Gold: T-Bonds & Jewellery Are Key

The Ukraine crisis may or may not be over.  Regardless, the crisis has only resulted in a tiny increase in the holdings of GLD-NYSE, the largest gold ETF.  Please view the latest tonnage holdings above. (The holdings are in the lower right hand corner).  As gold has rallied, the gold held by GLD-NYSE hasn’t changed much at all.

On that note, I’ve suggested that the West is still a mover of the gold price, but no longer the prime mover.  While interest rates and inflation numbers are still very important drivers of the gold price, the world has essential entered a “gold bull era”. 

This era is themed around gold jewellery demand that should grow relentlessly for decades.  It could soon totally overwhelm mine and scrap supply. 

Gold jewellery plays a highly significant role in Eastern culture and religion, and bank economists continue to underestimate the enormous monthly tonnage imports of Chindian (Chinese and Indian) gold dealers.  One upside surprise seems to follow another. 

Demand grows relentlessly, because Chindian industrialization grows relentlessly.  It’s an enormous multi-decade process that involves more than two billion citizens, who are all potential gold buyers. 

On the supply side, ETF sales are becoming a minor factor, and most of the weak hands there are gone.  Gold produced by mines is now the most important supply side price driver. 

Pierre Lassonde of Franco Nevada is a leading mine supply expert.  In a recent interview, Mr. Lassonde said he believes that supply will be static for the next five years. 

Even if it increases slightly, few high-grade projects of size are being found, and India’s nation elections are just a few months away.  The front runner is Narendra Modi, who is strongly endorsed by India’s most powerful gold jewellery players.  As strong as Chindian demand is now, it could become dramatically stronger soon after the election. 

Mainstream media claims that the price of gold has rallied on weak US economic data, but the simple truth is that US economic reports are no longer driving much gold tonnage in or out of physical and paper gold markets. 

Most of the current upside action on the daily gold price chart is thus likely related to insatiable Chindian gold jewellery demand.  In my professional opinion, gold would have risen to $1355 this week even if the Ukraine crisis never happened. 

Just as demand is relentless, this key hourly bars gold chart shows gold in a relentless uptrend.

The daily chart also looks magnificent. Note the middle channel demand line that I’ve highlighted in green.  It could serve as decent support on any pullback, and help launch gold into the $1361 HSR (horizontal support and resistance) zone.

From the $1180 area lows to the $1355 area highs, gold has rallied about $175.  It would seem reasonable to expect some kind of a pause in the upside action now. 

Regardless, I would urge investors who bought at higher prices to avoid getting involved in gold market “top calls”. 

Profits can be booked on winning positions, but losses should not be taken by underwater investors who are perhaps overly sure that a substantial correction is imminent. 

Selling a losing position with the hope of getting it back at a lower price is a dangerous approach to wealth building.  It generally ends badly for the top caller.

Many bank technicians now believe gold will reach the $1430 area before there is a serious correction.  While a vertical price spike scares away jewellery customers, a “steady as she goes” rise does not. 

If gold continues to rise at this modest pace that I consider ideal, gold dealers will continue to bid for more gold.  Their bid could be accompanied by modest hedge fund buying.    

In the big picture, all of gold’s technical lights are green.  In the West, rising T-bond prices (and hence lower rates) are one of the most important gold price drivers.  This long term US T-bond chart suggests much higher bond prices are coming. 

Note the buy signals being generated by key technical indicators, at the bottom of the chart.  I would argue that T-bonds can rally to 142 quite easily, and likely to the 153 area highs.  That could create a substantial move higher in the price of gold!

As money velocity increases, inflationary pressures could rise.  That’s a concern for institutional money managers.  They tend to buy gold bullion when they see financial system risks.  When they see risks of inflation, they tend to buy gold stocks.

This daily chart of this coffee ETN (JO-NYSE) shows that the price of coffee has surged about 100% in a very short period of time.  Other commodities are joining the rally, and that is getting the attention of inflation-oriented money managers.

This daily GDX chart shows the price hesitating at HSR in the $27 area.  That’s perfectly normal, and not a concern. 

Investors should not be concerned about whether a gold stocks correction is coming or not.  It’s irrelevant in the big picture.  Rates seem headed lower, and jewellery demand seems headed into the “Pluto zone”.  Rather than wasting time worrying about a correction based on the Ukraine situation, gold stock investors should be cheering for a breakout above $27 on the GDX chart, and poised to profit from it!

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Special Offer For Gold-Eagle Readers:  Please send me an Email to [email protected] and I’ll send you my free “Goldistocks Now!” report.  The intermediate-sized gold stocks may offer investors the most balanced mix of risk and reward.  In the gold jewellery bull era, they may become “Goldilocks” situations.  I’ll show you which ones may do best in 2014, and where I’m a buyer and a seller! 

Stewart Thomson 

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