Gold: Let The Good Times Roll?
Graceland Updates 4am-7am
July 29, 2014
- Which song would best describe the current state of the global gold market? Perhaps it would be,"Good Times Roll" , by the 1970s rock band "The Cars ".
- During the first six months of 2014, there have been quite a number of events that are positive for the gold market, and there was a big one yesterday.
- Please click here now. That's the monthly FXI-NYSE chart, which I refer to as the "Chinese Dow ".
- Gold and most commodities began a multi-year decline in 2011, as the Chinese stock market languished. The FXI has just staged what appears to be a very important upside breakout from a giant symmetrical triangle pattern. This should lead to a substantial rise in consumer confidence, and increased wealth amongst Chinese citizens.
- While I own the Chinese stock market (via dividend-oriented stock), I'm vastly more excited about the effect a rising market there has on gold demand.
- The election of Narendra Modi was a game changer for the Indian economy. A major bull trend in China's stock market would be an event of similar importance, for gold investors around the world.
- With both Indian and Chinese stock markets firing on all cylinders, citizens will be very keen to increase the amount of gold jewellery buying they do, for weddings and key festivals.
- Many investors in the gold community believe Goldman Sachs economists are "perma-bears ". I beg to differ. Here's their current view, as quoted by Barron's: 'the GS' strategists' bearishness has a limit. In a note to clients this week, the strategists write that they expect the $1,200 level, or roughly 7% beneath Thursday's prices, to function as "a good estimate of the floor price for gold." A price of $1,200, they write, is the 90th percentile of all-in sustaining costs in the gold-mining sector. Putting it more plainly, it's the price below which more producers have to think about scaling back their gold output. Go appreciably below this level and the pressure builds. The result in that case should be lower output. It's for this reason that the GS strategists argue that drops below $1,200 should be "generally short-lived," albeit possible during "times of extreme declines in demand." ' - Barron's Magazine, July 24, 2014.
- Please note that Goldman's extremely rational analysis of the cost of production, was written just before the Chinese stock market breakout occurred. They may need to raise that $1200 floor number a bit higher, and soon!
- The main argument of the gold bears is that strength in the US economy will create a rise in real interest rates, and that will create selling in gold ETFs that magically overwhelms Chindian gold jewellery buying, and overwhelms the entire industrialization of India as a price driver. I find that to be a ridiculous proposition.
- The gold bears may soon find themselves in a very lonely spot, as more top bank economists tone down their negative statements about gold. Many are becoming outright bullish, and reject the arguments of the bears. For the current viewpoint from mega-bank HSBC on rate hikes and gold, click here now.
- The taper's power to harm gold was a key platform of the bears. It's a hard and cold fact that during the taper, no significant ETF selling has occurred.
- Holdings in the SPDR fund are stable (currently about 801 tons). This fund appears to be held by very strong hands now, and there has been buying on days of price weakness.
- Yesterday was "options expiry day ", for COMEX gold options. I consider it a victory day for the bulls, because the price held steady, in the $1300 area.
- There are two more key US-oriented events for gold this week. The FOMC (policy-making arm of the Fed) meeting begins today, and a statement will be released at 2PM tomorrow.
- Janet Yellen's only major concern right now is probably the overheated junk bond market. A minor rise in rates could cause a significant (and needed) sell-off there, but I doubt it would do much to the Dow or gold. The junk bond bubble could also be addressed with regulation, rather than hiking interest rates.
- Please click here now. That's the daily gold chart, and it seems to be singing, "Let the Good Times Roll!"
- At the bottom of the chart, note the bullish posture of my 14,7,7 Stochastics series oscillator. Gold staged a nice breakout from a small bullish wedge pattern last night, and the entire chart has a very bullish look.
- Why is that? Well, the month of August can see Indian citizens buy enormous amounts of gold, as they begin preparations for the wedding season and Diwali. Expectations of those liquidity flows into gold are likely why the gold chart looks so bullish now.
- The US Employment Situation Report is scheduled for release this Friday, at 8:30AM. Precious metal enthusiasts should note that gold has a rough general tendency to decline slightly in the days leading up to this key report, and then rise sharply higher after it is released. As the FOMC drama unfolds, gold could easily trade at $1280 - $1290. Then, following the jobs report, it should begin a surge towards the $1347 area highs.
- Please click here now. That's the GDX daily chart. No chart is ever 100% bullish or 100% bearish. Overall, the GDX chart is very bullish.
- I don't think investors should be overly-concerned about the tiny head and shoulders top pattern that is in play now. GDX has already staged an upside breakout from the enormous symmetrical triangle.
- It's now within striking distance of the March highs near $28, and is rising in an up channel that I've highlighted with thin blue and gold lines. If there is a minor trend sell-off, it would likely create a right shoulder of an inverse head and shoulders bottom pattern. It's common for breakouts from large symmetrical triangles to be followed by pullbacks to the apex area.
- With Goldman Sachs sounding very rational, and HSBC refuting the arguments of the bears, the gold community is in a great position to begin the month of August. The bullish Indian stock market is now being accompanied by a "barn burner" of a rally in China. From a technical standpoint, any price weakness would only add to the bullish look of the charts. Let the good times roll!
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