Good News Bears
By Jon Nadler
trading week in bullion drew towards a rather
lackluster finish, as gold rose only slightly on
the back of not-so-mild declines in the dollar
and crude oil values. Safe haven flows into gold
have practically come to a standstill (see
today's Bloomberg analysis by VTB Capital in
London). The gold ETF remains stuck in 'neutral'
and has not added balances since June 5. To its
credit, it has also not lost from holdings, but
the inactivity period is as long as any seen
since last November. The same, however, cannot
be said for palladium, whose London-based ETF
holdings hit a new record: 315,572 ounces.
Finally, also according to Bloomberg, "gold may
decline as investors leave a “cave of fear” and
buy other assets such as property.
Twelve of 22 traders, investors and analysts
surveyed by Bloomberg News, or 55 percent, said
bullion would drop next week, the second
consecutive negative call. Eight people forecast
higher prices and two were neutral. Gold futures
for delivery in August were down 0.8 percent for
the week, at $933.10 an ounce, as of midday in
New York yesterday.
U.S. home resales probably advanced in May for a
second consecutive month, the first back-to-back
monthly gain since 2005, a Bloomberg News survey
of economists showed before a National
Association of Realtors report on June 23. Gold
rose to an 11-month high in February as
investors bought the metal to protect against
plunging equities and a deepening recession. The
weekly gold survey has forecast prices
accurately in 156 of 266 weeks, or 59 percent of
the time. "
Gold spot was ahead by 90 cents at 1pm NY time,
quoted at $933.20 per ounce. Silver was down 4
cents at $14.15 per ounce. Platinum gained $4 to
rise to $1205 and palladium rose $3 to $242.00
per ounce. Rhodium fell $37.50 to the even
$1300.00 per ounce marker. Book-squaring
appeared to take over in the final hours - as is
usually the case. Locally tense geopolitics (N.
Korea, Iran) kept some longs from letting go in
a 'just in case' play. Next week will tell more.
The same apathy was visible in equities, where
the Dow barely made headway based on the almost
complete lack of background news to bite into.
Some markets feel heavy and tired- see oil.
Black gold failed to hold above $72 and headed
back to $70.50 despite news of rebels bombing
pipelines in Nigeria.
The same cannot be said for gold's potential
impact factors/news. One bit of news that was
finally released (after we had expected it to
make market headlines as long as at least a week
ago) was the fact that the proposed IMF gold
sale (intended to meet the organization's budget
shortfall) made it through the US House or
Well, that should quiet to noisy comments from
quarters that said "over Harry Reid's dead body"
at least until such time as when the proposal is
placed in front of the Senate - where said
Senator is likely to eventually make some noises
of his own as regards the matter. And yet, the
sales appear set to take place. Just a question
of when, how much, and how.
Positive statements were issued by the World
Gold Council today - it sees the IMF sales as
not impacting the market (if conducted within
CBGA parameters) and it goes as far as to
'welcome the news that the US Congress has
passed the Military Supplemental Bill thereby
finalising the process allowing the IMF to sell
403.3 tonnes of gold in a manner that will have
no impact on the smooth running of the
international gold market."
Expecting 'zero' impact and expecting 'positive
sentiment' to be the result of the announcement
among market participants may all be fine, but
it does nothing to clarify the issue of the
remainder of the IMF's gold, and the dire need
to help poor nations - a topic which has still
not been addressed. We continue to regard at
least some of the remainder of the institution's
bullion as potentially 'in play' if global
economic conditions push more impoverished souls
over the edge and towards a life/death equation.
"The Obama administration has pushed a bill
through the U.S. House of Representatives
approving $106 billion in supplemental funding,
primarily for the Iraq and Afghanistan
'security' efforts, but attached to it was also
an expanded credit facility for the
International Monetary Fund (IMF) of a massive
$108 billion which included an agreement to
allow U.S,. members of the IMF Board to agree
the proposed $13 billion sale of 400 tons of IMF
gold to shore up its finances.
In theory the US. approval of the IMF gold sale,
which still has to pass through the U.S. Senate
would be the final hurdle in the gold sale
actually going ahead. But despite this there was
virtually little or no impact on the gold
market. In part this may be because of scant
publicity being given to this part of the
funding approval, but also in that firstly the
gold market has largely discounted the IMF gold
sale anyway, and secondly in that the IMF has
said it will dispose of its gold in an orderly
manner through a system such as the Central Bank
Gold Agreement which limits sales volumes in a
However the current CBGA runs out in September
and there has been no announcement yet of a
renewal beyond that date. Given Central Bank
gold sales under the CBGA appear to have dropped
sharply over the past year it may be felt there
is no longer a necessity for a new Agreement.
Indeed indications are that some major Central
Banks, notably the Russian and Chinese ones, as
well as some Middle Eastern banks, are likely to
increase gold holdings in part in an attempt to
diversify reserve dependence away from the U.S.
dollar given the mixed views on the greenback's
future path due to the huge amounts of money
being pumped into the U.S. Economy to try to
stave off recession - or even depression.
In their April Fortis Bank metals monthly, the
London based VM Group commented that "There are
some good arguments against a CBGA renewal. The
original 1999 Agreement arose from a structural
weakness in the gold market. Back then, a class
of investors (the Central Banks) believed they
were massively overweight in gold and wanted to
sell; the Central Banks decided to collaborate
on a selling programme in order to ensure that
they drip-fed gold onto a market that was
already very weak. Those conditions are arguably
no longer relevant.
"If there is no renewal of the CBGA, that would
send a tremendously bullish signal to the gold
price, at a time today when there are many more
actors on the buy-side (such as private
investors) and an obviously slowing interest to
sell. "This would boost gold's status as a
reserve asset, giving holders greater
flexibility in how they bought and sold it. It
would also encourage other Central Banks with
large forex reserves but little gold (such as
China) to buy. After all who wants to buy
something for which they need an Agreement in
order to re-sell?"
But, back to the U.S. Moves. Writing in the Wall
Street Journal, economist Judy Shelton comments:
"The Obama administration went to great lengths
to get the IMF its billions. Last week,
congressional leaders received a letter that
made a firm connection between global economics
and global security. "We know from the 1930s
that a protracted global economic slump can
foster undesirable and unforeseeable reactions
to hardship and adversity," it stated.
"Financial hardship and poverty breed
desperation, which helps terrorist networks to
attract new recruits with messages of hate,
violence and intolerance." The letter then urged
Republicans and Democrats to support the
President's request for IMF funding. "We believe
that the current instability poses a significant
risk to the long-term prosperity and security of
the United States." It was signed by Secretary
of State Hillary Clinton, National Security
Adviser James Jones, and, most notably,
Secretary of Defense Robert Gates."
Shelton's view is that this was an attempt to
pressure representatives into voting in favour
on the grounds that a well financed IMF might
provide a further bulwark against global
financial collapse leading to global instability
and would thus be a threat to greater U.S.
security. She questions this both on economic
grounds and on whether the IMF is indeed the
right vehicle to handle such a policy.
"Officials concerned about global security are
right to recognize that financial instability
breeds discontent and fosters social resentment
that can challenge ruling interests and topple
whole regimes." says Shelton. "The question is
whether short-term fixes -- in the form of
emergency loans to a flailing government, the
sort of assistance the IMF is prepared to offer
-- provide a solid foundation for economic
Part of the problem, in Shelton's view, is that
the IMF is no longer capable of fulfilling its
role of overseeing an international monetary
system because, since the end of the Bretton
Woods era there is effectively no global
monetary system and that all the IMF can offer
nowadays is "the prospect of lurching from one
short-term economic fix to the next." Where does
this leave gold? One would think that overall
such moves will end up being long term positive
for bullion. If and when IMF gold sales do hit
the market there may be short term adverse
consequences, but if this gold is seen to be
quickly absorbed (perhaps by Central Banks
looking to build gold reserves) then there could
be a quick rebound.
Fundamentals don't necessarily look good for
gold at the moment, but the gold market is
notable for ignoring fundamentals at least in
the short term. It has been retaining its price
levels reasonably well in the face of low
jewellery demand and a resurgent dollar - both
normally very adverse factors. Investment demand
seems to be stable. People are still nervous.
Gold still offers a degree of wealth protection
which most other markets do not at this
continuing time of economic turmoil." - Lawrence
Be that as it may, fundamentals poor or not, the
contrarian argument normally brought to us by
Mark Hulbert, over at Marketwatch, calls for
possibly higher prices over the period normally
known as the "summer doldrums."
In late May, when I last wrote about gold market
sentiment, bullishness among gold timers was at
a three-month high. And, as I reported then,
this meant that contrarian analysis was
forecasting lower gold prices. Today, in
contrast, gold timers on average are more
bearish than they've been since late April.
That, in turn, means contrarian analysis is more
upbeat on gold's near-term prospects.
Contrarian analysis, for those of you who find
this logic to be counter-intuitive, is based on
the historical tendency for there to be too much
optimism at tops and too much pessimism at
bottoms. It is the basis for the oft-used
phrases about bull markets liking to climb a
wall of worry, and bear markets preferring to
descend a slope of hope.
Objectively measuring market sentiment isn't
always easy, however. As readers of this column
know, I find it helpful to focus on investment
newsletters because, whatever else you might say
about newsletter editors, they are incredibly
sensitive to which way the winds are blowing.
And my econometric studies have shown that their
consensus forecast is inversely related (in a
statistically significant way) to the gold
market's subsequent direction -- just as
contrarian analysis would predict.
Consider our Gold Newsletter Sentiment Index (HGNSI),
which reflects the average recommended gold
market exposure among the shortest-term gold
timing newsletters tracked by the Hulbert
Financial Digest. It currently stands at 10.2%.
That's a big drop from where it was in late May
and early June, when the HGNSI got as high as
56.8%. That big a drop is encouraging, according
to contrarian analysts, because it suggests an
eagerness among market timers to run for the
exits and even jumping onto the bearish
An additional historical comparison reinforces
this conclusion: The last time that the HGNSI
was as low as it is now, gold bullion was
trading below $900 per ounce, well below its
current price. In other words, gold timers are
as discouraged today by gold in the low $930s as
they were a couple of months ago when bullion
was some $40 cheaper. This suggests that the
gold timers, on balance, are increasingly
inclined to see the glass as half-empty. In the
process, they are reconstructing the wall of
worry that markets like to rise.
Of course, the following caveats should go
without saying, but I'll repeat them anyway:
Sentiment is not the only factor that makes the
markets go 'round. So even though contrarian
analysis historically has been more right than
wrong in its predictions, it can provide no
Furthermore, contrarian analysis is only a
short-term market timing tool. In my econometric
studies, in fact, its greatest explanatory power
is over the short term -- a matter of weeks, not
years. So, for example, contrarian analysis
tells us nothing about where gold will be
trading a year from now.
But, if history is a guide, chances are good
that gold will be trading higher over the next
month or two."
Leave it to us to differ and continue to still
see a roughly $200 risk built into this market's
structure. Yes, it is called an IMHO - but it is
not the lone such HO. Similar risk/reward
concerns were voiced by seasoned trading staff
at German firm Heraeus in an interview given
during May's fund driven commodity bonanza. For
now, projected ranges are seen as between $680
and $980. Summer starts in a couple of days...