Gold Strengthens & Financial Stocks Deteriorate

Gold continues to trade sideways. 

The next trending move may be decided by an important economic report.  Janet Yellen is scheduled to speak at Yankee Stadium tomorrow morning, and the FOMC minutes will be released a few hours later.

Investors in the gold community know that most bank analysts are bearish on gold, and bullish on the US economy.  The first quarter was a disaster, with GDP growth almost non-existent. 

The Dow has become a bit of a “wet noodle” in 2014.  It tends to rally on speeches by Yellen, but then falls as GDP and participation rate numbers are released.

Yellen is arguably now more like a stock market cheerleader, than somebody working to meet inflation targets and create jobs for the average American.  The money the Fed has printed with its QE program has been used to buy bonds from the government and to buy OTC derivatives from the banks.  This is a very risky way to attempt to rebuild the American economy. 

The Fed’s board of governors and bank economists continue to predict a much stronger economy, but it has yet to materialize.  The velocity rates of M1 and M2 continue to decline, despite the truly enormous amount of money printing that has occurred.

Bank economists suggest that a modest slowdown in China (a GDP drop from 7.4% to 7.2%) is very bearish for commodities, yet a decent rise in US GDP (to about 4%) is somehow defined by them as also bearish for commodities. 

I fail to see how US growth is bearish for commodity prices, and I’m predicting Chinese growth will rise to 7.5% in the second half of this year.  Also, my feeling is that US money managers are on the lookout for the signs of inflation that a late-cycle burst in US GDP tends to create.

This snapshot of the SPDR fund gold holdings shows very little change since the beginning of the year.  If money managers believed the predictions of the economists, they would have sold enormous numbers of SPDR shares.  That hasn’t happened.

When the American OTC derivatives super-crisis began, money managers bought SPDR shares aggressively.  They sold a lot of them in 2013, in a panic.  That’s because bank economists and some Federal Reserve bank presidents began talking about tapering the QE program. 

The selling that has occurred since tapering began is negligible.  That suggests to me that most SPDR shares are held by very strong hands. 

If the long-promised higher GDP numbers do materialize in America, it could cause inflation numbers to rise.  Value-oriented money managers are more likely to buy natural resource stocks during a late-cycle surge in GDP than the general stock market.  That’s good news for gold stock investors.

As Western money managers have begun to focus more on inflation than risks to the financial system, Asian investors have moved their focus from gold bars and coins to gold jewellery.

In my professional opinion, trend shifts in both the West and the East are responsible for gold trading in 2014 with much less volatility, but with an upwards bias.  “China’s demand for bars and coins dropped to 60 tons in the first quarter from 134.6 tons from a year earlier, while jewelry consumption climbed to 203.2 tons from 185.2 tons, according to the producer-funded council.” – Bloomberg News, May 20, 2014.   

The demand for gold jewellery in China is enormous, and growing.  At about 800 tons a year, it’s already as large as the entire SPDR fund holdings!

In India, the world’s “ultimate” gold market, gold jewellery stocks are surging higher in today’s trading.  In 2013, these companies were crushed.  In terms of intensity, that crash rivalled the US stock market wipeout of 1929. 

That situation has changed dramatically.  That’s the daily chart for Gitanjali, one of India’s most important jewellery companies.  The chart looks spectacular.  

Many other Indian jewellery stocks (like Titan for example) are also moving higher this morning.

The landslide win of Narendra Modi just days ago is viewed by Indian economists as the catalyst that will raise Indian GDP growth to 8%.  The bottom line is that India’s gargantuan population is young, vibrant, and hungry for gold! 

The only way for Indians to get the enormous amount of gold they will demand as their economy grows, is to buy it from mines owned by Western gold community investors.

That’s the GDX daily chart.  I’ve highlighted two key periods of time.  As gold rose towards $1392, and GDX traded in the $26 - $28 area, the Ukraine was in the news, and gold investors were very excited.  Unfortunately, Indian dealers were pulling their bids then, and predicting a $100 decline in the price of bullion. 

That’s what happened, and gold stocks also declined.  Now, Indian dealers are talking about the possibility of a significant rally.  It’s unknown whether the massive rally in Indian jewellery stocks is based on enough demand to overcome the bearish statements and actions of Western bank economists, and push the gold price higher.  Regardless, I’m certainly not going to bet against India at this point in time.

That’s the daily US T-bond chart.  Generally speaking, bank economists haven’t fared very well in 2014 with their predictions.  Gold was supposed to fall hard as the Fed tapered.  The Fed did taper, but gold rallied higher.  The economists have been predicting higher rates, but that hasn’t happened.  Even if US GDP numbers get stronger for a few quarters, Indian gold demand appears set to begin a growth spurt far larger than any Western ETF selling would be. 

That’s the weekly XLF chart, which is an ETF of Western financial stocks.  Note the horrific deterioration of the Stochastics 14,3,3 series oscillator, at the bottom of the chart. 

That’s another look at XLF, via the daily chart.  Financial stocks have been the main driver of the US economic recovery, and now they appear to be in a fair amount of technical trouble.  While Indian and Chinese gold jewellery demand grows at a solid pace, the case made by bank economists for stronger growth in America seems questionable at best.  In contrast, the case for higher gold stock prices in the second half of this year is very strong indeed!    

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Stewart Thomson 

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