Gold, Banks And Interest Rates

1.    In many countries, inflation is beginning to creep higher.  Please click here now.  That’s the Australia CPI (Consumer Price Index), courtesy of Trading Economics.  The next report will be released today.  Note the recent jump in prices.  It comes as the Western economic recovery enters a more mature stage.

2.    Inflationary pressures normally tend to appear after a period of strong growth.  When central banks raise interest rates to combat that inflation, a strong economy will weaken, but it’s not disastrous.

3.    In the current situation, most Western governments have truly horrific balance sheets.  Their economies are recovering from the 2008 meltdown, but very slowly.  In the United States, this recovery has been one of the weakest on record.  It’s unknown how the Fed would respond, if prices began to rise strongly while GDP growth faded away.  The central bank could quickly become “stuck between a rock and a hard place”. 

4.    Please click here now.  That’s the daily gold chart.  I realize that in the Western gold community, a tremendous amount of bearishness has manifested itself recently.  I think it’s largely unjustified.

5.    As gold rallied towards $1392 in March, most investors were focused on the Ukraine situation.  They believed gold was ready to surge above $1400. 

6.    In contrast, I warned that large banks tend to take their cue from the action of Indian gold dealers.  The banks will often enter short positions on the COMEX, when the Indian dealers reduce their physical gold bids.  At the time, those dealers did indeed begin pulling their bids, and they talked about a likely drop to the $1300 area.

7.    That’s exactly what happened.  From there, Indians prepared to vote, and I suggested that while they headed to the polls, gold would trade in a range between $1280 and $1330.  That’s also precisely what has occurred.

8.    Charts don’t create fundamentals.  Fundamentals create charts.  Bank traders take their cue from demand, or lack of it, in the physical gold market.  Investors who are currently afraid of lower prices may be overly focused on the picture they see on various gold charts.

9.    As mentioned, fundamentals create charts, and when those fundamentals change, the picture on the charts changes quickly.  On that note, a modest decline in price that occurs while the world’s largest gold buyer class heads to the polls is perfectly normal.

10. At this point, gold could continue to trade in that $1280 -$1330 range.  It could also enter a new trading zone, either below or above the current one.  I certainly don’t see a possible new range of $1230 - $1280 as something that any investor should fear.  To understand why that is, please click here now.  That’s the latest COT report for gold.  It’s clear that the most powerful banks in the world aren’t afraid of this election-related softness in the price.

11. They are aggressive buyers of outright long positions, and rightly so.

12.  Please click here now.   That’s the most recent COT report for silver, and the banks are even more aggressive buyers here. 

13. In both the gold and silver markets, I’d like to take a moment now, to invite the entire Western gold community to join the world’s most powerful bullion banks on the buy side.

14. The precious metals world changed in 2013.  A gold bull market in gold ended, and a gold bull era began.

15. To understand the true power of the Indian gold buyer class that helps define that era, please click here now.  That’s the ten year government bond yield in India.  The yield is incredibly high, at almost 9%.

16. Most Western gold analysts think that if a central bank raises interest rates, it creates heavy selling in the gold market.  In the gold bull era, which is really the Chinese and Indian gold jewellery era, that mantra will no longer apply. 

17. When it comes to making their decision about buying gold, Indian gold buyers don’t really care if interest rates are high or low.  For all practical intents and purposes, their demand for gold is virtually inelastic.  It rises somewhat during key festivals like Diwali, and it wanes a bit during events like the current election.  

18. Western bank traders take advantage of these modest fluctuations in demand, helping gold experience trending moves of $50 - $200.

19. The bottom line is that the Indian economy is phenomenally strong, and poised to get vastly stronger after the election, regardless of who is declared the winner, and regardless of any change in US interest rates.  Despite a whopping 9% government bond yield, Indian GDP is growing at a 5.5% rate.  

20. I’d like to pose an open question.  What would happen to American GDP, if American interest rates went to 9%?  Would American GDP rise to 5.5%?  I think everyone in the gold community knows the answer to that question.  The already anemic GDP growth rate would turn negative in a heartbeat, and the entire financial system would again be at risk of shutting down. 

21.  Please click here now.  That’s the existing home sales chart for the United States of America.  It’s not a pretty picture, and the next report is scheduled for release today.  Americans tend to buy gold when the economy gets into trouble, and the economic road signs are beginning to point towards the end of the road.

22.  In a few short weeks, the Indian election will be completed, and the world’s most powerful gold buyer class will return to the physical gold market, with bids of size.  They are ready to buy increasing amounts of gold from Western gold mines, for decades to come. 

23. I would argue that the world’s most powerful bullion banks are buying gold and silver aggressively now, in anticipation of the imminent return of the Indian “titans of ton”  to the physical gold market. 

24. Please click here now.  That’s the GDX daily chart.  Western gold stock investors should be well accustomed to the more violent nature of sell-offs in their stocks, when there is modest softness in the gold bullion price.  That’s part of the gold stocks game, and players have to accept it with a shrug.  I’m watching a key downtrend line that I’ve highlighted there, to accompany a sizeable return of the Indian buyer to the physical gold market.  The buyers are not gone.  Their bids are simply diminished during this election.  That’s why gold isn’t declining much, even though some chart patterns are seen by amateur technicians as bearish.  The bears are making a mistake, taking on both the Indian buyers and the bullion banks, using just charts.  Gold is the ultimate asset, but perhaps some people have to learn that, the hard way! 

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Stewart Thomson 

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