As US Gold Production Drops, Supply/Demand Imbalance Is Bound To Catch Up

Strengths

• U.S. Mint gold coin sales achieved a second straight monthly gain, reaching 82,000 in sales month to date versus 76,000 for all of June.
• The U.S. Mint announced 2015 American Eagle Silver coins are sold out and is planning to resume sales in two weeks. Oddly, the announcement came on the same day the price of silver plunged to 2015 lows.
• India is meeting stiff resistance in its drive to make buying of gold jewelry more transparent and to channel demand into paper gold to stop the metal being used to hide billions of dollars of undeclared money. The jewelry trade says Modi’s plans won’t deter Indians from buying gold to keep their wealth away from the authorities. Furthermore, dealers are set to boycott tax requirements for bigger purchases.

Weaknesses

• Gold traders turned bearish for the second time in three weeks after Fed Chair Yellen’s testimony reaffirmed speculation that the Fed will raise interest rates this year. Further, gold fell for five straight days this week on anticipation of higher interest rates.
• Gold is down more than 10 percent from its 2015 highs and the pervading negative sentiment is evident in the position of speculators in the futures market. The net long positioning is now the lowest since at least 2006 when gold was worth less than $600/oz.
• Gold retreated after Greece secured a deal paving the way to a new bailout, agreeing with creditors on the reforms needed to start formal negotiations over a third bailout program in five years. The deal takes some of the luster off the need for a “safe haven” asset.

Opportunities

• China’s gold reserves touched a record 1,658 tons by June 2015, increasing by nearly 60 percent since April 2009, according to China’s central bank. The report seems to indicate that Chinese consumers have purchased more gold than estimated over the past six years, reaffirming consumer demand for the metal remains robust. While the total gold reserves came in lower than many had expected, Ross Norman from Sharps Pixley noted that perhaps other government agencies in China may have large holdings that haven’t been disclosed. Bloomberg’s Intelligence service had expected central bank holdings to be roughly 3,000 to 3,500 tonnes.  The lower number for central bank holdings leaves a clear path for further accumulation by the central bank as the Chinese government fulfills its goal to position the renminbi as a reserve currency.
• According to Ross Norman, CEO of Sharps Pixley and London Bullion Market Association’s top forecaster for the past 15 years, somebody big is sitting on the gold price and a relief rally when the Fed raises interest rates is a distinct possibility. He also noted that “either 5,000 years of safe haven buying has just become bunk, or there is a desire to portray what is evidently a financial and economic crisis as nothing to be concerned about.” Mr. Norman forecast a peak gold price of $1,450/oz. for 2015.
• Over the last decade U.S. gold production has been dropping relatively consistently. 2014 was the lowest production year for that span as U.S. mine supply hit a new decade low. For the U.S., 2015 year to date has been even worse for mined gold supply as production has dropped 7.5 percent from the low levels in 2014. Thus, gold bulls may have the last laugh as the supply/demand imbalance is bound to catch up at some point, forcing prices higher.

Threats

• Following strong housing data and mediocre CPI, wage growth and retail sales data, an unknown speculator decided to dump $1.4 billion notional in gold futures markets, sending silver prices plunging according to data presented on Zero Hedge.

• It seems like the “buy the dip” mantra has stopped working on U.S. equities. 2015 has had more down days in the S&P 500 Index than any year since 2002. Declines have gotten longer, averaging 1.9 days and rebounds are weakening. Another sign of weak market data, shows that the first half gain in the S&P 500 Index, was the smallest first half move in the index since 1927.  Further, clients have pulled more money from mutual and exchange-traded funds tracking U.S. shares than any time since at least 2000. Weakening resilience has been a bad sign for investors in the past, when it often preceded broader selloffs.
• Fed Vice Chairman Stanly Fischer said that reducing the Fed’s $4 trillion balance sheet without disrupting the markets will be a challenge. Keep in mind that all maturing securities in the Fed’s bond portfolio are being reinvested in the bond market to keep rates lower than market forces would dictate.

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