GOLD

On Friday gold closed at $1,584 per ounce, down $61.20 (3.72%) for the week on the heaviest volume of trading I have seen in months. Last week was not a pleasant week for precious metal investors.  The question I was asked by investors last week was, “With outstanding supply/demand fundamentals for Gold, how could it break below the key $1,600 per ounce support level?” We believe that there is a major seller in the market. Speculation as to who it is ranges from Spanish and Greek Banks needing Euros and Dollars, to heavy investor liquidation of Gold to meet margin calls or stop loss orders from losses in the global equity, currency, and energy markets.

Gold has major support at the $1,525 per ounce level and that level has shown extraordinary demand twice in the past nine months.  If we see another $60 drop in Gold to $1,525 per ounce, it could clean out the small investors with margin calls and stop loss orders. This is called by professional commodity traders ‘cleaning out the weak hands’ and happens many times before a major up-move starts. However, a sustained rally back above $1,600 for a few days could end this short term selloff.

I want to be very careful not to paint the short term outlook for Gold too bearish since the Chinese economy is still growing at a rate of 9.3%, and the Chinese investors (and their government) are known for becoming aggressive buyers of Gold at bargain prices.  

There is a great article by Julian Phillips on global gold demand available at:

http://www.mintstategold.com/investor-education/dmand_factors_driving_gold/

GOLDMAN SACHS IS BULLISH ON GOLD

With the gold price trading at $1,560 per ounce, Goldman Sachs (a Major Wall Street Bank) stated today that its 6-month and 12-month forecast for the gold price is $1,840 per ounce and $1,940 per ounce, respectively, citing weak US growth and renewed Euro zone risks, coupled with resilient physical demand.

SILVER

An ugly week for the value of Silver, down $1.54 per ounce (5.07%) closing on Friday at $28.89.

After breaking down below $30 per ounce last Tuesday, Silver could not muster the demand or trading volume to recover. On Wednesday we saw the price drop below $29 per ounce, with the market low of $28.44 per ounce on Friday.

For the past eleven weeks of trading, Silver has only had two up weeks. It is definitely in a short term bear trend.  The question is why? The answer is that Silver is caught in an economic nightmare; a combination of deteriorating global growth outlook, weaker than forecast output from China & India, selling in the gold market, and a stronger U.S. Dollar. All of these factors are anti-inflationary and have caused Silver to break the very important $30 per ounce psychological support level last week.

What’s next? Well, hopefully Silver will find support at $28.44 per ounce (last week’s low). But if it breaks down and $28 doesn’t hold,  $27.24 has chart support from 2010, with $26.14 being the December 2011 market low when massive buying appeared.  As for the upside of the silver price, $30 per ounce is the nearest resistance level, followed by $33.28 per ounce, which is the eight week high. 

PLATINUM

Last week with Gold down $61 per ounce, we saw Platinum drop $65, closing the week at only $1,471 per ounce. Platinum’s discount to the price of Gold is currently at an unbelievable $112 per ounce. This provides you with an opportunity to purchase Platinum at a 7 ½% discount to Gold. A discount of this size rarely happens, so last week I increased the recommended investment diversification for Platinum to 15% of your precious metal commitment. 

The Canadian 1oz Platinum Maple Leaf is the most active Platinum trading vehicle, and because it’s our #1 selling Platinum bullion item, we can offer them at only 5 ¾% over spot.  For a current quote on this item please visit: http://www.mintstategold.com/platinum-1/bullion-coins-and-bars/platinum-canadian-maple-leafs.html

Recommended investment commitment and diversification:

Precious Metal commitment: Minimum of 35% of investment capital

Diversification:  Gold 50%, Silver 35%, Platinum & Palladium 15%

Diversification includes 50% in long term investment quality rare coins and 50% short term bullion products

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JOHANNESBURG - We have looked at central bank gold market demand and showed just what a dynamic force it's becoming, just below the surface of the gold market. It's a relatively price-insensitive force that's strong day-to-day, clearing the market of stock when available. It enters the market in a way that leaves the market relatively undisturbed. But the rest of demand is very different. It's this other demand that will drive the gold price. Some of it is price sensitive, some not. Some is price sensitive in a surprising way. Some simply take up tonnage without being in itself a driving force. There are some forces that have no intention of holding gold for longer than their short-term view persists and then will sell it again.

Within the above parameters, it's extremely difficult to define gold demand accurately. The major difficulty lies in the difference in the motives for buying gold in the first place. For instance, the motive for Indians buying gold jewelry is very different from the motive behind developed world buying of gold.

We face the same difficulty in defining supply too. "Re-cycled" is a general term that does not touch on the motives for selling gold, and yet re-cycled gold is currently supplying 36% of supply. The motives behind re-cycling gold are very different in one part of the world to another and from one seller to the next.

These differences in the motives for buying and selling gold have a considerable impact on the price of the metal. That's what makes an understanding of these factors so critical. With an investor in gold needing so much more information than a trader -who can restrict himself to technical analysis- it is critical for him to understand these facets of the market.

Different Demand Types on the Gold Price

Technology

As you can see from the Gold supply and demand presentation from the World Gold Council, this demand is persistent, steady, and predictable, usually taking the shape of a contract to deliver in this pattern throughout the year. This predictability ensures it has little impact on the daily price of gold. In base metals this component of demand can rise up to 90% of total demand. This makes the remaining 10% of selling and buying (discretionary) unpredictable and the major influence on that metal's price. In the gold market, this facet of demand makes up only 10.5% of the total, leaving the balance of demand less predictable.

Furthermore, it's fair to assume that barring any major change in the state of the global economy, this component of demand will not fall. The emergence of Asia is now part of that formula and is unlikely to cause any major variation of that demand.

By far the greatest bulk of the demand from industry is consumed, never to return to the market, but that only amounts to 140 to 150 tonnes of demand; however, in uses such as the computer industry, there are determined efforts to reclaim and re-cycle that gold. This inevitably softens the impact of this demand on the gold price as much of it is reclaimed and recycled. Electronics uses 71% [330 tonnes] of Technology demand with the balance making up dentistry and other industrial uses, which are not re-cycled. Once that gold is in the mouth it doesn't come out again.

The result is that Technology demand is not a day-to-day price driver. Its impact on the price is that it takes off an amount from supply, lessening the volume that will affect the price.

Jewelry (Developed World)

In the developed world, it means jewelry with a gold content. Its quality doesn't matter that much except to express status for the average western woman who would almost never think of it as a form of money. It is almost exclusively for decorative purposes. The thought of melting it down for sale as gold would appear destructive to its owners. So whether it is 9-carat, 18-carat or 22-carat simply states its cost to the observer. As a piece of gold it has little other meaning.

Even melting it down to make new pieces from it is foreign to the average western woman. As to considering it a part of a household's financial security -only if the piece were of particular note- would that ever be contemplated. The current gold selling parties, where a jeweler gathers a group of women together and buys their old unused jewelry from them is the exception. Usually it involves pieces long sent up to the attic. We expect this facet of supply from the jewelry industry to last for a few years only, before that western world source is exhausted; however, it is a significant amount of the supply component. It's price sensitive to the extent that sellers remember the low prices paid for the gold, i.e. - $300 or less?, and see a windfall profit never expected. Don't expect to see these sellers buy again.

Investment demand - emerging world

While western jewelry demand reacts very much to the state of the developed world's economic states, emerging world demand for ‘jewelry' sits on the border of decoration and investment. Thus, we prefer to look at it as investment demand.

In much of the emerging world the number of people in the middle class has rocketed where economic growth is such a powerhouse that it is enriching their entire societies. For example, eventually the middle class of China's population of 1.3 billion people will reach 400 million or so. This equals the population of the U.S. in its entirety. Most of these believe that gold is an ideal form of saving for a rainy day and buy to hold for the long term.

With each of them having a totally different view of the financial system to their developed world counterparts, this source of long-term demand will prove, over time, an overwhelming driver of the gold price, almost equal in power to the central banks demand for gold.

The difference between the two is that central banks, we believe, will eventually want to control the gold market and may in select nations feel it imperative to take their own citizen's gold from them and into the national vaults.

Right now the Chinese government is encouraging its citizen's to buy gold [while making exports illegal] for themselves. Its support is also seen in the development of the Chinese gold distribution networks in that country, through the banking industry. It can now, freely import, distribute and sell gold to its people.

China's appetite for bullion continues to grow. Gold imports by China from Hong Kong increased to 63 tonnes in March from 40 tonnes in February, according to the Census and Statistics Department of Hong Kong. Chinese demand is not as price sensitive as Indian demand [see below] but we summarize the two and emphasize that the sensitivity is related more to volatility than its price level. If it were so then the buyer of gold at $300 in 2005 would be saying that at $1,600 it should no longer be bought. But as a new high is reached and stability achieved, thereafter, at that new price, back into the market they go, looking at the price rise since 2005 as a clear demonstration that it has the ability to keep rising.

Investment demand in the developed world

While the developed world has a sophisticated set of financial markets the emerging world has only had that for the last few years. In China they still have a way to go before they equal the financial skills and infrastructure now seen in the west. In India the financial system has not been able to achieve the sophisticated levels of the west. The inherent distrust in government and its attendant bureaucracy has created a ‘cash' society, independent of the banking system that thrives.  Gold is an inherent part of that system. The trust that we see in the west, in their financial systems, is just not present in the emerging world. That's one of the prime reasons why gold is so favored.

That trust in the financial system is one of the prime reasons that gold is not such a favored investment in the developed world. It requires no financial skills to make it earn income or develop a profit-making entity. It is a cold, lifeless, object outside the reach of the entrepreneur. It is insurance against the failure of capitalism and its paper money. That's why we have seen a switch from gold derivative buying to the metal itself.

To emphasize the point, an investment in a Gold Exchange Traded Fund is an investment in a quantity of gold held in a bank against which shares are issued. The fact that it is unallocated gold makes it a profit-seeking investment. As you can see in the table, investment in gold Exchange Traded Funds fell to 25% of its 2009 level this year. Investment in coins and bar gold has doubled. Holding allocated gold, or gold coins, or gold bars takes it out of the financial system and gives it that quality long-term gold investors seek. As doubts about the banking system and debt linger, this trend may well grow. The above figures tell us the story.

We expect this trend to continue and to swell in line with the growing doubts about the financial system in the years ahead.

Add this to emerging world and central bank demand and you have the three main price drivers in the years ahead.

They are enormous, relative to declining supply factors of re-cycled gold and barely growing, newly mined gold supply.

Impact of traders on the gold price.

Traders are solely profit-oriented. Their task is to push movements either way to maximize profits. It doesn't matter if they are dealing in gold, pork bellies, soya or silver. What counts is the extent of price movements.  They are made powerful in that they represent moment-to-moment buyers and sellers. If you counted the number of transactions they make to those of a long-term investor, the latter become irrelevant to the day-to-day price movements. Traders call the shots on a daily basis.

But traders are not crusaders for a cause. They are, at best, fickle and uninterested in the fundamentals. Fundamentals count to them, simply to describe the tide, in the picture Technical Analysis paints.  If today prompts them to ‘short' the market, they will. And tomorrow the picture tells them to go ‘long' of the market, they will. They are not investors. But they do cloud the picture. Today, they may react to the European elections and the price of the euro against the dollar, and this also changes on a day-to-day basis. Tomorrow the next important piece of news will affect them differently.

But as the long-term buyers take up all the available gold on the market, the Technical picture reflects this and will tell traders the way to go.

COMEX officials tell us that only 5% of its trades lead to the physical delivery of gold. An example of the impact traders can have, the COMEX recorded an unusually large transaction of 7,500 gold futures [750,000 ounces or 23.24 tonnes] during one minute of trading at 8:31 a.m., New York time this last week. The sale took out blocks of bids as large as 84 contracts [8,400 ounces] in one fell swoop and cut prices down to $1,648.80 an ounce [from $1,663.00]. The overall transaction was worth more than $1.24 billion. This smelt like one trader seeing a chance at a quiet time in gold's day to try to squash the gold price. In the past when the gold price was far lower, at $300 an ounce, traders drove the gold price up to $390, then down to $326 afterwards.

Today, this would be far more difficult due to the increasing demand from central banks [in particular on a daily basis] and to emerging world tidal demand narrowing supply and demand, considerably. The present danger to a trader is that he will be caught ‘short' and be forced to pay more than he sold for as he covers his position. The huge trade recorded on COMEX appears to have been successful [if it is now closed?], because central banks will simply wait for the appearance of an offer of physical gold from the market before buying on the dip. Traders have to reinforce their COMEX trades by precipitating a fall in the physical market price or they may not create a fall in the price. If they can't then the price may turn against them. That's why we saw heavy, sloppy sales at the quiet time of gold's day. That was the ideal time to impose downward pressures. But the next day we have seen repeated bounces in the gold prices as the stock sold was bought by equally large, if not larger investors at a busier time of the day.

If Indian buyers see the lower price as an opportunity at say $1,600 and Chinese byers follow through, they too have the ability to squeeze the traders and force them to cover their ‘short' positions and to go ‘long'. This will turn the price back up rapidly. It has the capacity to create an explosive rise in the gold price.

A look at the gold price this decade, rising from $275 to a peak over $1,900 shows what is possible over time. Traders have enjoyed the ups and downs of the gold price all that time, but never fought the trend. We expect this pattern to continue. As of now we are reaching a conclusion to the consolidation period that saw an over $1,900 gold price achieved and a pullback to $1,600 seen thereafter. As we see in the trends described in the GFMS figure for the last three years it is clear that there may well be an explosive breakout upwards, should the gold price retreat below $1,600.

Goldman Sachs Group Inc. (GS) stood by its forecast for a rally in gold this year, saying that the precious metal will advance to $1,840 an ounce over six months as the U.S. central bank embarks on a third round of stimulus in June.

Gold remains the “currency of last resort,” according to analysts led by Jeffrey Currie in a report dated yesterday, the same day that the price sank to the lowest level in four months as Europe’s escalating debt crisis boosted the dollar. The restated gold forecast implies a 16 percent surge.

Concerns that Greece may leave the euro reignited Europe’s crisis this week, driving commodities including gold lower along with base metals, crude oil and equities as the dollar climbed. The 17-nation euro area is on the verge of losing one of its members, according to a Bloomberg Global Poll published today.

“In early 2009, we suggested that gold had become the currency of last resort, overtaking the U.S. dollar’s status due to the rising risk of sovereign default and debasement concerns,” Currie wrote. Even as the U.S. currency advanced and gold fell on the European crisis in recent months, “it is too early for the dollar to reclaim this status,” he wrote.

Gold for June delivery on the Comex dropped 0.3 percent to $1,589.30 an ounce at 5:25 p.m. in Singapore, declining for a fourth day as Greek leaders struggled to form a government following elections at the weekend. The metal, which has lost 17 percent from its all-time high of $1,923.70 in September, is on course for a fourth monthly drop in May.

‘Remains in Place’

“The case for higher gold prices remains in place,” the analysts wrote. “U.S. economic and employment data has now disappointed for several weeks, European election results point to further stress in the euro area, while anecdotal data suggests that physical gold demand remains resilient.”

The U.S. Federal Reserve will announce additional monetary easing when policy makers meet next month, Jan Hatzius, chief economist at New York-based Goldman, predicted in a report on May 8. The central bank bought $2.3 trillion of bonds in two rounds of quantitative easing from December 2008 to June 2011 to drive the recovery in the world’s largest economy.

U.S. payrolls climbed by 115,000 workers in April, the smallest increase in six months, Labor Department reported last week, boosting concern that the recovery may falter. The jobless rate fell to a three-year low of 8.1 percent as people left the labor force, adding to worries that the expansion is cooling.

ETP Holdings

Gold, which has still risen 1.4 percent in New York in 2012, has rallied for 11 straight years as investors sought a hedge against inflation and central banks expanded reserves. Holdings in bullion-backed exchange-traded products are at 2,382.016 metric tons, about 1.2 percent below the March 13 record, data compiled by Bloomberg show.

Emerging-market central banks continued to purchase gold for reserves, while demand in largest user India may gain after the government withdrew an excise tax on precious-metal jewelry, the analysts wrote. A jump in imports into mainland China from Hong Kong also pointed to strong growth in demand, they wrote.

Goldman’s forecast for additional easing from the U.S. central bank is similar to that from Bill Gross, who runs Pacific Investment Management Co.’s Total Return Fund, the world’s largest mutual fund. A decision to buy more debt is “getting closer,” Gross wrote on Twitter this week.

The euro declined to $1.2912 yesterday, the lowest level since Jan. 23. In the Bloomberg Global Poll, 57 percent of 1,253 investors, analysts and traders who are Bloomberg subscribers said that at least one country will abandon the euro by year-end.