Nuances Of The Gold Jewellery Era

There’s a widespread belief that Western investors only buy strength, while Eastern investors only buy weakness.  That’s not completely accurate.

As gold declined towards the $700 area in the fall of 2008, holdings in the SPDR ETF actually began to increase.  Please view the below daily gold chart during that event.

The decline into the October 2008 lows was accompanied by tremendous fear and liquidation in general equity markets, yet the tonnage in the SPDR fund rose by about 100 tons during the final month of the decline.

That’s a snapshot of the current liquidity flows into and out of the SPDR fund. 

While gold suffered a sharp sell-off on Sunday night and Monday, the price weakness was accompanied by a solid increase in SPDR holdings!   

Many investors in the Western gold community appear to be looking for something to replace the gold price parabola that the Western super-crisis almost created.

That’s probably a mistake.  American QE is being tapered to zero, and the Chindian gold jewellery era is now the prime driver of the gold price.  As with any era, there will be periods of ecstasy, and periods of bitter disappointment. 

On that note, while the recent Indian government’s decision to leave gold import restrictions intact may feel disappointing, onshore India’s loss is offshore India’s gain.  I’m talking about… Dubai. 

Dubai is known as “offshore India”.  The city’s gold business is run mainly by Indian precious metal industry experts, and Indians dominate the buy-side of the trade.  As the gold jewellery era unfolds, Dubai should completely dominate all gold markets.  It will be the undisputed king of global gold price discovery very soon.

“As much as 40 per cent of all gold flows in the world happen through Dubai and the city is easily the most important hub for the trade.  Dubai has the infrastructure and the systems to set benchmarks, and even its own good delivery standards. It is now time for it to start asserting its role and demand recognition for its contributions to the trade.  With such major changes happening in every sphere of business, the current age belongs to performers and not consultants, who have had their share of fame but are now ready to be consigned to the dustbins of history. If managing global gold trade is anybody’s business, it is most obviously that of the producers, consumers or those who make trade happen.  Any other role is secondary.”  - GulfNews.Com, July 15, 2014.

The battle for control of gold price discovery is probably best summed up like this: Singapore and Shanghai may talk a good talk, but only Dubai walks the talk.  In the supposed battle to overtake London and New York as the prime market of gold price discovery, there is everyone else, and then there is Dubai.   

I’ve highlighted what is really a majestic symmetrical triangle pattern, on this daily gold chart.

Within the pattern is an inverse head and shoulders bottom pattern.  It could also be labelled an inverse head and shoulders bull continuation pattern. 

Fundamentally, yesterday’s price decline was probably caused by the Indian government decision to clamp down on gold installment plans.  Many large jewellers get 20% of their revenues from these plans that allow consumers to buy small amounts of gold each month.  They get gold grams of “interest” paid to them.  The jewellers may have had to sell some gold in a hurry, and that probably caused the decisive sell-off on the COMEX.

While it initially looked like the government may be trying to put the installment plans in the hands of the banks, it now appears that the plans are being strengthened, which is good news. 

“Under the new rules, the effective return on the deposits cannot be more than 12% and the total amount of deposits has to be within 25% of the company's net worth. In the case of many jewellers, the effective return has been as high as 17% or more.” –Times of India, July 13, 2014.

One of the nice features of the gold jewellery bull era that I think Western mining stock investors will come to appreciate, is that bad news doesn’t last long, it isn’t usually as bad as it initially appears to be, and there are always plenty of opportunities to buy modest price weakness with confidence.

From a technical standpoint, the current Indian “installment plan reset” is helping building right shoulder symmetry with the left shoulder.  Also, during the recent rally I sensed that investors were starting to think they had to “chase price, before it gets away”.  A lot of excess greed was cleansed from the market yesterday, and that’s bullish.

That’s the GDX daily chart, and it looks superb.

In late May, GDX began to rally from the $22 area, and rose to about $27.50 as of last week.  That’s a superb performance, but there’s nothing happening fundamentally in the gold jewellery bull era that requires investors to “buy, before it gets away”.

That mindset might have had some practical application in the super-crisis, but it’s essentially useless in the gold jewellery era.  It will take some time for Western mining stock investors to understand the nuances of the new era, much like it takes time for a soldier of war to adjust to life after combat. 

Technically, a 50% correction of the recent rally in GDX would put the price at about $25.  The chart is “textbook bullish”.  GDX has staged a clear breakout from a beautiful symmetrical triangle pattern.  The key 14,7,7 Stochastics oscillator that I refer to as the “stokeillator” (or abbreviated as “stoker”) is very overbought.  It has been flashing a sell signal for about a week.

A pullback to either the green boundary line of the large triangle pattern or to the $25 area would likely put the oscillator in an area where a buy signal would be likely.  Overall, gold stocks look set to benefit immensely, as the city of Dubai leads all love trade stakeholders, into a remarkable world of higher gold prices.

As good as senior and intermediate stocks look, junior gold stocks look even better.  This daily GDXJ chart shows that many junior stocks exceeded their March highs, while GDX and gold bullion did not.  That’s bullish for the entire precious metals sector.  GDXJ exceeded the $46 area highs, after rallying about 40% in just six weeks.  There is enormous support in the $39 - $40 area.  That support is defined by the Fibonacci 50% retracement line, the blue triangle boundary line, and the top of the flag pattern, and eager junior gold stock traders should be ready to add to positions there!

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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 “Goldilocks” report.  The senior gold stocks are too sluggish for many investors, and the juniors carry a lot of risk.  The intermediate-size producers provide a great combination of risk management and upside reward; a “Goldilocks” situation.  I’ll show you the top five intermediate gold stocks I’m focused on right now, and why.       

Stewart Thomson 

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