Why is Gold Trending Lower?
Commodities / Gold & Silver May 30, 2007 - 01:18 PM
Gold and the HUI have been trending down. I hear various reasons proffered about why – central banks are selling – that is why gold is down – etc. Indeed, the Spanish central bank has sold 80 tons of gold in the last two months because they are seriously low on foreign reserves. That is another story.
But, I see very good macroeconomic reasons for gold to be tepid and down now. In fact, things like what the USD does are far more weighty to gold, than temporal central bank selling of gold. True, 40 tons is a lot, but compared to the financial mass of the USD for instance, that is literally a drop in the bucket.
One major force driving gold down now is that the USD has begun a short term strengthening trend. I have written about this to subscribers for three or more weeks now.
And, as an example, I had sent out an alert last week that gold was testing 660, and looking lower, then two days it broke below that, and now sits just near 650.
What is happening is the USD is in a rising trend, after it bounced at 81.5 on the USDX. Previously it had been falling the month or so before, and gold had threatened to get $700.
But, (now) 80 is supported on the USDX. I had expected the USD to begin its rising trend weeks ago, and called it right when the turn came. I expected that to cap gold's rise below $700 then. Since that call, gold has now dropped to the 650's.
The weight of the USD is so immense in the financial world, that any trend changes in the USD will greatly affect gold. This being the case, and the fact that the USD is clearly now in a short term rising trend, we have little further to look for where gold is headed near term- basically inverse to the rising USD at this time. Speculators are looking primarily at the recent trend change in the USDX to upward and gold is suffering.
Now gold and the USD are not always inverse, but, at this time they are. Oil is also flagging a bit, and that combined with some lessening geopolitical tension with Iran (a situation that changes every week) combined to pull gold well below that threatening $700 peak a month or so ago.
Macro economic factors are what matter
In short, the macro economic factors, something I focus on, are what drive gold. The other typical proffered gold factors, such as central bank selling, gold manipulation, and such, are short term factors. They are not primary drivers of the gold price. I also do not use charting much, but see things such as the movement of the USD and oil, or copper prices, as far more important to the gold price. The same factors are not always the prime gold mover. They switch. I try to focus on what is changing in that regard.
Compared to my research intensive macro economic approach, something like charting is more past looking. I believe that charting is by nature a past centric method. It has some merits, but, even though I have a BS in Math and could become a very good chartist, I choose the far harder macro economic approach.
Gold and copper
Continuing the discussion of the present gold price, another significant factor is that copper has really flagged. The HUI has closely tracked coppers fortunes lately. There are reports that China manufactures are dishoarding copper right now, one reason being that prices are high and new supplies are coming online. Another, and more significant, implication of Chinese dishoarding of copper is that they may actually be seeing some decline in manufacturing demand. This is something we will want to follow closely.
I don't expect we will hear of any slowing in the Chinese industrial sector from the financial news first. I expect to see data like copper inventories tell the story before anyone gets the picture out. Chinese economic statistics are very undeveloped. In many cases, no one really knows what is happening in any specific sense there. We will find out what happens in China well after the fact.
And that means, if there are any signs of slowing there, probably the first places to look for that data is in demand for industrial commodities, like copper.
In any case, gold and the HUI are following the fortunes of copper closely right now. I suspect that gold and copper are foretelling of some economic slowing occurring in the world. Now, against this view, is the manic attitude that the world financial press has about the future of the stock markets here and abroad. Aside from the fact that everyone knows the Shanghai market is out of control, pretty much everyone seems to be thinking we are in for a big world stock boom – perhaps after a small correction.
But, I have to say, I do not believe that. Perhaps some other things are more indicative of the truth, like falling prices for some key base metals like copper. Copper is used in just about everything imagined, and is considered a leading economic indicator because of that. The present euphoria in the financial press and market sentiment is just a big smoke screen in my opinion- that one should look beyond.
I am a long term gold bull – but objective about it
I am a long term gold bull – in the sense that I firmly believe that we will need it to help protect from a coming USD crisis in a number of years. However, I also write dispassionately about the gold complex, and use macro economic analysis to back up my thinking. Prudent Squirrel subscribers have been well aware of gold's recent down leg for over a month, and have anticipated its fortunes in advance by a week or several days with email alerts I put out as needed.
Here is an excerpt from the latest Prudent Squirrel newsletter discussing gold that was published Sunday:
Gold is still showing weakness. I had put out alerts that $660 was breaking down, and we indeed saw gold breaking to the low 650's two days later. I have noticed that gold is showing lower highs and slightly lower lows. It is trending down. This has happened long enough to take out a significant amount of speculator interest. There has been a 25% decline in gold investor interest in the first and second quarters of 2007. GLD and ETFs have sold off 16 tons in roughly the last week. The weakness in copper and some of the other base metals appears to be from speculators taking at least a cautionary note on them as well. Some metals, like uranium and aluminum, have gotten a boost again, but, frankly, speculators are taking a serious look at metals right now - and are tepid at best about them. IF this continues, absent some geopolitical disaster which can always appear out of nowhere, gold (and precious metals) could continue a moderate decline for a time. This is not to alarm you, because I have felt that speculators have just added a lot of unwelcome volatility to what is really a monetary commodity - gold. The only people who should be overly concerned about the weakness in PMs right now are people long in futures and other paper gold. If you are in gold and such for financial safety - longer term- then the price swings we are seeing are not yet cause for alarm. There is also an absence of Indian physical demand. That will continue for a good time because the main buying wedding and holiday seasons are past. India is the largest buyer of physical gold for jewelry and such.
The HUI has taken quite a beating since April. If the USD continues to hold above 82.5, and even rise, gold and the HUI are likely not finished drooping. I suspect that the USD has begun a short term small move to the upside - and hazard a guess it could eventually get to as much as 84 or 85 on the USDX in the coming months. This may not last long, but appears to be in the cards. Speculators will continue leaving the gold complex if the USD continues its small rising trend…
The Prudent Squirrel Newsletter is my macro economic gold commentary. Subscribers get 44 issues a year published Sundays and mid week email market alerts.
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By Christopher Laird
PrudentSquirrel.com
Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.
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