Market Update: Gold hit hard as Bears regain control, for now

Precious metal investors received a rude shock this week with gold, which looked like it was finally ready to re-exert itself, but falling roughly USD $50oz in two trading days.

After popping as high as USD $1346oz in trading on the 11th July, its been a one way street back below USD $1300oz, with silver also hit hard, falling well below the USD $21oz mark.

MKS Groups Daily Asia Wrap, which you can read in full here, covered the second leg of the correction well, stating;
“It was another extremely heavy session for gold overnight. After a lethargic Asian session with gold eventually managing to climb through $1310 to $1313.80, strong USD buying across the board on Yellen's comments swept metals lower. Gold fell from above $1310 per-speech through the 100 dma ($1303.70) and again through $1300 where some very large stops from macro names were tripped - similar to the day before through $1310. The yellow metal hit the floor at $1292.60 just above the 50 dma support and 50% retracement levels of the recent June/July uptrend which currently intersect around $1292. Over the rest of the session the metal saw light demand come in but it was only enough to claw back a few dollars before the close. The yellow metal has now declined -3.3% ($45) over the last two sessions with big stops taken out. We feel that there may be additional selling around but for now the worst has likely past. With this is mind going long between $1285-92 (200 dma and 50 dma respectively) we feel could present an attractive opportunity to target a rebound towards $1310. Above this level offers remain fairly thick however. Silver followed gold lower overnight taking its 48 hour loss to -3.5% or $0.78. The white metal however was quicker to snap back from the $20.66 low back towards $20.85. Following the Comex floor close however fresh selling was seen and the white metal closed out the session on a very weak note, just above the intra-day low. Unlike the previous session PGM's were not immune overnight with both plat and palladium suffering losses. The former dropped $18 following Yellen's address and the latter $10 supporting the USD buying across the board.”

In terms of where we are now, the 50 day moving average for gold (around USD $1280) remains supportive, and as long as the market can hold above this level, bulls will have some encouragement.

Should it fail, there is a good chance gold will fall all the way back down to the USD $1250 to USD $1260oz mark. Either way, for those looking to build positions and pick up some more physical metal, either in gold or silver, dollar cost averaging and staggered purchasers would appear the most prudent course of action, as further downside can’t be ruled out.

Commodities Still Best Performers in 2014

Despite the severe drawdown in the past few trading days, it’s worth reminding readers just how resilient gold, and indeed the commodity complex, has been in the past few months, with commodities strongly outperforming equities and bonds.

The following two charts are worth a look, with one showing the returns from the past 6 months, whilst the other shows annual returns going back years. While there is no escaping the difficult period precious metal investors are going through right now, it does pay to remind at times like this, just how solid the bull run has been to date.

First Half of 2014 Returns

Long Term Annual Returns

And whilst this week’s setback has rattled investors (we expect to see significantly reduced bullishness in the gold surveys we review and/or contribute to weekly), it does also pay to remember that if history is any guide, seasonality is on our side over the next two months, with Q3 typically a great quarter to be long gold.

Either way, the reasons to own gold and silver in your portfolio most certainly haven’t dissipated, and if you’re a long term investor like I am, you’ll be sensing opportunity in pullbacks like the one we’ve seen this week.

Fixing the Fix

Over the last few months there has been much noise made about the future of the London Gold Fix, with the Silver Fix up for replacement and questions marks about the integrity of the whole process.

Whilst the Silver Fix will be no more, and a replacement process has now been agreed on, there was an overnight statement from the London Gold Market Fixing Limited (LGMFL) announcing a number of developments in relation to the gold fixing process.

The key part is the decision to appoint a third party to assume responsibility for administration for the London Gold Fixing, but as per the statement in full, which can be accessed here, its still a case of ‘watch this space’ as there are clearly codes of conduct and other policy developments and the like which they’re yet to finalise.

We don’t expect this to have any major implications on the price of gold, but is an interesting development nonetheless, in what is obviously a key piece of the global gold markets architecture as it were.

Some quick comments on the Aussie Economy

There hasn’t been a lot in the way of major economic data out the past few days, but a few things have popped up.

Firstly, the Westpac Leading Index was released, and it showed further deterioration, with Westpac stating that “it is indicating that growth in the Australian economy can be expected to remain below trend for the remainder of 2014 with limited momentum into 2015”.

On a brighter note, we’ve seen dwelling construction continue to improve, with a noticeable pick up in actual construction activity. As has been the case for a little while though, this construction activity is leaning further and further toward apartments rather than detached houses, as sky-high land prices force Australians to economise.

Macrobusiness have a great chart on this, which you can see below.

Finally, it looks as if consumer anxiety levels are rising, with the NAB Consumer Anxiety Index rising to a record high of 64.5 points in Q2 2014, with concerns over retirement funding, health and job security also increasing. Most noticeable was the rise in stress in WA, something we unfortunately expect to worsen in the coming months and years, as the mining boom unwinds.

Must Read of the Week

This is the must read of the week. The Fortaleza Declaration from the sixth BRICS summit, which involves currency swap lines, deeper trade integration, a $100 billion competitor to the IMF and the major point, non-dollar exchange mechanisms.

The full declaration is available here, and is worth reading. 3 billion people, and some of the fastest growing economies on the planet over the past two decades just took a decisive step away from the US Dollar Reserve system.

It’s a big deal, and it’s even more interesting that a google and internet search of major western news outlets reveals very few articles and or reactions published in regard to it.

The Zerohedge website carried a great piece covering the topic, which is available here.

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.