Old blog: Market News

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.

On the topic of future inflationary or deflationary expectations, there are strong fundamental arguments on both sides. In my simple interpretation, the deflationary camp (dollar bulls) make the case that the economy remains fractured, entire industries are being undermined by the pandemic, there is high unemployment, the personal savings rate is up, the stock market is at stretched valuations, the housing market is approaching bubble territory, and the demand for US dollars remains the prevailing undercurrent of international trade. The Fed, despite its best efforts, cannot seem to meet its inflation target. Further economic weakness or perhaps a market crash would incite a flight to liquidity, demand for dollars to meet debt obligations, and broad debt defaults, further tightening the monetary supply. A strong dollar generally weighs heavily on the price of precious metals, particularly in short-term liquidity crises, and creates the potential for a near term headwind on metals prices.

The inflationary camp argues that the Fed – and policymakers – have shown their willingness to do “whatever it takes” to prop up the markets and inject unfathomable amounts of liquidity into the system. There is seemingly no limit to the tools available for this purpose, as we have seen direct stimulus injections into personal bank accounts, Federal programs such as PPP, and other fiscal interventions. In theory, a $1,200 stimulus check could be a $12,000 stimulus check or a $120,000 stimulus check. The government can continue to print, and can even choose to monetize the national debt.

As a technical analyst, these theories are beyond my capability to fully comprehend in whole or predict with any accuracy. I simply look at the charts to determine primary, secondary, and tertiary trends, and what those trends communicate about the environment now. My job is to react to what the market. On that point alone, this is what I see.

THE DOLLAR IS TRENDING DOWN

The primary, multi-decade trend in the dollar remains down. From 2008-2017 the dollar produced a powerful countertrend move that culminated in its third multi-decade lower high. This countertrend move broke down in March, has since pulled back to retest the breakdown, and appears poised for another leg down. The topping pattern formed from 2015-2020 appears to be a diamond reversal pattern. The primary downtrend would be violated only if price moved above falling resistance represented as the upper bound of the falling channel. So, in brief, the long term trend is down, the bullish, decade-long countertrend appears to be over, and it would appear that further weakness is ahead.

GOLD IS TRENDING UP

Conversely, gold is trending up. The countertrend bullish move in the dollar coincided with a countertrend bearish move in gold, which created a 7-year base (continuation pattern) that broke out to all-time highs this year. Gold remains in a 20 year uptrend, and the breakout to new all-time highs suggests that the primary trend is resuming its upward thrust.

THE STOCK MARKET IS TRENDING UP

The S&P500 also remains up. While a crash may be in the offing at some point in the future, the 12-year trend remains up, and even the historic Covid selloff in March was notably just a back test of the two-year price shelf from 2015-2017.

THE S&P500 PRICED IN GOLD IS TRENDING DOWN

Gold outperformance relative to equities remains noteworthy. The primary, 20+ year trend remains down. During the period from 2011-2018 when gold was basing, the S&P500 outperformed gold, but this entire moved appears to be a countertrend 381.% Fibonacci retracement, which broke down in 2019 and now appears to be resuming the downward trajectory of the primary trend. This trend suggest further gold outperformance even if the nominal price of each rises in tandem with a weakening dollar.

The same chart with only the 50 week moving average and 200-week moving average shows only three crosses over the past 20 years. These crosses are infrequent, and the 50 week MA falling through the 200-week MA in March would seem to confirm the expectation of further downside pressure in this ratio.

As always, I would love to know your feedback.

The sell off in markets accelerated by coronavirus and the global reaction to curtail the pandemic has left no prisoners, as nearly all asset classes are selling off in a flight to liquidity. As large institutions face margin calls, they are forced to close positions or raise cash by selling anything and everything that is liquid. Gold and silver - the “safe haven” assets - are no exception. I would remind readers that in the global financial crisis gold fell 27% and silver fell 55% in nominal terms. Gold outperformed equities on a relative basis, but silver actually underperformed.

The selloff in the markets has gold now testing key technical levels and silver breaking down from support. Mining stocks have accelerated to the downside even faster. In a liquidity crisis, nothing is immune.

GOLD

Gold is now retesting the rising trend line from the August 2018 low. A break here would target the major horizontal breakout area ~$1530-$1540. That will be the last gasp to preserve a bullish regime. If price trades below that level, it could send gold down towards a retest of the six-year breakout level at 1370.

GDX - GOLD MINERS ETF

GDX is in a similar position to gold. All key technical levels have broken down and only one remains before a complete capitulation (the rising trend line from July 2018) at ~21. A breakdown there would target 17.

SILVER

Silver has broken down from its megaphone pattern, and most importantly just broke horizontal support. This is bearish action in silver, and there is no meaningful support here until a retest of 14.30 from May 2019.

Trading activity in the physical market has been extremely robust and consuming nearly all of my time, but I will try to keep updates coming. Be safe out there!