The Daily Market Report: Gold Undervalued at Low-End of Range

17-Jul (USAGOLD) — Gold slid in early New York trading to register a slight penetration of the range low at 1131.15, marked by the November 2014 low. Heightened rate hike concerns and a lower than expected rise in “official” Chinese gold reserves have conspired to weigh on the yellow metal.

Reports suggest there was a huge $1.4 bln notional sell executed in the futures market. That would be in excess of 12,000 contracts. If this is accurate, gold actually absorbed the sell pretty well!

China released its long anticipated update to its gold reserves today. China now holds 1,658 metric tonnes of gold in reserve, a 57% increase over the 1054 metric tonnes it has been reporting since 2009. This was well below even the most conservative estimates, which ranged from 2,000MT to in excess of 3,000MT.

Obviously, China has been underreporting their gold reserves for six-years and they may well still be doing so. Perhaps the intent here is to release these data a little more frequently and bring it up to reality gradually, so as not to completely disrupt the market.

Jim Rickards said this morning that China was releasing just enough information to appease the IMF. Zerohedge on the other hand, suggested the release comes now because it is an exercise to see if it will have any stabilizing influence on volatile Chinese stock market. The implication being, that they will reveal that reserves are actually larger if stocks remain under pressure.

Even if today’s report actually represents something close to the truth, it suggests to me that China will continue to acquire gold for some time to come. Even with the 57% increase in gold reserves, gold as a percentage of total reserves actually dipped modestly. They still have a ton of reserves in dollars that they are still probably very interested in diversifying out of.

A strong U.S. housing starts print and another uptick in CPI lends to support to those expecting a Fed rate hike this year. Even with today’s announced uptick in inflation, which was in line with expectations, the annualized rate is a meager 0.1%. Nonetheless, the monetary policy hawks will make hay with the fact that this number is no longer negative; even if it is well below the Fed’s target.

Earlier this week, a BofA / Merrill Lynch survey of fund managers showed that there is a belief that gold is undervalued. This is the first time fund managers have thought so since 2009. At the time the survey came out, gold was trading around 1155.00. If the yellow metal was undervalued at that level, it’s a steal $20 lower!