Market Analysis

Gold demand firmer in Q3

Healthy Q3, driven by stronger consumer and central bank buying, helped year-to-date demand recover to pre-COVID norms.

Gold demand (excluding OTC) in Q3 was 28% higher y-o-y at 1,181t. Year-to-date (y-t-d) demand increased 18% vs the same period in 2021, returning to pre-pandemic levels.

Jewellery consumption reached a robust 523t, increasing 10% y-o-y despite the deteriorating global economic backdrop. Y-t-d demand is slightly firmer (+2%) at 1,454t.

Investment demand (excluding OTC) for Q3 was 47% lower y-o-y at 124t, reflecting weak sentiment among some investor segments. 36% growth in bar and coin investment (to 351t) was insufficient to offset 227t of ETF outflows. OTC demand contracted significantly during the quarter, echoing weak investor sentiment in ETFs and futures markets.

Central banks continued to accumulate gold, with purchases estimated at a quarterly record of nearly 400t.

An 8% y-o-y fall in technology demand reflected a fall in consumer demand for electronics due to the global economic downturn.

Total gold supply increased marginally (+1% y-o-y) to 1,215t. A sixth consecutive quarter of y-o-y growth in mine production was partly offset by lower levels of recycling.

Highlights

The LBMA gold price PM (US$/oz) fell by 8% during the third quarter. The decline was largely a response to US dollar strength as the Fed hiked interest rates to combat high inflation. However, the average gold price in Q3 was only 3% lower y-o-y, more closely aligning with the relative performance of demand (OTC inclusive) and supply during the quarter.

Investment demand diverged on differing priorities. Retail investors bought gold as a store of value amid surging global inflation, while ETF investors reduced their holdings in the face of rising global interest rates.

India generated much of the global recovery in jewelry. Urban consumers were the engine of Indian demand in Q3, encouraged by a return to pre-COVID levels of economic activity. Rural consumers were more cautious as their inflation outpaced that of their urban counterparts.

Chinese retail demand firmed as lockdown restrictions eased. Jewelry consumers benefited from a pullback in the gold price as lockdown restrictions eased in key cities. And retail investors were encouraged by gold’s safe-haven appeal amid a depreciating local currency and falling local equity prices.

Silver remains a slow moving, frustrating long position for metals bulls who have remained steadfast over the past two years while watching base metals, energy, ags, and virtually all other commodities explode in price over the past 18 months. Since the price peak in August of 2020, Silver is down almost 20% while the DBC commodity tracking ETF is up 170%. Let’s take a look at the tape. Silver has been flirting will long term support at 21.80 (tested 6 times since the breakout in 2020), and falling resistance from the 2011 high (which it has also tested six times). Within this long, two year price consolidation between long term support and long term resistance, action can be further broken down into response and activity around the 200 day moving average, where price found support in the spring and summer of 2021, broke in July and retested (and rejected) three times throughout the winter until finally breaking through in February. Last week’s sell-off pushed price right to the 200 DMA, where it found support and bounced hard.

Price is now forming a bull wedge, and a breakout of the wedge would likely precipitate a run to falling resistance in the $27 zone. With RSI sitting in the 40s, there is some potential energy in the system for a near term move.

Zooming out, silver looks good structurally. Price consolidation at long term support at 21.80 is clearly visible and forming a two-year ascending triangle. Big picture, the measured move on a breakout above $30 would create a price target right at $49 (at or around prior all-time highs). I view $30 as a key level, because it was the prior high in January 2021. A clean break above that level becomes very bullish.

Conversely, a breakdown below support at 21.80 would be bearish and likely precipitate a price waterfall back into the low teens.

GOLD

It has been awhile since I posted an update on metals, largely because metals have been stuck in quiet consolidation mode until the past week or so. We have been watching falling trend channel resistance on gold for the past six months, and after the double bottom in March around the 61.8% Fibonacci retracement, gold has steadily climbed, recapturing the 200 day moving average for the first time since February 2^nd and breaking out above falling resistance of the multi-month bull flag that commenced with the August ’20 peak. Price action looks exceedingly constructive here, with RSI now in overbought territory for the first time in nine months. Bulls want to see price hold the 200 DMA, or at least stay above 1840. There is blue sky to 1965 if it does.

SILVER

Gold has been the laggard. Higher beta silver, as well as mining stocks, have led the way. Silver broke the 200 DMA in early April, and has once again hurdled the troublesome 25-27 area. Bulls need silver to hold 28.50 for a retest of 30, which it struck twice in the last nine months. A break of 30 should precipitate a swift move to the 161.8 Fibonacci extension at 35, which coincides with the October 2012 peak.

GOLD MINERS

GDX, the Gold Miner ETF, broker falling resistance on the 4^th test back on April 15^th, successfully retested, and has pushed its way back to the 61.8 Fibonacci retracement from the August high. Constructively, price has never fallen into oversold territory from the entire move following the March 2020 low – even during this long consolidation period. We are likely to see some digestion of price at these levels, but a break of 40 should ignite a move to retest the August 2020 high at 45.85.

GOLD

For the past month gold has been trading in a range between 1720 and 1780, struggling to make the breakout leap it seemed to promise the first week of the year. Gnawing at bulls is the fact that every other commodity, like copper, gold, zinc, and others, have exploded higher while gold seems stuck on the launch pad.

It seems to me that gold is leading, not lagging the other commodities. Gold's move in 2020 preceded, and even foreshadowed, the run in base metals and other commodities. Since then, the market has digested those gains while rotating capital into other assets.

This is depicted in the chart via a multi-month bull flag, which is a depiction of sellers taking gains against waning appetite on the demand side. This is healthy, and gold, thus far, remains in an uptrend.

The chart below now has gold coming into multiple support areas: rising trend support from the March 2020 low, falling channel support from the 2020 high, the 61.8% Fib retracement from March trough to September peak, and horizontal support.

Furthermore, sentiment is now at its worst since late 2015 as investors find returns in nearly every other asset class. The situation seems ripe for a rally, and at the very least, risk/reward seems to favor the bulls.

GDXJ - the gold junior mining ETF - is similarly coming into channel support and horizontal support, and price has not been oversold throughout the entire consolidation period. If gold and the gold miners are to rally, this is the area to do so.

GOLD

Metals bulls have been frustrated with repeated attempts to break out of a multi-month bull flag/falling channel. At the turn of the new year, with the presidential election all but behind the country, and with calls for more money-printing and ongoing stimulus, it seemed a given that – like the base metals and energy - gold would break out and follow the inflation narrative to higher prices. And, for three days, that is just what happened, as gold pushed from a 2020 close of $1895 to $1960 in the first three days of the new year, only to sell off hard and fall back below falling trend line support. This was gold’s second pass at $1960, which was the 6.18% Fibonacci retracement from the August high to the November low. As the saying goes, from failed moves come fast moves, and the failed move precipitated a $160 sell-off in a week and a half ($140 of which occurred in the 3 days following the peak). It was a major head fake for bulls and stopped out many traders who bought the breakout. Price also lost the 200-day moving average, which was another warning sign for bulls.

On the positive side, price recently recovered the 200-day moving average, stochastics have turned up, and despite the rapid selloff earlier in the month, the daily RSI never hit oversold conditions. Instead price has been stuck in no man’s land between 1800-1900 per ounce. The next real move can’t begin until gold recovers $1890 to break falling resistance and hurdle the 38.2% Fib retracement.

SILVER & PLATINUM

While gold has struggled, silver and platinum have remained surprisingly resilient. The higher beta cousins of the yellow metal tend to trend with gold, but more dramatically in percentage terms. It would seems both are being supported by the run-up in base metals, as each have industrial properties that are far broader than gold. In fact, on several occasions this month silver and platinum have traded up on days when gold has traded down. Silver remains stuck at long term support between $25-$26, nearly broke rising trend support with intraday dips into the $24 range, only to close above support. It’s now decision time as price is pinching between horizontal resistance and rising support. A key pivot point is $26.07, and a secular breakout occurs above $28.11.

For platinum, $1200 is the key level to watch. As platinum approaches $1200, I would expect to see some consolidation or a pullback as it builds the necessary power to break through long term resistance. This has been the key level since 2014. A break above $1200 opens up a move to $1300, above which would be extremely bullish.

DOLLAR

The recent dollar rebound has been the major headwind for the metals. As I stated in a previous post, the trend remains down and all signs point to further weakness. One final thrust towards 91 seems plausible, but ultimately price seems destined for 88.

S&P 500

The inflation narrative and weakness in bonds have supported higher equity prices. The Nasdaq in particular is an unstoppable train. Equity markets across the globe have been breaking out, and risk appetite is growing. Whatever you may think about valuations and the weakness of underlying economic conditions, all signs point toward higher equity prices ahead. For the S&P 500, 4000 is an important psychological level, with my near term target pushing to 4150.