miércoles, 17 de diciembre de 2014

miércoles, diciembre 17, 2014
Gold And Silver: Physical Demand Is A Signal Prospects Are Looking Up

 by: Andrew Hecht            
             

Summary
  • Gold is stable on the year.
  • Silver is showing signs of life.
  • An inverse correlation - gold versus the dollar.
  • Physical demand.
  • Hard assets and real money.
Precious metal prices moved higher across the board last week. Gold moved $32.10 higher on a week on week basis while silver gained 79.9 cents per ounce. Even platinum and palladium were up on the week, finishing $12 and $13.85 better, respectively. All eyes in the commodity market focused on oil, which continues to sink, losing another $8.03 or 12.2% on the active month January NYMEX futures contract for the week. Perhaps precious metals took a lead from the US dollar index, which finished last week around 1% lower after running into some long-term resistance.

Gold is stable on the year

As this year is almost over, it is highly likely that the high and low is in place for gold in 2014. Gold closed 2013 at $1238.60. It traded to a high of $1392.60 during the week of March 17 and a low of $1130.40 on November 7. As of the close of business Friday, December 12, gold is down 1.3% on the year. It has been a quiet year in the gold market.

Recently interest in gold has been decreasing, perhaps due to the intense daily action in crude oil.

(click to enlarge)

As the chart illustrates, gold has made a nice recovery since making the lows for the year in November. Since the bullish key-reversal on November 7, gold has made a series of higher highs and higher lows. There were many shorts in gold prior to the reversal. Open interest data (the number of open long and short positions) shows that the majority of those shorts have closed their positions.

Open interest now stands at 368,521 contracts, the lowest since September 1, and has dropped by 21.4% since November 21.

With all said and done, thus far in 2014, gold has been stable; it has held its value.

Silver is showing signs of life

Silver is another story. So far, silver has had a rough time in 2014, mirroring action in many other commodity sectors. Silver closed 2013 at $20.211 and as of the close of business Friday, December 12, is down 15.6% for the year. Silver traded to a high of $22.20 in late February and a low of $14.155 on December 1. Over the past five weeks, silver has made a series of bullish key reversal patterns on the daily chart.

(click to enlarge)

Silver, like gold, has made an impressive recovery from the lows. Silver has rallied from a low of $14.155 two weeks ago and closed Friday 20.5% above that low. Like gold, the silver market had numerous shorts looking for lower prices. Open interest is currently at 147,536 contracts, which is the lowest since May and 15.6% below the level on November 21. Those shorts closed positions during the recent rally.

Silver has had a tough year in 2014, but recent action has invigorated the market. A close above $16.69 at the end of this month will signify a bullish key reversal on the monthly chart, a bullish long-term signal.

An inverse relationship - gold versus the dollar

Historically, gold has an inverse relationship with the US dollar. When the dollar appreciates relative to currencies like the euro, yen, Swiss franc and others, the dollar price of gold tends to decrease as the price of the yellow metal in other currencies appreciates. Interestingly enough, this year gold has remained stable, down only 1.3% while the US dollar index is up 9.4% on the year. While gold is down marginally in dollars, it is up 7.7% in euros thus far in 2014.

Gold has shown incredible resilience in the face of a rallying dollar in 2014, perhaps signaling intrinsic strength. Gold has also displayed strength this year when compared to the performance of other precious metals and commodity prices in general. Platinum is currently trading at a $10 premium to gold. At the beginning of 2014, platinum was at almost a $180 premium to gold. The decrease in platinum's premium points to relative strength in gold.

Finally, the silver-gold ratio closed 2013 at 61.5-1, or 61.5 ounces of silver value in each ounce of gold value. That relationship is currently trading at 71.67-1 in another testament to gold's fortitude.

Physical demand

Physical demand is always a key indicator of the price direction for precious metals. There are some signs that demand for gold and silver is starting to percolate.

The Indian government recently lifted restrictions on gold imports, which will surely cause a pickup in physical buying. There has been good and steady official sector buying in gold in 2014. According to the World Gold Council, "signs are that 2014 will be another solid year of strengthening reserves with gold." The Russians have been notable official sector purchasers.

This makes a great deal of sense given sanctions levied on Russia by the US and Europe. I sense that given these sanctions, it is not just the Russian Central Bank buying gold. The ruble has moved 77% lower since the beginning of 2014 on a confluence of events. Sanctions coupled with dramatically lower crude oil prices, the Russian economy is highly dependent on crude oil revenues, has caused the currency to tank. Fearing further devaluations and the potential for hyperinflation, I suspect that Russians will be exchanging their rubles for as much gold as possible. The Russians are scrambling to put assets into stable vehicles.

Finally, lower crude oil prices are a shot in the arm for China, which has been suffering from sluggish growth in 2014. Any pickup in the Chinese economy will increase demand for physical gold.

Silver demand has been strong lately. Sales of silver eagle coins have set a record in 2014.

Additionally, silver ETF products have been attracting investors lately. Low prices in silver generally attract bargain hunters who look to add to physical holdings as prices move lower. Silver demand earlier this month spiked as prices rejected lows at $14.155. Rising industrial applications for silver also promise steady future demand.

The global picture for physical gold and silver demand looks good.

Hard assets and real money - fundamentals

It has been a rough year for commodities. Prices for crude oil, iron ore, grains and other raw materials have moved dramatically lower. The US economy has seen a nice rebound in 2014.

Europe has been a completely different story. European economies have deteriorated. Greece is on the verge of a major default. Fitch just downgraded France's debt this past Friday. Europe's traditional trading partner, Russia, is under myriad sanctions, which has had a negative effect on European trade.

Although the dollar is strong, interest rates around the world remain low, as fears of deflation have gripped Central Bankers. The prospect for a continuation of low yields is excellent going into the New Year. This is a positive for precious metal prices.

Gold and silver are hard assets; they have intrinsic value and they have been a means of exchange for a much longer time than any paper currency currently used in the world. In a world with so much uncertainty and tension, the prospects for gold and silver going into 2015 look better than they have in some time. Gold's stability and silver's recent rebound could be signs that these metals will reassert themselves in the coming year. Watch silver, it led gold down in 2014 and a close above $16.69 at the end of this month will present a bullish technical signal that will carry the metals into next year on a positive note.

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