Gold has once again begun to assert its safe haven value after the
recent drop in equity prices. Last
week’s Argentina bond default scare coupled with rising tensions between Russia
and Ukraine have combined to spook global equity markets.
On Thursday NATO warned that Russia was preparing to send 20,000
troops into eastern Ukraine under the pretext of a humanitarian mission to save
separatist rebels. Due to these concerns
gold’s value has risen to a 2-week high.
Gold’s rally is all the more conspicuous in light of the recent rally in
the U.S. dollar index.
Adding to gold’s growing attraction as a safe haven was Thursday’s
decision by the European Central Bank (ECB) to leave the benchmark interest
rate unchanged at record lows. This was preceded by news on Wednesday
that Germany experienced a second monthly decline in factory orders (-3.2%
versus an expected +1.0%, according to Briefing.com). Elsewhere in the euro zone, Italy’s economy
sank into recession after two consecutive quarters of contraction in its
GDP. The economic trouble in Italy is
reflected in the iShares MSCI Italy ETF (EWI) chart shown below.
The
MSCI France ETF (EWQ, not shown) is also reflecting weakness within
France. Meanwhile the former star of the
last global economic crisis two years ago ago, namely Greece, is once again
showing signs of weakening. The Greece
20 ETF (GREK), a proxy for the country’s stock market, recently plunged to a
new low for 2014. The financial press
hasn’t yet begun to focus on Greece, but it would appear that several countries
in the European Union are struggling with economic problems. The last vestiges of the longer-term
deflationary (Kress) cycle are in evidence right now as the 60-year cycle is
scheduled to bottom in late September/early October.
To date the rally in gold futures price has beaten gains made in
equities, Treasuries and commodities, according to a Reuters report. Indeed, many commodity prices have taken a
beating this summer as the deflationary cycle nears its terminus. Corn and wheat prices are at multi-year lows
while oil and gasoline prices have recently begun to retreat. Treasury prices are on the rise as anything
with safe haven quality has been the focus of investors’ attentions lately as
the long-wave deflationary cycle makes it final curtain call.
By contrast silver was lower on Thursday and continues to lag the
yellow metal as safety concerns fuel gold’s latest rally. Silver is likely to continue its position of
relative weakness as long as the climate of investor fear remains the driver
for gold. Only when fear subsides does
silver typically see increased demand due to its greater exposure as an
industrial metal.
My contention over the last several months has been that as the
60-year cycle of deflation nears its final low this autumn the gold price would
likely benefit from it. We’re beginning
to see an uptick of interest in gold as now that fear has taken the front seat
again in the news. Until recently
investors cheered all the positive economic news that came out while ignoring
bad news pertaining to Russia/Ukraine and the Middle East. Now good news is routinely ignored while bad
news is amplified by investors, a tell-tale sign of a fear-driven market as the
long-term cycle bottoms. A further
acceleration of fear should serve to increase investors’ interest in gold.
Let’s
once again turn our attention to the investor sentiment picture. Last year’s decline in the gold price was
blamed in large measure on ETF managers dumping physical gold from their
funds. According to a recent report from
Commerzbank, ETFs have repeated this action through much of this year. Commerzbank observed:
“Over the year so far on balance, there has still been an
outflow of some 30 tons of gold from ETFs.
In view of the headwinds presented by additional demand components, [any]
ETF inflows will probably merely have slowed down the price decline in recent
weeks.”
The bank
emphasized that while gold prices may have been somewhat stabilized by last
month’s ETF inflows, it doesn’t foresee a revival in the gold price anytime
soon:
“While
the present negative factors remain – a strong US dollar, weak physical demand in
Asia, and weak coin sales in the west – we do not envisage any serious price
gains. In addition to modest coin sales
in the US, Australian coin sales too, for example, dipped sharply month on
month in July to 25,100 ounces.”
Thus
another major bank has joined the ranks of the gold bears in what could be
setting up another contrarian play for gold.
Adding to the contrarian factor is the behavior of small speculators of
late. According to Barron’s, speculative
investors have been cutting back on Comex gold futures and options.
Meanwhile,
the latest data from the SPDR Gold Trust (GLD), the world's largest gold-backed ETF,
showed that holdings fell 1.79 tons to 800.05 tons, according to Reuters. This marks the first drop since July 24. Thus we see that even ETF managers are once
again turning bearish on gold.
The overall sentiment backdrop that is forming is
gradually changing more in gold’s favor.
An ideal market environment is one where most retail traders and
institutional investors are bearish on the metal, which in turn sets up a
potential technical rally as short interest increases. If the fuel (i.e. bearish sentiment) for the
next gold technical rally is ample enough, it could go beyond a simple technical
bounce to something more extended.
