March 2014 – Week 1 Edition
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Gold shot up above $1350 on Monday, March 3, after tensions escalated in Russia's conflict with her southern neighbor (who was previously a captive member of the Soviet Union), Ukraine, which is also the pathway for much of Europe's energy supplies, so oil is rising too - though not as fast as gold. I also heard some indications last week from new Fed Chair Janet Yellen that she might slow the "tapering" of the Fed's money-pumping policy of "quantitative easing." This combination of a slowing U.S. economy and rising tensions in Eastern Europe caused gold's sharp rise, vs. smaller upward moves in silver and oil.
Barron's Author Slams Gold - Even While Russia Invades Ukraine
Saturday morning's edition of Barron's slammed gold in their Commodities Corner ("The Gold Rally's Fatal Flaws" by Tatyana Shumsky), even while Russia's Vladimir Putin was sending troops to occupy the Crimean peninsula (including the warm-water port of Sevastopol) in supposedly-sovereign Ukraine. In essence, the Barron's author seemed unaware that the Ukraine crisis was already brewing. Sometimes, analysts just look at a chart or local market dynamics, while ignoring the big, bad world around them.
Barron's article begins, "Gold has staged an impressive rebound in 2014, but few market watchers expect it to last." That's her first mistake. Which "few market watchers"? Those in New York City, or the wide variety of gold analysts around the world, most of whom expect the price to rise. She bases her analysis on two pillars - tighter monetary policy and "cost-sensitive gold buyers in emerging markets." However, Janet Yellen (the "Queen of the Doves") has indicated she might slow the tapering of monetary easing, and the Federal Reserve has already expanded its balance sheet five-fold (from $810 billion to $4.16 trillion) in the last six years. Slowing that expansion rate is still highly inflationary and positive for gold.
As for global buyers "slowing down" their purchases, she needs to take a trip to see these global markets. Gold imports to China rose 326% in January 2014 vs. January 2013. All around the world, gold is seen as a safe haven from depreciating currencies. The Chinese yuan fell 1% last week, as Beijing wants a weaker currency to spur its exports. Over one billion Chinese citizens want protection against a falling currency and a weak, unreliable banking system. The Argentine peso is off 21% so far in 2013, while the Russian ruble and Ukrainian hryvnia are collapsing this week. Gold is the world's cash refuge in times of crisis.
Amazingly, The Same Author Wrote "Gold Bugs Return" in Friday's Wall Street Journal
Amazingly, Barron's gold author Tatyana Shumsky was credited as co-author (with Ira Iosebashvili) in Friday's Wall Street Journal article that was bullish on gold: "Gold Bugs Return after Last Year's Rout."
The Journal article begins: "Investors are buying gold again. Gold is up 11% this year and wagers on rising prices are at a four month high in the futures market. This month, investors were net buyers of SPDR Gold Shares, the biggest exchange-traded fund that buys gold, for the first time since December, 2012." Specifically, the Journal says SPDR Gold Shares (GLD) added 10.54 metric tons* to its gold holdings in February. That's a comparatively small increase, vs. the total 552.6 tons unloaded by this single ETF last year, but it's a welcome new trend. (Total gold ETF sales reached 881 tons in 2013.)
Gold's 7% gain in February marked its best month since July, 2013. A lot of February's buying was related to 2013 tax loss sales. (The IRS's "wash rule" requires that investors wishing to take a tax loss may not buy back the same investment within 30 days.) To lock in their 2013 tax losses, many GLD investors sold their shares in late December, pushing gold down to $1182 on December 31. Then, some of these same investors bought these same gold ETF shares back after 31+ days, i.e., in February 2014.
The Journal also shows that investor's "net bullish bets on gold" reached 90,942 contracts for the week ending February 18, a 31% rise from the previous week. Then, on Monday, March 3, we learned that gold investors were even more bullish in the following week. For the week ending February 25, bullish trading positions were at their highest level in over a year. The "commitments of traders" data from the Commodity Futures Trading Commission (CFTC) says that net long (bullish) gold futures and options positions on the COMEX came to 113,911 contracts, a 64% two-week increase, and the most bullish position on COMEX since the week of December 11, 2012. The bulk of the most recent increase comes from "short covering" (former bears covering their short bets). Last December, there was a 3-to-1 ratio of shorts to longs - with 26,700 "long" positions vs. 80,000 "short" lots. That was the highest number of short positions since 2007, when gold was around $700. (Both times turned out to be excellent buying opportunities.)
*A metric ton (or tonne) equals one million grams, or 2205 pounds avoirdupois, or 32,150 Troy ounces. In this report, when I use the American spelling of "tons," I am referring to metric tons, or tonnes.
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