Gold continues to surprise to the downside on the COMEX and the futures markets in spite of huge physical demand, increasing supply issues and surging premiums on bullion products.
Speculative paper players using huge leverage continue to exit positions for the relative safety of cash due to margin calls on other bets and some investment banks continue to short gold despite the incredibly strong fundamentals for bullion itself. Once the AM and PM gold fixes for physical bullion took place yesterday (at $772.25 and $755.25 respectively) gold was again aggressively sold short by some US investment banks. The selling is very determined and suggests that there is a strong desire not to have gold surging back above $800/oz.
Gold remains extremely oversold as evidenced in the commitment of traders report (COT) which shows that open interest has recently dropped to just over 300,000 open contracts from a record of 490,000 contracts last October. This is due to the relentless unwinding of long positions by speculators in the massive deleveraging seen in recent months.
However, the unwinding of leveraged positions and short term manipulations by the leveraged paper players will prove to be just that – short term manipulations. The laws of supply and demand will triumph over the irrational casino type behavior seen in the gold market in recent weeks.
The laws of supply and demand will result in sharply higher bullion prices in the coming weeks. Already the premiums on one ounce gold coins and bars are as high as 15% – if the coins or bars can be sourced at all. Silver coins and bars are attracting even higher premiums of as high as 50% to 100% as there is little or no supply of 1 oz, 10 oz and 100 oz silver products. Only 1000 oz silver bars are available and even they are seeing their premiums rise.
(Please click here to view the Performance Table in US dollars for comparison)
Investors are increasingly wary of high risk, new fangled and complex financial derivative products designed to make large returns. Return of capital is now more important than return on capital.
Wealth accumulation is rightly being shunned in favour of wealth preservation and bullion and those investors who have wisely diversified into bullion will be the beneficiaries of this in the coming weeks.
Investors want hard tangible assets in their portfolio that have little or no counterparty risk and cannot collapse in value in a matter of days as many share prices have done in recent weeks. Systemic risk also has savers concerned about the security of their deposits despite recent government guarantees. The counterparty risk posed by spread betting companies and CFD providers is now being reassessed.
Gold is Up 12% while S&P is Down 37% Since Credit Crisis Began
As expected, the finite currency that is gold has held up better than any of the commodities. Gold had fallen about 32% since hitting a record nominal high in March, compared with a 57% decline in oil, 54% drop in copper, and 65% decline in platinum. Stock markets have not fared much better than commodity markets in the last year with declines of between 35% and 50% seen on the major international indices.
The Performance Table above and the table below (Physical Gold Versus the S&P 500) conclusively show how gold has acted as a safe haven in recent months and gold will continue to act as a safe haven in the medium to long term as it always has.
Physical Gold Versus the S&P 500
The table above is a clear example of gold’s historic role as a safe haven asset in times of economic uncertainty. It shows the industry performance of Physical Gold Versus the S&P 500 during eleven stock market declines of 15% or more in the Post-War period (since 1946).
Since August 2007 gold has risen from $650 to $730 today or more than 12% and the S&P 500 has fallen by 37% (1500 to 954). Other stock market indices have fallen by much more.
This is clear evidence if any were needed of gold’s role as a safe haven in a properly diversified investment portfolio.