Shanghai Gold Volume Shock

For decades, the American “paper gold” market (the COMEX) has been the primary market for determining the POYG (price of your gold). 

Most analysts in the gold community believe that demand for physical gold will somehow overwhelm the COMEX, and “liberate” the POYG.  They predict vastly higher prices are coming, when that happens.

I disagree.  I believe paper gold markets will continue to be the primary price setting mechanism for gold, but Asian paper gold markets will be where most of the action is.

Like the COMEX, the Shanghai futures exchange (SHFE) is a paper gold market.  Yesterday marked the beginning of extended trading hours (night trading) for the SHFE, and volume was superb.

The average trading volume during the day is about 90,000 contracts.  The first night session saw more than 220,000 contracts change hands.

Slowly, Shanghai’s paper gold market should begin to rival the COMEX.  That’s excellent news for bullish gold investors in the West!

Public investors in Asia are generally “pro-gold”, while Westerners are generally “pro-fiat”.  Institutional paper gold investors in Asia are more reluctant to sell into price declines than their Western counterparts, and they can be eager buyers of size!

Also, when analysing the gold price, the market actions of Japanese investors should not be overlooked.  “Assets held by Mitsubishi UFJ’s gold ETF reached 24.58 billion yen ($243 million) on July 5, compared with 25.86 billion yen at the end of last year, Hoshi said.  About half of the assets are held by individual investors, with the rest owned by financial institutions, pension funds and corporations and foreigners, Hoshi said.  Trading value in Mitsubishi UFJ Trust’s gold ETF on the Tokyo Stock Exchange amounted to 7.23 billion yen in May, becoming the most-traded commodity fund listed in Japan, according to data compiled by the bank.” –Bloomberg News, July 9, 2013.

The rise of Eastern paper gold markets will be a process, rather than a one-time event, so patience is required.  Japan’s paper gold markets are still very small, but they are gaining popularity.  The trend is definitely your friend.

“SPDR Gold Trust, the world's largest gold ETF, said its holdings fell 1.56 percent to 946.96 tonnes on Monday - the lowest since February 2009.” –Reuters News, July 9, 2013.

SPDR is a Western gold ETF.  In the big picture, the West continues to bail out of gold, and the East is an eager buyer of all that is offered.

The banks are also substantial buyers, as shown by recent COT reports. 

You can see that the commercial traders’ long position is growing nicely.  The gold community is not alone; powerful banks and many types of Asian entities are buyers now.

That’s the hourly bars chart for gold.  It shows the trading on the COMEX. 

It will be interesting to see if the SHFE night session traders can put a bit of a scare into COMEX pit traders this week.

Regardless, my suggestion to both Eastern and Western gold traders is to be a light seller in the $1255 - $1275 range, and a buyer at $1175 - $1225.

That’s the daily gold chart.  No significant rally has occurred yet, but a number of bank analysts have suggested the decline is nearly finished.  That should provide some comfort to investors.

Note the position of my stokeillator. A buy signal is in play, and I don’t like to bet against it.  Longer term investors should book some profits in the $1280 - $1320 zone, if the price gets there.  Hold the rest as a core position.

Chinese inflation is apparently on the rise again, as are Chinese gold imports from Hong Kong. 

You are looking at the GDX daily chart.  It’s an appalling picture, but I’m a buyer anyways.  From a tactical standpoint, I recommend adding short positions or put options with every purchase of gold stock, to maintain some semblance of emotional sanity.

One reason that I’m now focused on gold stocks more than bullion, is because I believe that gold stocks outperform in an inflationary environment.  Since 2008, deflation has been the main investment theme, but I think there is a transition to inflation, in play now.

Also, there’s a lot of talk about owning gold bullion as a “growth with safety” play.  I believe in “safety first”, not “safety after I’ve blown up in gold stocks”.  Gold bullion is arguably the safest asset in the world, so it should be the first item on every investor’s buy list, not one that is bought in hindsight, after a portfolio wipeout occurs.  It’s too late to transition to bullion from gold stocks now, and it’s the wrong play, in my professional opinion.

That’s the daily chart for silver.  I prefer to own silver stocks, rather than bullion.  Buyers of silver stocks should already own silver bullion, as your “safety first” play. The red supply line on this chart is a pesky one.  The stokeillator is flashing a buy signal, but the silver price still can’t break above that annoying trend line.  Patience is the virtue that is required here.

That’s the daily chart of SIL-NYSE, which is a silver stocks ETF.   I own it, and I want to own a lot more of it.  Will you join me today, in a small way, and show the East… how the West was really won?  Hi, ho, silver!

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Special Offer For Gold-Eagle readers:  Send me an Email to [email protected] and I’ll send you my free “Gold And The Commodity Super-Cycle!” report.  Many bank analysts believe that gold and silver will not participate in the rest of the super-cycle.  I disagree, and I’ll show you why!

Stewart Thomson

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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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