Thursday, February 6, 2014

A look at the gold market

Reuters reported that the SPDR Gold Trust (GLD), the world’s largest gold-backed exchange-traded fund, had a “rare” inflow of fresh investment.  Holdings increased by 2.10 tons to 792.56 tons, though that figure is still near a five-year low.  The multi-month trend of net outflows was finally broken this week as investors flocked to the traditional safe havens of Treasury and gold instruments in the wake of a mini-panic in the emerging markets. 

If nothing else, this demonstrates that the inverse correlation between the precious metals and stocks is still alive and well.  It also shows that investors are still very open to the flight-to-safety trade whenever equities come under pressure.

Elsewhere Bloomberg points out that banks led by Goldman Sachs Group and Citigroup are maintaining that commodities are heading for losses in 2014 as rising supplies and slowing demand should exacerbate the bear markets in gold, copper and other metals.  Goldman pointed out that open interest measuring holdings across the 24 commodities tracked by the Standard & Poor’s GSCI Spot Index (BUSY) fell for three straight quarters through December, the longest slump since the global recession in 2008.  The super cycle that led commodities to almost quadruple since 2001 is reversing, with prices set to drop 3 percent in 12 months, Goldman said.  The asset class will be a “wallflower” compared with equities, Citigroup said.

By contrast, JPMorgan Chase says commodity bears are “overly confident on the reliability of supply” and underestimate demand.  All but eight of the 65 commodity indices the bank tracks will gain over the next two years, with five of them posting double-digit annual returns, analysts led by Colin Fenton wrote in a Dec. 30 report highlighted by Bloomberg Businessweek.  The “super cycle” is “just beyond its midpoint,” said JPMorgan, and the markets are still in the “bull phases.”

This conflict of opinion among major analysts is typical of a transition phase in the markets and normally coincides with congestion, i.e. a lateral trading range.  Based on the wide divergence of opinion among investors and analysts alike, an intermediate period of volatility where neither bulls nor bears gain a prolonged advantage is a likely outcome.

[Excerpted from the Jan. 30 issue of Gold & Silver Stock Report]