These past few weeks it seems like paper gold is out and
physical gold is in.
The fall in the price of gold has triggered a new run on physical
gold that shows no sign of abating. Record amounts of money have
exited 'paper,' i.e. futures and
, and headed straight to the bank or the mint to be exchanged for
coins and bullion bars -- that is, if one can get them. The
strength of physical retail buying has taken dealers and mints
around the world by surprise, leaving them scrambling to keep up
with demand. The sudden surge is evidence of pent-up demand,
particularly from China and India.
There seems to be a growing disconnect between paper and real gold.
It's very likely that the paper sellers didn't foresee the rush to
physical gold. Could it be the case that the physical market is
lagging behind and will eventually catch up and sell off too? Let's
look at some of the evidence.
Physical Gold, an investment company, said there were waiting lists
of three weeks for some coins, and four to six weeks for gold bars
whereas previously all would have been available within a few days.
The US mint had to suspend sales of certain coins as buying
increased. It sold an estimated 210,000 ounces of gold coins in
April -- almost three and half times more than the 62,000 it sold
The Perth Mint worked overtime over the weekend to manufacture
enough stock to meet orders, which are at levels last seen in the
2008 financial crisis (confirmation of the 2008 - present analogy).
There are reports that both Istanbul and Dubai are out of
investment bars, according to Bloomberg, with wholesale and bulk
buyers paying a premium of between $6 and $9 an ounce for kilo
A US coin shop said that sales of Krugerrand have increased 468%
last week as investors rush to get the precious metal at what they
see as a bargain rate.
wrote that Asia is witnessing one of the strongest waves of
physical gold buying in 30 years. "Buyers Scour Asia for Physical
Gold," proclaimed the headline.
Swiss refiners have run out of kilo gold bars (cost: around
$48,000). There is now a one-month wait for delivery.
Physical stocks of gold held at
) Comex warehouses in New York have dropped to a near-five-year low
in a further sign that gold's price crash unleashed a frenzy of
demand, according to a Reuter's report.
Well…you get the point. The gold bugs are coming out of the
woodwork and they want the kind of gold they can bite between their
teeth. World over, private investors have taken advantage of the
dip to pounce on physical gold. Keep in mind that there is some
effort that goes into buying physical gold. It's not like placing
an order online for the purchase of ETF shares. Most physical gold
buyers are not in it for the short term -- they plan to hold on.
At my firm, we have always advocated physical gold over the paper
kind for long-term investments. If your investment time horizon is
more than a year, you want to purchase the physical metal, not
somebody's promise to pay you some money down the line based on the
price of the metal. For short-term trades, however, ETF shares are
To see what is in store for the price of gold in the following
weeks, let's turn to the chart section. We will start with the
yellow metal's medium-term chart (charts courtesy of
Click to enlarge
A closer look shows us that gold has actually corrected to its
previous support level (declining, dashed line) and verified this
as resistance. At this time, it could just be a pause within a
rally, but generally the main short-term trend here is down,
although we have had a correction of about one-half of gold's
recent decline. It seems now that the move to the downside will
continue and the RSI suggests this is clearly possible. It is no
longer oversold and is pretty much in mid-range levels. Moreover,
in last week's essay (
Gold Charts Suggest Decline Is Not Over Yet
) I discussed the importance of long-term cycles on the gold market
- the cycle suggests further declines and formation of the final
bottom in the next several weeks.
Let us move on to the chart of the yellow metal from the non-USD
Here, gold prices are not at the 50% retracement level but rather
are lower. Other than that, this chart is similar to the previous
gold charts and it seems that the short-term trend here will
continue to the downside.
Finally, let's have a look at the
(INDEXDJX:.DJI) to gold ratio chart.
This chart suggests that we will see lower gold prices. The reason
for this is that the declining resistance line for the ratio has
not been reached.
Summing up, the strength in the physical market suggests that the
bull market is intact and that what we're seeing now is just a
major correction within the secular bull market. However, it seems
that declines in gold prices are not over yet. The bottom appears
likely to be a few weeks away and this gives the market plenty of
time to move lower. Gold corrected 50% of its decline and could now
move lower once again. The Dow to gold ratio indicates a strong
resistance line has not yet been reached. This supports the premise
that gold's final bottom is not yet in.
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