Best of the Week
Most Popular
1.London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - Nadeem_Walayat
2. Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - Michael_Noonan
3.Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - Nadeem_Walayat
4.Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - Jim_Willie_CB
5.Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - Keith Markey
6.Gold Prices 2014: Do What Goldman Does, Not What It Says - David Zeiler
7.Bitcoin Price Strong Appreciation to Be Followed by Declines? - Mike_McAra
8.Gold Preparing to Launch as U.S. Dollar Drops to Key Support - Jason_Hamlin
9.Doctor Doom on the Fiat Money Empire Coming Financial Crisis - Andrew_McKillop
10.The Real Purpose Of QE - It’s Not Employment - Darryl_R_Schoon
Last 72 Hrs
America has Become a Police State - 19th Apr 14
Elite Herd Psychology And War By Default - 19th Apr 14
E.U. Officially Adopts the Bank Depositors Bail-In - 19th Apr 14
Goldman Sachs Is Highly Motivated To Low-Ball Gold Price - 19th Apr 14
Save MtGox - Bitcoin Important Implications of Going Down - 19th Apr 14
Stock Market SPX Topping Valuations - 19th Apr 14
Tesco Profits Panic! Back to Back £5 Off £40 Shop Voucher Promotions - 18th Apr 14
The Obama Game - Is Putin Being Lured Into a Trap? - 18th Apr 14
The Growing Threat to Capitalism - 18th Apr 14
Build Biotech Wealth on Solid Platforms - 18th Apr 14
Has Solar Power Finally Arrived? - 18th Apr 14
Bank Depositor Bail-Ins and Real Assets vs Liability-Based Assets - 18th Apr 14
10 Ways to Screw up Your Retirement - 17th Apr 14
One of Harry Dent’s Three Keys to Market Prediction is Cycles - 17th Apr 14
Obamacare Proof Stocks - 17th Apr 14
Gold, Silver And The Mining Sector: Prepare For A Severe Fall - 17th Apr 14
Hidden Australian Life Sciences Bio-tech Growth Stocks - 17th Apr 14
Disrupting Big Data Status Quo - 17th Apr 14
What the Stock Market Bears Have Been Waiting for... - 17th Apr 14
Copper Is Pathological and Suffers from SAD, but It Has Value - 17th Apr 14
Old World Order New World Order, Chaos And Change - 17th Apr 14
Even The US Government Will Abandon the U.S. Dollar - 17th Apr 14
Gold - Coming Super Bubble - 17th Apr 14
Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - 16th Apr 14
High-Frequency Insider Trading - 16th Apr 14
Gold Prices 2014: Do What Goldman Does, Not What It Says - 16th Apr 14
These CEOs Will Make Investors Rich - 16th Apr 14
Climate Change, Central Banking And The Faustian Bargain - 16th Apr 14
Every Central Bank for Itself - 16th Apr 14
Social Security, U.S. Treasury Stealing Every Last Penny From Americans - 16th Apr 14
Ukraine Falling to Economic Warfare and Its Own Missteps - 16th Apr 14
Silver and Gold Miners Still Disappoint - 16th Apr 14
Silver, Gold, and What Could Go Wrong - 15th Apr 14
How I Intend to Survive the Meltdown of America - 15th Apr 14
France Wakes Up To The Multicultural Multi-Threat - 15th Apr 14
The Real Purpose Of QE - It’s Not Employment - 15th Apr 14
Peak Coal - 15th Apr 14
Flash Crash, Rigged Markets - What’s the Frequency Zenith? - 15th Apr 14
Forecasting U.S. GDP Growth: A Look at WSJ Economists’ Collective Crystal Ball - 15th Apr 14
Stock Market - Is Something Nasty About to Happen? - 15th Apr 14
How to Trade Your Way To Freedom - 15th Apr 14
Understanding (and Ignoring) the Media Bandwagon Against Gold - 15th Apr 14
When Stock Market Bubble Crashes, Take Refuge in Gold Stocks - 15th Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Changing Gold Demand and the U.S. Dollar Link

Commodities / Gold and Silver 2013 Feb 19, 2013 - 04:29 PM GMT

By: P_Radomski_CFA

Commodities

The World Gold Council published a report last week that raises a few important questions and quite a few eyebrows, so let's examine it.

You can access the report here. We recommend that you read it, but if you're not going to go through the entire report, please just take a look at its first page and the chart with total demand for gold from 2003 to 2012.


The thing that got people concerned is the decline in demand and in particular the decline in the investment demand. First, let's take a closer look at the decline in total demand. The key point here is that it's not the first time that we see a y-o-y decline in demand. We saw the same in 2006 and in 2009. Guess what price did in the following years - 2007 and 2010? It rallied strongly in both cases. In 2007 gold rallied 31% and in 2010 gold rallied 29%. If gold is to close 2013 30% higher than it closed 2012, then the price for the end of this year would be $2,176.

To measure the investment demand we summed up two columns: "total bar and coin investment" and "ETFs and similar" (source: World Gold Council).

total bar and coin investment

The sum of the two has actually decreased for the first time since this bull market began over 10 years ago. Should this be surprising? Investment demand is very different from regular demand for any good. Normal demand decreases with prices as people don't want to buy things that are getting expensive. With investment goods, it's the other way around because investors that see higher prices tend to extrapolate the trend and buy the expensive asset believing that the price will move even higher in the future. Gold price didn't do much in the second half of 2011 and throughout the whole 2012 - it seems natural to expect investors to be discouraged and thus to invest less.

The dip in demand would likely be bigger this year because of the increased demand in India in 2012 due to expected tariffs increase on gold imports this year. Without this "early demand" we would be likely looking at even lower values.

Is that a bad thing? Not necessarily, because this is something that shows that investors' optimism has declined. In the Feb 8 gold article we wrote the following:

We would like to add that the time factor may make this consolidation significant. Less than 40 years ago the correction took gold much lower - about half of the previous high - before the final rally in gold materialized. At this time we think that the prolonged consolidation might have been enough and gold doesn't have to move even lower - the lack of a rally might have been enough to make people throw in the towel.

Lower investment demand indicates just that - lower levels of investor optimism. The data shows that the correction is actually more discouraging and profound than it seems if you take a look at the price only. The decline in investment demand simply confirms that the price may NOT have to move much lower because the damage to the investor sentiment has already been done. Consequently, it's not a bearish piece of information.

Another important thing visible in the report is what we've been writing about for quite some time - that the official sector is now buying gold instead of selling it. While this makes us a bit concerned as the governments tend to be the worst investors, it is a very positive factor for gold in the years to come. Governments may say what they have to say (just what they have always done) but the money will flow in tune with what they really think. And it's flowing into gold and countries are either demanding their gold back (Germany) or seriously considering it.

Since we analyzed the gold charts themselves in our last gold article, today we would like to focus on the currency markets as they seem to exert the most influence on precious metals in the medium- and long term. We'll start with the Euro Index short-term chart (charts courtesy by http://stockcharts.com)

$XEU Euro - Philadelphia INDX

We see that the index declined on Thursday and also earlier this month. These declines appear to be a verification of the reverse head-and-shoulders pattern and the implications remain bullish at this time.

The same can be said about the implications of the short-term trend - the currency remains above the short-term support line.

Let us now move on to the U.S. dollar with the USD Index serving as a proxy here.

$USD US Dollar Index - Cash Settle (EOD) ICE

In the medium-term USD Index chart, we see that significant declines followed the 2012 top. Since then, a prolonged consolidation period has been seen and the period of declines ahead after such a lengthy consolidation could very well continue and complete the head-and-shoulders pattern in the coming weeks. This would have very negative consequences for the dollar.

Now, we'll have a look at the short-term picture of the USD market.

$USD US Dollar Index - Cash Settle (EOD) ICE

Many investors may now be asking themselves, "Will a breakdown be seen anytime soon?" In the short-term USD Index chart, the fact is that we see that a cyclical turning point is coming very soon. With the preceding move to the upside, we could very well see the long awaited medium-term decline begin. With each consecutive attempt to break down below the support line (neck level of the head-and-shoulders pattern), the odds of success increase slightly. It once again seems that a successful breakdown will be seen soon, and the head-and-shoulders pattern will be completed.

Summing up, current situation in the gold market - as indicated by the abovementioned World Gold Council report - seems to be a good foundation for the substantial rally that we believe will materialize in the coming months. Investor's optimism has clearly cooled off and the institutional part of the market carries on buying more and more of the yellow metal.

The overall situation remains bearish for the USD Index even though the index has rallied a bit this month. The weeks ahead will likely see the index level move to the downside. Once the index reverses direction, a bigger rally will likely be seen in the precious metals sector.

To make sure that you are notified once the new features are implemented, and get immediate access to our free thoughts on the market, including information not available publicly, we urge you to sign up for our free gold newsletter. Sign up today and you'll also get free, 7-day access to the Premium Sections on our website, including valuable tools and charts dedicated to serious Precious Metals Investors and Traders along with our 14 best gold investment practices. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Gold & Silver Investment & Trading Website - SunshineProfits.com

* * * * *

About Sunshine Profits

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Przemyslaw Radomski Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014