Gresham’s Law says buy the dip
Nervousness in precious metals is not going to stop the gold and silver bull market. Underweight portfolios are beginning to drive prices through ETF accumulation.
ALASDAIR MACLEOD
This week, Friday’s selloff continued with both gold and silver drifting lower.
In European morning trade today, gold was $4065, $295 lower than last Friday’s close, and silver at $48.10 was down $4.30.
On Comex, silver’s volume dwindled while in gold it merely declined.
This one-week selloff appears spectacular but should be observed in the context of the previous rise.
If support at $4000 fails, the gold chart suggests that support will then be found at about $3750, when the price should coincide with the rapidly rising 55-day moving average.
Silver, being more volatile on charting grounds should be the weaker of the two in this scenario.
But silver is still in backwardation, though the disparity between spot and the active future has declined to about 20 cents, suggesting some temporary supply has reached the London market.
What happens in the short term is probably in the hands of ETF buyers.
India has been a strong source of silver demand, with major ETF providers suspending share creation for lack of supply.
It is estimated that about 80% of LBMA vaulted silver is ETF stocks, leaving a theoretical float of 160 million ounces.
But much of that is bound to be owned by industrial corporations, needing it for manufacturing.
On Comex, at first glance silver stocks appear much healthier at 500moz:
The problem Comex faces is stand for deliveries, which so far this year total 386 million ounces.
How much of that remains in the warehouse system is unknown but is likely to be a fair chunk.
The point is that while there is some liquidity available backing Comex futures, it is probably not as great as the warehouse numbers suggests.
Gold ETFs are beginning to gather pace, as our next chart from the World Gold Council demonstrates:
According to the WGC, net inflows in September were the strongest on record.
This is probably the best indicator of what’s happening, as underweight portfolios reassess their exposure to gold.
October’s inflows could turn out to be even more spectacular, despite the mid-month correction.
We know the current price dip is short-term because pressure on the Fed to reduce interest rates is increasing.
Even though government statistics are not being produced due to the US government shutdown, there are other indicators which suggest that the US is heading for recession, the most important being the Fed’s Beige Book.
According to the Fed’s Beige Book released last week, “…three districts reported slight to modest growth, five no change, and four a slight softening”.
The relevance of the Beige Book is that it informs interest rate policy, confirming further cuts.
Note that gold took off when the Fed last cut its funds rate in mid-September, rising $800 at one point.
And for much of this year, this cut was discounted by markets, particularly since August when gold broke up out of a four-month consolidation to rise by over $1000 from mid-August.
It was about then that markets began to discount a September rate cut.
We now have confirmation from the Beige Book of growing certainty that the Fed will abandon its inflation target, shifting to its full employment mandate to prevent the economy stalling.
The signal to the market is therefore clear: continue selling the dollar and buy gold.
In summary, the next phase of gold’s bull market is likely to be driven by portfolios buying despite the dip, mainly by accumulating ETFs.
In silver, there is the additional factor of industrial demand which will keep the free float of bullion tight.
Traders can take their chances, but hoarders mindful of Gresham’s Law (bad money drives the good out of circulation) will rejoice at the opportunity to continue stacking.
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