LAWRIE WILLIAMS: Tense time for gold bulls

Gold, after a good week last week started turning down late Friday and was taken down further on Monday and this morning.  Note the 'taken down' comment.  There certainly does seem to be an important element of High Frequency Trading in the activity on these days – could this be the banks which have been making bearish forecasts like Goldman Sachs and Natixis trying to intervene surreptitiously to protect their own and their clients’ positions?  If so have they gone far enough to create doubts in gold investors’ minds to bring about a downwards price spiral back below the $1,200 mark?

One clue here will be the ongoing performance of the SPDR Gold Shares gold ETF (GLD) which has been on a roll so far this year.  But between Friday and Monday’s close we did at last see a significant outflow from the biggest gold ETF for the first time in a couple of months, with a large 8.63 tonne liquidation.  If this is followed by more such then gold could be in for a bit of a short term price problem backtracking on its recent gains.  The real question is how far could it fall before the next recovery sets in.

As we reported here, at last week’s Prospectors and Developers Convention in Toronto, a number of the more balanced gold followers were indeed predicting a price pullback.  When a commodity shoots up as fast as gold did during February and the first couple of days of March then some kind of retrenchment is almost inevitable.  Traders will take profits, which will account for a relatively small part of the pullback, and institutional holders may start getting nervous and hold back from further purchases.  With reduced Indian gold imports, largely due to the strike by jewellery manufacturers protesting against the government’s additional gold levy when they had been hoping for a reduction, and perhaps lower Chinese demand post the New Year holiday and a degree of price sensitivity, the timing was ripe for a bit of a takedown by those elements who would have been badly burnt by a continuing gold price rise.

So far though, the price fall has been fairly well contained, but eyes will be on the U.S. Fed for guidance on thinking on the state of the U.S. and global economies and hints as to whether or not another interest hike, albeit another small one, is imminent.  A hawkish Fed, coupled with a further recovery in global equities could set the cat among the gold pigeons – but the equities seesaw seemed to be on another downwards leg today, after a few days of recovery, and if this persists could give gold another new lease of life.

As Grant Williams noted in his latest Things that make you go hmmm... newsletter (always a hugely informative, prescient and humorous read) (www.ttmygh.com ), gold has a nasty habit of kicking its investors in the teeth one last time – see  PDAC in retrospect. Is the recent gold rally sustainable?, just when they think its back on the upwards path again.  They will be hoping that if this is the case now, then this will indeed be ‘one last time’, at least until the yellow metal has put on a bit more steam first.

At the moment we see a 50:50 chance of gold moving in either direction from where it is now.  If it can hold around the $1,230 level, where it is at the moment, then upwards is the most likely breakout move.  If it drops below $1,220 then we can probably expect $1,200 or lower.  Gold has been showing some resilience on its down moves, but a hawkish, or less dovish statement out of the FOMC meeting could provide initial negative stimulus. If so, hopefully it will be shortlived.  Gold is still up nearly 15% on the year to date, despite the latest pullback.  Thus it will have gained quite a few more solid adherents in the process which could help it maintain its gains to date.

15 Mar 2016

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