This week I want to focus on the gold and silver market and see what ingredients I find as interesting signs for identifying a potential bottom opportunity for buying during this most auspicious time.
According to Sprott Asset Management Markets at a Glance, "The massive imbalance between supply and demand in gold is not reflected in prices because available statistics are misleading." Table 1 below contrasts mine production with demand from some of the world's largest gold consumers. According to WGC/GFMS data, the world will mine, on an annualized basis, about 2,800 tonnes of gold for 2013.
I reduced these figures to reflect mine production from China and Russia never leaves the country and is used solely to satisfy domestic demand. Accordingly, we are left with a total world mine supply of about 2,140 tonnes. On the demand side, I make some in-house adjustments to better represent demand from emerging markets. To proxy for gold consumption in China, Hong Kong, India, Thailand and Turkey, I use net imports of gold, as reported by their various governmental agencies. While imports might in general be an imperfect proxy for demand, those countries see very little re-export of what they import and keep most of it for themselves, so it is not unreasonable to assume that what they import they "consume", on top of their domestic production. To this I add the demand, as estimated by the GFMS, from other countries and that of central banks. I annualized the year-to-date figures and found that for this year, annualized total demand is approximately 5,200 tonnes. On that basis, "core" annualized demand is approximately 3,000 tonnes more than mine supply.
TABLE 1: WORLD GOLD SUPPLY AND DEMAND 2013, IN TONNES
In a recent article published in Seeking Alpha Sprott's John Embry made the following comments discussing the spread between the paper and physical gold and silver markets, "At some point the West is going to run out of gold." At that point, the West will no longer be able to support "the chicanery in the paper market." He is surprised that the difference between the price of gold in the paper and physical markets has gone on so long; "It has gone on a lot longer than a rational mind would have thought." But, he said, "I'd be shocked if it lasted another 6 to 12 months."
Let's take a look at the gold futures markets and see what we can anticipate for next week of trading.
The December gold futures contract closed at 1290. The market closing below the 9 MA (1312) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral.
With the market closing above the VC Weekly Price Momentum Indicator of 1282, it confirms that the price momentum is bullish. Cover short on corrections at the 1269 - 1249 levels and go long on a weekly reversal stop. If long, use the 1249 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 1302 - 1315 levels during the week.
When you put into perspective the compelling and bullish fundamental and technical picture for gold, we can begin to identify where we might find some real values in silver currently.
The US Mint this week broke its yearly sales record for American Eagle silver coins as 2013 sales reached 40,175,000 ounces. The previous record, set in 2011, was 39,868,500 ounces.
In June, Bloomberg reported that the Mint had sold the most silver coins in the first half of the year since at least 1986; at the time, Richard Peterson, the Mint's acting director, predicted that a new annual record might be coming.
The new yearly record was brought on by authorized purchasers buying the full weekly allocation of 500,000 coins, as per Bloomberg. The Mint plans to issue its final weekly allocation of coins on December 9.
When you interpret conventional wisdom of EW analysis and the fundamental picture, in simple language, the patterns seem to be indicating a major bottom completion in silver is taking place at current price levels between the 20.50 - 20.00 area. It seems that a close below 20.50 could trigger a final washout correction into the low to mid 18 to 18.50 price range. A close below 18.00 will invalidate this pattern completely. I personally believe if this was to be the case, this level or price range might be what major-long term buyers are waiting for to add to their long-term holdings. Any push down to this levels would create a pronounced bottom that will attract major long-term physical buying as values down here would be tremendously oversold and below the cost of production. If the lower price levels are tested I don't expect them to stay there for very long.
Upon completion of this bottom, an impulse 3 wave up should take prices into the 27.00 - 27.50 levels within the next 30 days. This is the upper resistance level of the major long term uptrend channel pattern unfolding since the lows in June were made. Once this pattern is completed we can additionally calculate prices moving forward.
Based on the fundamental picture of supply and demand for the gold and silver markets, it appears that current values are below fair market value and are offering a historic opportunity to store value and purchasing power long-term.
The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts
Trading Derivatives, Financial Instruments And Precious Metals Involves Significant Risk Of Loss And Is Not Suitable For Everyone. Past Performance Is Not Necessarily Indicative Of Future Results.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGQ, USLV, PSLV, SLV, GLD, GDX, GDXJ over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.