The Daily Market Report: Gold Rebounds After Testing Range Low
24-Jul (USAGOLD) — Gold dropped again in overseas trading to plumb the recent lows. However, physical buying remains strong and the yellow metal rebound in U.S. trading to probe back above $1,100. Gold is presently more than $6 higher on the day and more than $20 off the intraday low.
The World Gold Council reiterates some of the reasons — which we also noted this week — that the financial press is citing for the drop in the gold price:
• The continued recovery in the US economy, the associated strengthening dollar, and an expected rise in interest rates. This, they believe, represents major
headwinds for gold.
• A slowdown in China’s gold demand.
• The recent broad commodity sell-off, which is itself a result of US dollar strength and concerns over China’s economic growth.
• And in the background, political tensions have eased, as illustrated by the tentative resolution of a Greek bailout.
All of these factors are significant in one way or another, although perhaps not as significant as it is often implied relative to the price of gold. The WGC goes on to explain that in a Market Commentary published yesterday:
• Gold is different from commodities. Its demand drivers are diverse and it has low correlations with commodities and other assets classes.
• China’s gold demand remains in good health. Demand may have eased since the highs of 2013, but its growth trend is intact. Q1 2015 was the fourth best quarter on record and the People’s Bank of China has increased its gold reserves by 57% since 2009.
• Headwinds such as the strong dollar and an expectation of US rate rises are probably overstated. It would be surprising if expectations of a US rate rise were not already factored into the gold price. And despite the US dollar index rising by 12.5% in 2014, the US dollar gold price was flat.
The real reason for recent losses has everything to do with very large sell orders in the futures markets, conspicuously occurring during times of day that have very low liquidity. The WGC calls them “isolated trades” and states that they are “not representative of the broader supply and demand dynamics” in the gold market.
Traders that slam markets with super-high volume at times of poor liquidity “do not shape demand over the longer term.” There actions however, do tend to bring out those that do shape demand over the longer term. Buyers of physical gold have been out in force, taking advantage of the lower prices that come courtesy of the paper market.
The WGC also makes this interesting observation:
This type of speculative trading, which actually broke the market on Monday and caused trading to be halted twice, may actually drive the business that is more reflective of “broader supply and demand dynamics” to the Chinese markets.
This is something that was alluded to by our own Michael J. Kosares in a special report published 2-weeks ago. Kosares notes that in Chinese gold markets “an institution wishing to bet against gold would be forced to do so by delivering the physical metal itself in kilo bar form (the standard trading unit) upon settlement – an expensive and cumbersome process likely to further discourage excessive speculation or attempts at price manipulation.”
“In short, the physical flow of metal – its purchase and sale in real terms – will govern pricing in Shanghai, not leveraged paper trades, as is the case in the West,” says Kosares. Sounds like a much more transparent and ‘real’ market to me.
Be sure to read Mike’s insightful report: The Shanghai stock crash and China gold demand: What it means for the future of the gold market
