Weekly Market Report 03/17/14

This Week’s Headlines:

Gold
What is driving the Gold price higher?
Silver
Recommended Investment Commitment and Diversification

GOLD

Last week was a very profitable week for Gold investors, since Gold moved higher and higher every day of the trading week. By Friday, it was trading at $1,379 per ounce, an increase of $40.80 (3.05%) for the week. On the CME exchange, both the trading volume and the open interest was increasing on the popular April 2014 hundred ounce Gold contract. It took Gold five attempts to breakout above the $1,350 per ounce resistance level, and now it is working on breaking out above the $1,381 resistance level.

Gold is now up $177.10 per ounce (14.74%) from the beginning of the year. Last year’s downtrend has been broken, and many professional and technical traders have become aggressive buyers on any price dip. Even paper Gold buyers, (investors who purchase the popular exchange traded fund, GLD) have purchased 11.60 troy tonnes last week to take physical gold holdings, making it 816.59 metric tonnes, a 2014 high.

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What is driving the Gold price higher?

The ongoing Crimea crisis between Russia, the Ukraine, the U.S. and Western Europe has garnered most of the headlines and is a contributor to the recent upward move in Gold but the largest increase came on March 12th. That is when the Chinese Premier, Li Keqiang, warned that their country was likely to experience a number of defaults as a consequence of having their government increase financial deregulation. At a press conference, he described future bond defaults as “unavoidable.”

A failure by the Shanghai Chaori Solar Energy company to meet their interest payments last week on its $1.4 billion debt became China’s first onshore corporate bond default. This prompted some concern as well as some alarming talk about a wave of defaults to come across China. Major Chinese defaults would cause investors to take flight from the entire Chinese corporate debt market and increase purchases of precious metals. On Wednesday the 12th of March, Gold increased $23.80 per ounce on the heaviest trading volume day that I have seen in months.

For thousands of years the Chinese people have had a great love for Gold and in recent years the Chinese government has encouraged physical ownership for the public. Today, China is the world’s #1 buyer of Gold, consuming over 1,000 metric tonnes a year. That is 200 tonnes more than the entire GLD holdings, and Chinese demand is likely to double or even triple should there be major defaults in the Chinese bond market. I will be monitoring any reports of increasing defaults, but, a major increase in the price of Gold and/or Chinese demand may be a better indicator.

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SILVER

After the March 7th selloff, Silver bounced back to above the $21 per ounce price last Wednesday, when Gold rallied $23.80. For the balance of last week, Silver traded in a narrow range from $21.11 to $21.80 per ounce. I haven’t been impressed by Silver’s recent price action and would like to see it rally above the $22 per ounce level on solid volume. Last Friday, Silver closed the week at $21.41 per ounce, up $0.48 (2.25%) for the week, never able to reach $22 per ounce. With last week’s $40 move in Gold, the Silver to Gold ratio continues to go higher, currently at 64.41%.

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Recommended Investment Commitment and Diversification:

Precious Metal commitment: Minimum of 40% of investment capital

Diversification:  Gold 50%, Silver 45%, Platinum & Palladium 5%

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

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