Weekly Market Report 2/19/13

I believe that last week’s precious metal trading was a pivotal point for 2013, and could have been the long awaited “weak hands clean out.” Read below for more details.

GOLD (It’s time to go all-in on Gold and Silver)

Last week’s Gold and Silver trading was very educational and could be a pivotal point in the recent Gold downtrend. Let me explain, but first I need to share what a professional commodity trader (PCT) does for a living. He/she makes their living by trading commodities on a short term basis. Whether it is grains, currencies, or precious metals, they identify an opportunity or timing and then either buy (go long) or sell (go short) on an actively traded contract with the hope of profiting in a few days.

Such a specific opportunity occurred on Monday when professional commodity traders came to the conclusion that with Asian markets closed to celebrate the Lunar New Year holiday, there would be a lack of Gold/Silver buyers for their precious metal markets. You remember that in many of my past Weekly Market Reports I have said that China, India, and other Asian countries have traditionally been the largest buyers of precious metals.

On Monday Feb. 11, Gold traded as high as $1,670 per ounce on the actively traded April CME Group contract. That day there was heavy PCT selling/shorting approximately 16.7 million ounces (about $28 trillion) driving the market down to $1,649 per ounce by its close. From Tuesday to Thursday the professional selling continued when Gold reached $1,650 per ounce. Finally, on Friday when Gold broke through technical support at $1,630 per ounce, the chartists, margin calls, and stop loss sellers took it from there. The selling drove the Gold price down to $1,596 per ounce before the PCT started to cover their very profitable short positions. The volume for April 100oz CME Gold contracts on Friday was a record 25.9 million ounces (about $41 trillion).  In late buying, Gold short covering and bargain buyers drove Gold back to $1,609 per ounce, down $59 per ounce for the week, where the market closed   

WHY ARE GOLD AND SILVER AT A PIVOTAL POINT?

On Friday, Feb. 15, many of the financial commentators on CNBC and CNN expressed their opinion that the twelve year track record of gains for the Gold price was over, because investors are:

1. Switching out of Gold into stocks for growth and income.
2. There is no inflation, and investors have no reason for owning Gold.
3. The U.S. economy is recovering, easing pressure for more monetary stimulus.
4. Investors like George Soros are reducing their core holdings of Gold.
5. World demand for physical Gold dropped 4% in 2012.

I have heard similar arguments about Gold in the past. In 2006 Gold hit $725 on May 12, and five months later Gold declined to $560.75 per ounce (22.66%). At that time the majority of financial news commentators and market analysts continually said that the Gold run was over and wrongly predicted it would break $500 on its way back to $375. Many of my Gold clients called me in 2006 worried about losing their five years of Gold profits; as a 40+ year precious metal specialist I shared my bullish opinion.

Again in 2008, Gold hit $1,011.25 on March 17, and seven months later Gold declined to $712.50 per ounce (29.54%). Again the majority of news commentators and financial analysts on CNBC and CNN said that the Gold run was over and again wrongly predicted it would decline, this time to $600 per ounce.

Please remember that during 2006 and again in 2008 the world’s central banks were selling Gold into the market. Now, they are aggressive buyers, purchasing an all-time record high of 534 metric tonnes in 2012 to replace the paper currency in their national reserves.

In addition to record high central bank buying, the following are some of the bullish Gold factors:

1. World Gold supplies declined 1.4% in 2012, and are projected to drop again in 2013.
2. Central banks and large investors are not buying Gold as an inflation hedge; Gold is an alternative investment to paper currency.
3. World Debt is growing at an unprecedented pace ($16.5 trillion in the U.S.)
4. Although there may not be a QE4 in the U.S., look at growing monetary stimulus in Europe, Great Britain, Japan, and China.
5. As the U.S. economy recovers there will be growing U.S. demand for Gold/Silver. See the current U.S. Mint record Gold and Silver sales records.
6. George Soros did lower his stake in paper Gold, but we are seeing large investors switching to physical Gold stored in depositories. Large investor John Paulson has not sold any of his 2.18 million ounces of Gold.
7. While overall volume was down 4% from 2011 at 4,405.5 tonnes, the total 2012 value reached an all-time high of $236.4 billion.
8. Basel III is set to upgrade the status of Gold to a Level I bank asset in 2015.

Based on last week’s trading activity and my contrary opinion theory, I feel that we are seeing what is called a “weak hands clean out” of small investors in the Gold and Silver markets, and that Gold will continue its twelve year record of gains in 2013. Since 2011 the Gold price has consolidated in the $1,525 to $1,920 per ounce area and is ready to breakout. I would not be surprised to see Gold move back above its 2011 high of $1,920 per ounce, and see Silver above $40 per ounce in 2013. 

The first step in Gold’s recovery is to build a new short term trading range between $1,600 and the previous technical support level of $1,630 per ounce. Right now we are seeing a war in the world’s Gold and Silver markets between margin call selling and growth in new long term buyers. After a short period of time both the Gold and Silver markets should build a new base; Gold between $1,600 and $1,630, and hopefully Silver would stay above $30 per ounce. 

ASIAN PRECIOIUS METAL MARKETS RE-OPENED TO RECORD HIGH VOLUME

Asian markets finally re-opened late Sunday night U.S. time (Monday am in Asia) after a weeklong break. During Asian’s precious metal trading Sunday and Monday, both Gold and Silver showed excellent demand and support. Gold opened higher Sunday night, trading up $10 per ounce at $1,619 per ounce before seeing any selling. Silver quickly moved back above its key resistance level of $30 per ounce before seeing any selling. Also not surprisingly, Gold’s trading volume for the benchmark cash contract on the Shanghai Gold Exchange climbed to a new record high. Physical bullion dealers report heavy sales in both India and China.

“Chinese investors returned to the market today after the holiday, and the slump in Gold prices in the past week provided great incentive for buying as many Chinese are still holding a bullish outlook on Gold,” said Qu Mingyu, a precious metal trader at Bank of China.

SILVER 

Last week’s Silver trading pretty much mirrored Gold. There were heavy short sales above $31 per ounce Monday to Thursday in the active March 5,000oz Silver contract on the CME exchange. Heavy trading volume reached a spike on Friday when short covering, margin call selling, and stop loss sellers purchased 69,885 (about 350 million ounces or about $1 trillion) CME March contracts. Silver traded as low as $29.66 per ounce on Friday, but the late buying drove the price back to $29.90 by the close of the market. 

PLATINUM & PALLADIUM

Platinum did not escape last week’s precious metal decline. Although the volume of trading was a fraction of Gold and Silver, the market price did drop substantially. Platinum closed down $37 per ounce, at $1,677 per ounce, still trading at a $68 premium to Gold. Palladium was the star performer for the week closing at $753 per ounce, up $2 on the week.

Recommended investment commitment and diversification:

Precious Metal commitment: Minimum of 35% of investment capital

Diversification:  Gold 55%, Silver 40%, Platinum & Palladium 5%

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

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