 3 tonnes withdrawn yesterday when media reports suggested there was likely to be no interruption to government business with Congress likely to agree to raise the debt ceiling yet again.  Hardly surprising given the devastation wreaked on Texas by Hurricane Harvey and the potential for similar damage levels from Hurricane Irma.

The GLD increase figures over the past few weeks follow a fall of almost 60 tonnes in the calendar month immediately following the Independence Day holiday on July 4th.  The overall rise in GLD holdings is being mirrored in European gold ETFs, although not in Asian ones where actual metal seems to be being held in preference to the gold-backed ETFs. (Some will see the gold ETFs themselves as being a form of paper gold but they are physical gold-backed whereas the paper gold in the futures markets is not!)

While yesterday also saw a pick-up in the U.S. equities markets on the debt ceiling rumours, the writer is not convinced that the accompanying fall in the gold price will be anything but shortlived. Nor do we see the equities recovery lasting.   After falling below $1, 330 at one time gold seemed to be heading back towards $1,340 in European trading this morning.  $1,340-45 has proved to be a strong resistance level so far, generating very high paper gold sales levels each time gold tries to break out above this level.  But if it does break out then the next resistance level is seen as being in the $1,370s, although one suspects the psychological $1,350 may be another barrier to a sustained rise.

My colleague, Ross Norman, though, has a slightly different viewpoint which should be taken into account as he has far more experience of the historical vagaries of the gold market than this writer.  In another article published here yesterday, see:  On paper gold has never looked better…    Ross notes that while, on the face of things, the factors favouring gold moving up look strong, the practicalities of it achieving consistent upwards momentum militate against this pattern.

We will likely see which viewpoint is correct, perhaps in the next few weeks.  At some stage those seemingly seeking to hold the gold price back with their paper gold sales may change tack, and when this happens the sky’s the limit. 

In geopolitics, something which could give gold a huge boost, if it were to happen, is Jim Rickards opinion that President Trump will have little option but to take military action against North Korea.  See: The Nuclear Blast Heard Around the World.  However we do see this as unlikely given the latter’s military strength, and that both China and Russia might well take North Korea’s side in any conflict. 

However rhetoric and provocation will likely continue apace and as this escalates then the gold price could well break through the barriers that seem to be holding it back.  Of course if Rickards is correct there would likely be a huge instantaneous gold price boost.  The results of such a conflict, though, might not go according to plan!  Gold bulls be careful what you wish for!

07 Sep 2017

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com

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