-- Posted Friday, 21 June 2013

Today’s AM fix was USD 1,290.25, EUR 976.28 and GBP 833.33 per ounce.
Yesterday’s AM fix was USD 1,303.25, EUR 986.34 and GBP 842.38 per ounce.

Gold plummeted $72.50 or 5.37% yesterday and closed at $1,278.50/oz. Silver dipped to $19.59 and finished down 8.01%.

Gold and silver have rallied from their lowest levels since September 2010 due to increased physical demand in Asia and notable Chinese buying.

Gold is down 5.8% this week and set for its worst week since September 2011.

Precious metals, commodities, stocks and bonds all fell sharply yesterday after the Federal Reserve signalled it may reduce their massive monetary stimulus if the economy recovers.

Risks of a credit crisis, a ‘Lehman Brothers’ moment in China and renewed concerns about Greece and the Eurozone also contributed to liquidations in all markets.

These risks will support gold in the coming months but yesterday as is often the case, hedge funds, banks and more speculative trading types sold en masse. Once support at $1,340/oz was breached stop loss orders were triggered leading to gold quickly falling to the $1,300/oz level.

Gold Resistance and Support Chart – (GoldCore)

There were no reports of significant physical selling yesterday by investors or central banks. Indeed,

Russia's Central Bank announced that they had bought another 200,000 ounces and their gold reserves rose month-on-month to 32.0 million ounces as of June 1 from 31.8 million ounces a month earlier.

Gold was also hurt by the CME’s move to raise initial margins for Comex gold after prices plunged. The exchange operator raised Comex 100 Gold Futures initial margins for speculators by 25% to $8,800 per contract from $7,040.

Gold’s Fundamentals
The price drop has again led to increased demand in China and much of Asia. Reuters report that traders say that China “snapped up bullion at lower prices.” In Thailand, gold shops on Bangkok’s Chinatown saw huge demand as people rushed to buy gold at bargain prices (see photo).

As gold prices in China have dropped continuously in the past week, the volume traded in the Shanghai Gold Exchange climbed to a one month high on Wednesday. Volume for cash bullion of 99.99% purity on the Shanghai Gold Exchange climbed to 21,776 kg yesterday, the highest level since May 24, vs. 19,175 kg on June 18, according to Bloomberg.

People flock to buy gold at a shop at Yaowarat, Bangkok’s Chinatown, after the gold price fell below Bt20,000 per baht weight (15.2 grammes) yesterday

Gold brokers internationally report that there were more physical buyers than sellers yesterday. It will be interesting to see if this is the case again today. If so, it will suggest that the weak hands have already been shook out of the physical market and remaining gold owners are very much focussed on the long term.

China is poised to pass India as the largest bullion buyer as early as this year. This is because India raised import taxes while Beijing made investing easier according to the China Gold Association.

China approved its first two domestic exchange-traded products backed by the metal this month while India raised levies to curb demand that is feeding a current-account gap. The two countries account for more than half of global demand.

China surpassing India as the largest buyer of gold is an important development as the per capita consumption of 1.3 billion people continues to increase from a near zero base. This is because gold ownership was banned in China from 1950 to 2003.

Some of the smartest money in the world continues to accumulate gold and ignore the considerable noise coming from banks and the Federal Reserve.

Respected Jim Rogers bought gold yesterday. In an interview published overnight with Hard Assets Investor he said:

“I bought more today, as a matter of fact … I bought a little bit, not much, over the last few days in case this was the bottom. I would not be surprised if there's another chance to buy lower later on, but I'm buying and I own it. I haven't sold any.”

Gold’s Technicals
Gold is now oversold on a host of benchmarks and gold’s 14-day relative strength index is at 29.4, below the level of 30 that indicates to some analysts that gold is in oversold territory and a rebound may be imminent.

Technically gold looks very negative however and gold’s short term trend remains down and momentum could lead to gold testing support at $1,200/oz.

Indeed, as we warned back in July 2011 prior to gold reaching its record nominal high of $1,915/oz, gold could fall to $1,000/oz prior to resuming its bull market and in time surpassing its inflation adjusted high of $2,400/oz.

Bull markets see price resistance turn into price support and the resistance seen at $1,200/oz in 2009 and 2010 may now become support (see chart).

A worst case scenario could see gold test support at the previous resistance of $1,000/oz level seen in 2008 and 2009.

Gold in USD, 1970-1980 – (Bloomberg)

It is always worth looking at gold’s last bull market in the 1970’s when gold rose from $35/oz in 1971 to over $183/oz by January 1975. In the next 21 months, gold fell in value by nearly 50% to $104/oz by late August 1976.

This led to many pronouncements that gold’s bull market was over and the bubble had burst.

In the next 40 months from August 1976 to January 1980, gold rose 8 fold from nearly $100/oz to $850/oz.

Cross Currency Table – (Bloomberg)

Conclusion
The macroeconomic and monetary backdrop remains favourable and this is leading to still robust physical demand globally. Currencies are being debased globally and inflation is an increasing problem especially in emerging markets.

The Eurozone and indeed global debt crisis is far from over and is likely to return with a vengeance soon, as the root causes of the crisis, too much debt, have not been addressed. Indeed, in many cases they have gotten worse with many national balance sheets deteriorating by the month.

We believe that this long and brutal price decline, which we flagged, will in time be seen as a long period of correction akin to that seen between January 1975 and August 1976.

History does not repeat but it very frequently rhymes – to paraphrase Mark Twain.

Smart Asian, western and global money continues to accumulate gold on the dip.