Source: Ron Struthers for Streetwise Reports 09/19/2018
Ron Struthers of Struthers Resource Stock Report reviews the current status of the gold market and discusses four gold miners on his buy list.
This is one of the most unusual and interesting gold (GLD) markets that I can remember in well over a decade. There are several factors at play that include:
- Trade war with China becoming a currency war.
- India’s tax situation.
- Commercial traders are net long for the first time in 17 years.
- Gold sentiment at extreme lows.
- Kinesis, a new gold-backed cryptocurrency.
- Year-end is approaching, which is often volatile for gold prices.
- Gold stocks cheaper than 2015 bottom.
In January, the Trump administration began imposing tariffs on various products and countries that intensified a trade war. On July 6, when the U.S. imposed tariffs on China the trade war escalated further and started to become more of a currency war. The yuan to US$ exchange rate was already falling in 2018 and dropped further after the July 6 announcement (I have July 4 highlighted on the chart). In essence the devaluation offset the tariffs.
Simultaneously, China has been using its US$ reserves to buy cheaper US$ priced physical gold to maintain the CNY to Gold peg. This helps facilitate yuan-based oil purchases because oil producing states can immediately convert their yuan to gold through the Petro/Yuan futures contract. This is resulting in more physical demand for gold from China that will rival the 2013 highs. This graphic using World Gold Council data shows China on track to hit 1,000 tonnes this year and with demand picking up in the second half of 2018, it should come out above 1,000 tonnes.
While demand from India, the second largest consumer, looks soft, it does take into effect smuggling and a tax loophole. Gold is subject to a 10% import tax, but if doré bars (not pure or refined) are imported, the tax is avoided is how I understand it. The import of doré bars removes supply to refineries elsewhere. In 2016, the World Gold Council estimated smuggling into India amounted to 120 tonnes.
Many gold traders, including myself, watch the weekly COT Report. Typically the Commercial traders are short gold and Managed Money is long when gold has rallied. Commercials will typically trigger gold to fall through support levels and as Managed Money sells, the Commercials buy to cover their short position. Once the Commercial short position is very low, gold rallies and the process repeats. Some call it the rinse and wash cycle. It is very unusual to see Commercials with a net long position, but we have that now for the first time in 17 years. This is very bullish as the Commercials are considered the smart money.
On the gold chart, noted with the arrows, the COT is more bullish than the December 2017 low and even the bear bottom low of December 2015 (not shown here). I also note with the circle an almost perfect morning doji star reversal pattern. These are strong reversal signals and I would now like to see a break above $1225 as further confirmation of the August bottom.
There is also a new bullish factor in the market that might be as significant as when numerous gold ETFs arrived in 2004 to 2010 that helped propel gold to the 2011 highs. The latest scheme is a gold-backed monetary system cryptocurrency called Kinesis.
There have been some other gold-backed cryptos helping to draw mainstream attention to gold as a safe-haven asset, but it is important to differentiate what Kinesis is. Not only does the Kinesis currency provide a yield, but Kinesis defeats Gresham’s Law, which no other gold-backed cryptocurrency does. In fact, Kinesis isn’t just another a cryptocurrency, it is actually 100% physically backed digital gold trading via blockchain.
Kinesis was born from the team at Allocated Bullion Exchange (abx.com) who operate an institutional exchange in spot physical precious metals, with partnerships with Deutsche Borse, government postal systems and many others. The physical metal holdings will be inside the ABX secure quality assured environment. The ICO will be the largest in history and was launched September 10 ending November 11. So far there is over $57 million in sales in just the first few days from launch.
This next chart I start dragging out every year in the fourth quarter and we are close enough. Gold has seen weakness in December in every of the last 10 years. I did not update the chart as it just shows an estimate for the 2017 bottom. We know from the chart above that the December 2017 low was about $1260. It begs the question: Will gold drop to new lows in December 2018? I would be very surprised to see a lot more weakness with the current COT positions. I believe the most likely scenario is a rally to around $1280 to $1300, topping out in October or November sometime, and then a drop back down in December or this year is different.
There are a number of indicators I point out above that could tighten the physical market in gold. There are also a number of other positive fundamentals. A Fed rate hike is baked in for the September 25–26 meeting. Gold has most often been weak ahead of the rate hike and rallies after it is announced. There are still tensions in Iran and the ongoing trade disputes that could spur a flight to gold. Uncertainty leading up to November mid-term elections. September and October are historically the most volatile months for the stock market. September has been good so far, but maybe October will get ugly and gold will benefit as a safe haven. All said, what I see as the most bullish factor is how cheap and oversold gold stocks have become.
On this HUI (NYSE Arca Gold BUGS Index) chart, the stocks …read more
From:: The Gold Report