Why is gold not shining?

It’s supposed to be looking up for gold, with increased consumer demand and a series of central banks, including Russia, dumping US Treasuries to buy the shiny undollar.

So why are prices – in USD terms at least – in the doldrums?

According to the World Gold Council, overall demand in Q1 2018 was down 7% and the lowest in ten years:

  • The main cause was a fall in investment demand for gold bars and gold-backed ETFs, partly due to range-bound gold prices.
  • Jewellery demand was steady at 487.7t, as growth in China and the US compensated for weaker Indian demand.
  • Central banks bought 116.5t of gold (+42% y-o-y).
  • Technology demand extended its recent upward trend, growing 4% y-o-y to 82.1t.
  • Meanwhile supply was up by 3% and mine production slightly higher than expected.

But the outlook is rosy:

Increased consumer demand by Asian giants and greater ethical responsibilities of the gold mining sector will brighten the industry over the next few decades, according to analysts.

“As the middle class expands rapidly in China, India and elsewhere, demand for gold will undoubtedly increase. The gold mining industry is going to be challenged to produce as much gold in the next 30 years as it has done during recent years,” WGC CEO Aram Shishmanian stated.

According to the latest study, technological advancement will become an increasingly important factor in the industry, while economic growth will continue to support global mining.

“Production methods and stakeholder relations will need to evolve if the gold industry is to make a meaningful contribution to society over the next three decades.”

Barrick Gold Corporation chief innovation officer Michelle Ash believes companies will have to look to alternative mining methods to meet rising consumer demands to decrease environmental impacts.

“I believe that open pit mining will become increasingly unpalatable to local communities and central governments. Even today there is growing antipathy to the use of large amounts of land for mining, especially in developing countries where subsistence farming is practised,” she stated.

Basically, in the long term as the working class Indians and Chinese become middle class and demand more gold as their economies expand, but only if they don’t abandon their cultural want for the shiny, but nearly useless metal as they get richer.

Could extra demand in the medium term come from central banks or will they continue to shun gold as the non-money that it is? Russia is leading the way here, cutting its holdings of U.S. Treasuries by more than half. Not a big amount in the scheme of things – approx. $50 billion vs the $21 trillion pile – and done mostly on the back of uncertain sanctions from the US, so for want of a better word, it’s not a headline.

In the short term, it’s all bearish news, from a pure price perspective, looking at the daily chart first:

On the monthly chart you can see, all of the gains for calendar 2018 have been wiped out, with gold effectively going nowhere in nominal terms, let alone real terms for several years. Gold in USD has gone next to nowhere for a very long term, abrogating its primary role as being an inflation hedge, with the secondary role as that of insurance against volatility also lacking luster:

And speculators have moved to a net short position as of this week, prepping for the remainder of 2018. From Kitco:

The Commodity Futures Trading Commission releases a report each Friday showing the positioning of various categories of market participants as of the prior Tuesday.

The last “disaggregated” CFTC report showed that money managers were net-long, or bullish, by only 10,528 contracts as of June 19. This was the lowest level in more than two years.

“Even gold ETF [exchange-traded-fund] inflows of over three tonnes yesterday – the first in 12 days – were unable to halt the price slide,” Commerzbank says. “As there has been no other news about gold demand in recent days, gold is presumably still being sold via the futures market. Speculative net-long positions are likely in the meantime to have been switched to net-short positions.”

All of gold’s normal catalysts – increased volatility, low or negative real rates, low or zero bond yields, the genuine safe haven bid – all haven’t worked. Even US inflation at a six year high and rising, forcing the Fed’s hand, is not helping:

It’s going to take a lot more Putin’s and rich Chinese and Indian middle class women to get things moving higher again for gold.

That, or a falling USD.

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  1. With gold being used in technology, it is effectively being destroyed. There has been a lot of research into recycling and ‘mining’ gold from old electronics but the methods, materials and potentially deadly chemicals required make it cost prohibitive.

    • “With gold being used in technology, it is effectively being destroyed”

      The use in technology is miniscule and irrelevant.

  2. Based on the long term chart, I will buy with both fists when it clears and holds $1400. Until then it’s a hold / sell in my view. Needs to stay above its post GFC low at $1,050 or its daylight below.

  3. Well .. the Aussie gold miners are certainly not playing along with the script … EVN, RRL, NST et al are all smashing it. Unfortunately not with me as a shareholder any longer due reading about a strong USD/ weak gold thesis.

    • Yes, it is a bit of a mystery — not all explained by a declining currency.

      Am a shareholder but have been selling into the rally expecting sense to prevail. Alas!

    • DingwallMEMBER

      HnH answered my same question in another thread – the EU made some decisions on immigration and DXY bore the brunt

  4. Michael Pento gives a good assessment of gold vs real Interest rates. Whilst “real” interest rates are rising in the US to combat the “threat” of inflation, the price of gold will fall. However, if inflation is confirmed, or more likely rising interest rates cause a US recession, gold to the moon.

    • Yes, real interest rates are the only game in town.

      – Jewellery demand is irrelevant
      – Retail demand is irrelevant
      – Flows into and out of China and India are irrelevant
      – Anything the World Gold Council says is largely irrelevant
      – People who analyse gold as a commodity are irrelevant. Gold is not consumed like commodities are.

      Gold is money and should be analysed like a currency. Virtually all the gold ever mined is still with us an available for sale.

  5. What did we read earlier in the month? ( who knows where!)
    “Watch Gold. If its price falls and keeps falling, Trump ( the USA) is winning the trade war”

  6. delusionalinvesting

    From a pricing perspective, gold is not a metal. It is a Forex currency. The trading volumes of XAU dwarf that of the metal. That is where supply and demand matter.

    • Disagree, you are far more wrong than you know… some EFT’s may play miners or juniors even. But most real EFT’s – such as HSBC, you could walk in with a certificate and redeem gold at a number of branches, e.g. Singapore, London, etc with physical with half an hours wait.

      I was in the office on a late Friday afternoon several years ago when gold fell out of bed (should be a clue). Blackrock accused a small US West Coast fund of shorting the whole market (not sure how they got that information – or if they were simply making it up).

      I remember Soros (who initially claimed that it was a great bubble) selling out approximately (publicly at least) his long positions two or threes weeks before the crash near the top. At the time I thought him nuts that this was a big run still in play. In retrospect how did Soros know??? He was watching the net EFT position (shown on Bloomberg) sold when he saw it go negative. It was a smart move, and maybe I wasn’t so smart (along with everyone else)….

      And it should have made sense, because gold was in strong correlation with the commodity prices. If it was money it wouldn’t have been so close. It was part of the general bubble.

      Taking a bigger step from the EFT picture, what is the growth dynamics, because a shortage will induce a spike!

      Net EFT’s are still on a decline, Central Bank purchases are no longer declining strongly, but flat. Russia is playing a long-term financial position (shorting the overall bond market), which it will do well from. But outside your useful zone. And public purchases, especially from China and India are flat or declining.

      Looking at the three main demand factors, gold is going nowhere…

      Ignore the typical resource analyst buy gold, or the bunker mentality (we all need gold, because the global financial system is about to collapse, which I deep affinity for reasons I don’t understand) – because the drivers are simply not there!!! Very, very few people understand this market – that includes the professionals. Try and be dispassionate. Hard I know. But this is the truth – it could be flat for a decade or more. try buying in around US$800-850 in a deflation event. Miners will give the best leverage, you will be able to pick them up pennies in the pound!

      Remember the price I paid for this gold ring on my hand, Italian curve, on Hannan’s Street, my wife and I picked out our pair together, costed around $330. Cheap – but the gold price dropped by another third several years later…

      I say all this listening to ABBA – Waterloo!

  7. It is correct to say gold is not money, as here we all agree that money is debt.

    Right, but for the wrong reasons 🙂

  8. Blow back from both sellers pumping 20K gold hitting the reality wall, plus post GFC its been shown to be a soft malleable metal traded in a narrow market.

  9. nexus789MEMBER

    Heavily manipulated to suppress the price of gold by the central banks. If the real price of physical gold was revealed based on the volumes of fiat pumped into the system it would probably collapse pretty quickly.

  10. – Quite simple.
    – One has to look at REAL interest rates. When REAL interest rates (the actual rate minus the inflation) become (more) negative then the gold price will rise. That happened in the (inflationary) 1970s and the (inflationary) 2000s (say between 2000 and 2008).
    – But we saw that in the (very) early 1980s rates remained (comparatively) (very) high but inflation collapsed. And that took gold down as well. In the 1980s and 1990s REAL interest rates were actually (comparatively) very high/positive.
    – Currently US rates are drifting higher leading to REAL interest rates becoming less negative or even positive. Hence gold remaining lackluster.

  11. Almost all of the gold that has ever been produced is available for buying and selling at a certain price. The annual production is a small part of the total supply.
    The recent weakness in USD gold reflects a stronger USD. Gold is holding its value against third currencies. The AUD gold price has been relatively stable to A$1,700 – A$1,750/oz.
    Gold has been an excellent store of value over the past 20-30 years. After allowing for technology and inflation bubbles in some areas, an ounce of gold will buy pretty much what it would buy 30 years ago, showing that money has lost value, but an ounce of gold will still buy a good quality man’s suit off the rack (on sale), just as it did in the 1980’s.

  12. – Nope. Contrary to common believe interest rates DO NOT drive interest rates.
    – ONE good example is rates in the 2000s. Between say 2000 and mid 2008 inflation went through the roof (think: oil, CRB index) but in spite of that (US) rates actually went down, form about 6.5% in 2000 down to about 4.5 % in mid 2008.
    – If inflation/deflation drives interest rates then we should have seen that in the 2nd half of 2008 the US 10 year yield should have come crshing down as well. Yes, interest rates went/drifted lower but they didn’t crash.

  13. From a silver holder’s perspective, gold is overpriced. Apparently there is some historic ratio between silver price and gold price. Right now silver is very cheap, but apparently so is gold, just less so. It could be that if bullion holders buy into the ratio thing they may also be wary of gold.