The primary trend has been confirmed in the past month through various signals. At the same time, a heroic battle is going on by central planners to suppress natural market forces which is blatantly visible in the gold market. Related to gold, we have witnessed historic extremes in the past couple of weeks.
Gold’s primary function confirmed but remains hidden
The monthly review starts with gold’s primary function: its monetary role. It is amazing how this remains the most misunderstood concept / function. Between the masses of reviews and commentaries about Cyprus in the mainstream media, almost no one pointed to physical gold owners as being the only ones remaining unaffected.
The epicenter of the currency war is currently Japan. With a government committed to inflating the monetary base and assets like equities and bonds, the Yen is the big loser. Trading partners of Japan are the losers of Abe and his team’s actions, with Korea being vocal in their complaints.
At the same time, the Sterling lost in value, standing at 153. The euro remains range bound (127) and rather strong in the light of the Cypriot event. For the time being, it appears that the US dollar remains the less bad of all, being the loser (or winner) of the global currency war.
As the currency war moves in waves (or cycles) throughout the globe, one could expect that the epicenter moves away from Japan in the foreseeable future. The most plausible candidates are Europe (where the stability of the euro could be affected based on the evolution in Cyprus) and/or the UK.
Interestingly, in the light of continuing of the massive bond buying program by the Fed, the US monetary base remains more or less stable (slight increase lately). The ECB balance sheet is witnessing a slight deleveraging. The gold price in both currencies remains stable, which should not be a coincidence.
On a more ironic note, the quote of the month comes probably from chairman Mr. Bernanke who said that the Federal Reserve’s low-interest-rate policies are helping to boost growth around the world, rejecting criticism that they could lead to a global currency war. (Source: Bloomberg). The BRIC countries do not buy all the lies coming out of the West. For instance, China & Brazil recently agreed on non-US dollar trading agreements (3-year currency swap agreement for bilateral trade).
In the same respect, recent data from the World Gold Council showed that the share of the world reserve currency in central banks throughout the world is decreasing. Clearly gold is on the rise, and rightfully so in our opinion.
As we will discuss later on, the central planners are fighting a heroic battle to defend “their” monetary system. Financial repression remains their only answer. The price of gold is close to new highs in Japan, but remains range bound in the West.
The economic view and the markets
The banking crisis in Cyprus was the key event in the past month. It blatantly reminded who the real owner is of funds at bank accounts. We consider this as one of the preliminary cracks in the financial system. The truth is out for the masses; the first steps are undertaken by the banking elite. No excuse for both parties when we arrive in a later stage.
The US stock market hitting new highs was the other key event of the month. Driven by inflationary fuel the stock indexes seem unstoppable. Interestingly new highs are made with average volume. The rise is too smooth; the risk of a trip is significant. We fear these heights and remain cautious.
Macro-economic indicators, including inflation / interest rates / unemployment / GDP, remained at comparable levels. No significant news hit the wires. The situation remains extremely fragile and extraordinarily artificial.
The gold & silver market
In the light of the above context, one could have expected a significant rise in the price of gold, driven by a flight to an asset free of counterparty risk. Although we do not have data that show a flight to gold, we can see that price of gold remained almost unaffected. On the other hand, a further decrease in a trending decline did not take place neither.
The charts reveal that both gold and silver are range bound but remain most of the time below their key moving averages, in particular the 50 and 200 day MA.
The most striking evolution in the precious metals market is the exceptional strength in physical silver investment demand (signaled by the US Mint data and the physical holdings of all silver ETF’s combined) in the light of a slightly declining price. The COT market structure reveals how historic low speculative net long positions have capped the price.
Although gold saw a similar COT structure, the physical investment demand did not reach the same extent as silver. If the COT report reveals anything, then it is the bullish setup because of the low net short positions of the commercials. Combined with the historic low speculative net long positions, it is a positive setup from a contrarian point of view. Short term, however, it could remain somehow preventing prices to rise significantly.
Fueled by significantly lowering forecasts of financial institutions and extremely negative attention in the mainstream media, unsurprisingly the sentiment vis-à-vis remains negative. The Hulbert gold sentiment, being one of the key indicators, stands at historically low readings.
The following chart shows the sentiment for the four precious metals and copper.
In the same respect, sentiment in the gold shares remains at extreme lows,as rarely seen before.
Gold shares could have seen a major bottom in March for two reasons. First, selling is drying up. Second, inside stock buying is peaking. It remains to be confirmed, but it is likely that the gold shares could lead the metals higher in the coming months, just like they did in the fall of past year. With a bullish setup in the COT market structure, it is likely that the prices of the metals could follow deliberately.
No specific news out of Asia or the central banks pointed to the discontinuation of the ongoing trend.
In closing, we conclude that the primary trend remains intact. The monetary mess in which the world finds itself cannot be resolved given the current course of the central planners. The fundamental case for gold lies in there. The macro economy and the markets could not provide a catalyst for gold and silver in the short run, although very high risk hangs almost as an aura around the (Western) world. Given the gold and silver market conditions we believe that current support levels will be respected.
Gold Silver Worlds | April 4, 2013