When times change, champions change with the times. To survive in the West’s new era of long term slow growth, business owners have essentially had to reinvent themselves. Their mantra is adapt or die.
The gold market is also changing, and so the champions known as the Western gold community need to change with it. Gold price discovery is moving, slowly and consistently, from the West to the East.
In another two to three years, Chindian and mid-East demand will probably surpass global mine and scrap supply. It’s already adding stability to the gold price discovery process, and that will accelerate. Having said that, it’s important to remember that gold is money, and like fiat money, there is more to price discovery than just the demand/supply balance of physical gold.
It’s true the amount of physical gold held in the COMEX and LBMA vaults that is eligible and registered for delivery is not that large, but most euros and dollars traded on the FOREX markets alongside gold are not delivered to the buyer by the seller either.
Price discovery for an asset can be determined with a casino-like process, with legitimacy. The gold trading volume in London and New York, although stagnant, dwarfs that of the rest of the world.
Because gold is a currency, price discovery for gold is not so much about “who has the fizz” (physical gold), but about who trades the most volume, betting on the price.
I’ve predicted that Shanghai will surpass New York in terms of trading volume, and thus in domination of price discovery. That process is in play now,but it will take another 2 – 5 years for the actual volume to rise above the levels of London and New York.
I’ve also predicted that gold trading volume in Dubai will ultimately surpass Shanghai, making the “city of gold” the fitting master of global price discovery. The bottom line is that most of the world’s physical gold trades through the Dubai and Shanghai exchanges, but the bets on the price of that gold are far bigger, for now, in London and New York.
The good news for Western gold community investors is that the growth of trading volume in both Dubai and Shanghai is strong and consistent, and that is occurring while London and New York volumes are stagnating.
Events and processes in the West will continue to have a big effect on gold price discovery, for many years to come, even after price discovery becomes dominated by Shanghai and Dubai.
On that note, the December 15 – 16 FOMC meeting is arguably the most important meeting of the past seven years. That’s because Janet Yellen can’t simply “flip a switch” to raise rates the way her predecessors could.
Because of the Fed’s QE program, the refusal of the US government to downsize itself has not resulted in a debt crisis. That may be about to change.
Most gold gurus think rate hikes are about supposed economic growth, while I’ve vehemently argued they are about putting pressure on the government to shrink itself, and about reversing money velocity. From a “PR” perspective, it’s very difficult for Janet to state publicly that she’s planning to raise rates to essentially attack the US government’s ability to borrow, and to reverse the deflationary effects of Ben Bernanke’s QE program.
MSM (mainstream media) and many pundits in the gold community talk endlessly about “rate hikes decisions”, but the new era reality of implementing those hikes is highly complex, and potentially dangerous.
Janet is experimenting with using non-bank entities to raise the Fed Funds rate, but her experiments have involved limited amounts of capital. As things stand now, the amount of bonds Janet would have to sell in the open market to hike rates, and keep them hiked, would probably collapse the bond market, creating a massive panic in stocks and real estate as well.
To actually raise interest rates on the reserve currency of the world is much harder than it seems, when open market sales are ruled out. In my professional opinion, Janet is going to deliberately force some bank reserves out of the Fed and into the private sector.
She’ll attempt to replace those with non-bank assets. Non-banks can’t loan out their investor money, while banks can. So, even a small movement of loanable bank reserves into the private sector could produce a dramatic reversal in US money supply velocity, which is the main driver of inflation.
Janet’s plan to raise rates appears to have significant inflationary implications, which is fabulous news for gold investors. It may be why gold stocks are staging what is arguably a historic bullish non-confirmation with bullion right now!
That’s the hourly bars gold chart. I predicted a strong decline ahead of the US jobs report, and a big rally when it was released, and that’s exactly what happened. I sent a key intraday alert to my subscribers on Friday, to sell some gold, and short some, near the height of the upside action!
Now, the FOMC meeting comes into focus. Gold may pull back to the $1057 area, before moving towards $1097, but there is a nice little inverse H&S bottom pattern in play. That’s good news for rally enthusiasts!
That’s a longer term gold chart, using daily bars. Gold may be entering what I refer to as “technical head and shouldering”, where one small inverse H&S bottom pattern morphs into a bigger one. This technical action also fits with what Janet appears to be trying to do with money velocity via her rate hikes experiment.
Gold stocks and silver stocks had a fabulous day on Friday, and a horrific follow-up yesterday. That’s the (N:GDX) daily chart. Volume has risen on the rally, and yesterday’s down day volume was a little softer than on Friday’s up day volume. GDX refuses to make new lows while bullion does.
That’s the daily chart for Agnico Eagle Mines (N:AEM). It’s arguably a better proxy for the gold stock sector than Barrick. Yesterday, the “Eagle” only gave back a portion of Friday’s superb performance, and it’s soaring far above its recent lows, while bullion struggles.
Gold stocks like Agnico Eagle are poised for a great year in 2016, partly because of policy changes from Janet Yellen, and partly because of growing Chindian demand, but the most important catalyst of all for gold stocks may now be institutional players who view any move lower in bullion from here, as a reason to buy gold stocks aggressively!
Written between 4am-7am. 5-6 issues per week. Emailed at aprox 9am daily.
Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.
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