Up until last night, it was shaping up as yet another slow week in the precious metal market, but a wild night on Wall Street and a rise in bond yields dented demand for the precious metal complex.

As we discussed last week, the gold price in US dollars has been battling the $1,200 mark for the whole month of April. Up until last night, it seemed evenly matched, but action in the past 24 hours indicates that the bears could be about to take control again. Last night saw a drop through this level to $1,186 US and a further selloff could be on the cards for US gold.

Primary cause for the soft outlook for precious metals is again the strength in equity markets, with DOW above 18,000 points, and the S&P500 above 2,100 points. In Japan, the NIKKEI climbed back above 20,000 points as well.

Despite the soaring US Dollar, US company earnings (the headline ones anyway), are holding up better than expected too, though a host of companies are still disappointing when it comes to revenue and sales growth.

Weakness in the broader commodity complex also isn’t helping, with copper under serious pressure in the past 48 hours, down roughly 6%, despite stimulus efforts from the People’s Bank of China.

US existing home sales also flew higher overnight, about the first US data point that has surprised meaningfully to the upside in some time. Though one swallow does not make a summer, this will embolden those who are again expecting the US economy to ‘bounce back’ from a poor Q1, with expectations of stronger growth later in the year.

This line of thinking will be tested again later this week, with the all important durable goods orders report for March set to be released. If that is stronger than the 0.4% (ex transports) result expected, gold could again take a hit.

On the plus side for gold right now, we’re seeing continued buying out of Russia, and the heightened chances of a Greek exit from the Euro will provide some support.

Furthermore, should Durables miss this Friday, then expectations of a Fed rate hike could be pushed back even further, which could hurt the USD and provide some kind of bid for gold, or at least encourage some short-covering. As it stands, when we look at US macro data and the lack of official inflationary pressure, there seems little reason for the Fed to hike right now. When (or should I say IF) the market comes to price that in more fully, we could see a stronger bid for gold.

But all up, there isn’t any huge reason to expect bullion bounce strongly right now, which dovetails in with a technical picture that is also somewhat troubling.

Technically Speaking

Technically, the overnight action hasn’t come as a huge surprise, as back on the 27th of March we did a piece that looked at Fibonacci retracement levels, and why some more potential weakness was on the cards.

It appears this time that the theory has held up. We identified the overall trend as a downtrend from the recent top at $1,310 in January. This fitted with the overall long-term trend on the weekly charts too. I did mention I thought we would see this latest rally top out between $1,200 and $1,250 (for other reasons) but this also happened to be the range where the fib retracement levels sat.

As you can see below the blue line heading down and to the right of the $1,310 top is our overall trend. The theory has it that if the price reverses from the trend and starts heading back up, we will hit resistance at either a 38.2%, 50% or 61.8% retracement. Indeed we did see a lot of selling around the $1,200 and a peak at exactly the 50% mark of $1,224.

It could very well be coincidence, or the fact that a lot of traders will follow these levels and act in the same manner once they are reached. Never the less we have hit resistance and it looks like we could roll over and head south in the short-term. The MACD indicator at the bottom of the chart is very close to signaling a sell sign. RSI also looks like it’s about to roll over.

The bottom line for those that like the technical and the charts is that the above still indicates that there is a good chance we will test (and possibly break) the $1,130 US level in either May or June. If that happens, it will likely be the final wash-out in this now near 4 year cyclical bear market for precious metals. If it does happen, it will likely be the buying opportunity of the decade, with few other asset classes providing the return potential that precious metals will in the coming years.

We are still dollar cost averaging into the market, for two reasons. One – it’s going to be nigh on impossible predicting the absolute bottom of this market, and it will likely only be seen in hindsight. Secondly, like 99% of our clients, we are investing Aussie dollars to buy gold, and the Aussie dollar looks like it is on an even bigger downtrend than US gold has been. The latest bounce in the AUD, off the back of better than expected unemployment data and higher than expected core inflation won’t bring to a halt the RBA rate cutting cycle, so we see that as an opportunity, rather than a change of trend.

We remain firm in our belief that Australian dollar precious metal investors will benefit from both a rising USD gold price and a falling AUD in the coming years, even if the first part of that picture is yet to clearly emerge.

The Chinese Gold Reserve

Donald Rumsfeld would call the Chinese national gold reserve a “known unknown”. We all want to know the answer. We all know it’s important. But we simply don’t know the answer.

There’s been more noise on the much speculated on Chinese national gold reserve this week, with Bloomberg running the Headline “Mystery of Chinas Gold Stash may soon be solved as IMF beckons”.

Bloomberg Intelligence are pegging the number as high as 3,500 tons, and have used trade data, plus domestic gold mining output and China Gold Association figures to come to this number. ANZ Chief Economist Warren Hogan thinks the number is in the same ballpark, estimating that the holding could be in the vicinity of 3,000 tons.

Meanwhile, without putting a figure on it, World Gold Council director Ashish Bhatia noted that there was substantial room for the Chinese national gold reserve to grow, observing that it made sense for central banks to hold between 4 to 10 percent of their assets in gold. With the better part of $4 Trillion in reserves, the Chinese would need a lot of gold to get to that level.

The Chinese are being typically coy on the subject, with Yi Gang, the central banks deputy governor, stating in 2013 that he didn’t see the Chinese gold holding climbing any higher than 2% of reserves, as the “market was too small”.

Astute observers of the gold market will know that if there is one thing the gold market isn’t, it’s small, with the OTC market alone in the UK turning over tens of billions of dollars a day.

Granted, that’s turnover, and not all of it is going to end up in the vaults of the PBOC, but there is room for their reserves to grow much higher than 2% I would expect.

Analysts expect that the Chinese may reveal their holdings this year as part of a move to get the Yuan added to the IMF Special Drawing Right, or SDR, which currently includes the dollar, the euro, the yen and the British pound. Nomura Holdings Inc. think the Chinese could show their hand as early as next month, or in October.

If the Chinese have indeed increased their gold holdings beyond 3,500 tons, they will be in the silver medal position when it comes to national gold reserves, overtaking Germany, who currently hold 3,384 tons, but still in second spot behind the United States, who purport to hold 8,133 tons of the physical metal.

The Bloomberg article can be read here for those who’d like to see it. For an alternative read, please click here to read what my friend Mark O’Byrne, from Gold Core, had to say on the matter.

My own view on this matter is that the eventual Chinese announcement about their updated gold holdings may well end up being a bit of a damp squib when it comes to the impact on the gold market. I also think that the number will leave plenty in it for the bulls to like, and for the bears.

For example – if the Chinese announce they’ve got 3,500 tons (or thereabouts), you can already imagine the list of gold hyperbulls who within 24-48 hours will have notes out saying “they’re bluffing” and the number must be 5,000 tons or more.

Gold bears on the other hand will say “see, we told you they aren’t buying that much gold”, or they could even argue “well if you think they have 5,000 tons, why isn’t the price a lot higher than it is”.

Going back to the Rumsfeld analogy earlier, it is not “known unknowns” that tend to move the markets, but rather the “unknown unknowns”, which, when they rise to the surface, are the Black Swans that so often change the direction of markets, often profoundly.

As such, whilst I, alongside the rest of the gold community wait with baited breath for any announcement that the Chinese will make regarding their national gold reserve, I don’t necessarily think it will shake up the market like many are expecting.

Until next week

Disclaimer

This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. Any prices, quotes or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness. This report was produced in conjunction with ABC Bullion NSW.