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Patrick MontesDeOca
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Published Technical Analyst, Author, Commodity Trader, Systems Developer, Algorithmic Intelligence, Computer Modeling of Processes. I custom build Proprietary Artificial Intelligence for each individual client's portfolio needs. After more 30 years in the business, Patrick MontesDeOca has... More
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Vedic Codes of the Stock Market Volume 3 – ETFS
  • The Best Cure For Low Prices Is Low Prices 0 comments
    May 22, 2013 8:16 AM | about stocks: ETF, GLD

    South Africa's $402 million trade surplus with the United States turned into a $689 million deficit in March. Why?

    Examining the data points, the US trade deficit decreased to $38.8 billion in March, according to official statistics. The total amount of trade (imports plus exports) conducted with the US shrunk more than $7 billion to $407.1 billion. The US's largest trade surplus was with Hong Kong. The autonomous Chinese region imported $3.2 billion more from the US than it exported. The largest US trade deficit was with mainland China, which declined to $17.89 billion.

    $1 billion worth of gold has been shipped to South Africa from New York.

    It turns out the $1.1 billion swing in South Africa's trade with the US is entirely due to unusual shipments of gold from the US to South Africa in February and March. So far this year, 20,013 kg of unwrought gold, worth $982 million, has left John F. Kennedy International Airport (JFK), in New York, for South Africa, according to the US Census Bureau's foreign trade division. (Unwrought gold includes bars created from scrap as well as cast bars, but not bullion, jewelry, powder, or currency.

    The shipments from JFK were the only unwrought gold to leave the US for South Africa in 2013,although another large shipment occurred in September 2012.

    The numbers indicated in the charts above are a real concern in terms of pricing the yellow metal properly. The paper and physical markets have become two completely different markets. The paper market or electronic price benchmark has been used to set the price of gold as far back as I can remember. But in all my more than 30 years of studying market behaviour, never have I seen such a difference in pricing between the cash and futures markets. This creates one of the most exciting conditions for long-term investors to capture this window of opportunity and build speculative wealth aggressively in a short period of time.

    The cash market, in this case the physical gold bullion market, is a market in which prices are affected by changes in the supply and demand balance. In a free market, a short supply situation will lead to higher prices based on the increasing demand for the actual product. Ample supplies will lead to theopposite; lower prices. This is basic Econ 101.

    With paper gold prices, this balance between supply and demand on the one hand and price on the other has ceased to operate. The current price metric used, called the futures or paper market, has transormed into a virtual casino controlled by the central banks, who have driven prices to historical extremes. The open interest far exceeds the amount of supply available to deliver against the record large short positions controlled by large speculative managed money investment funds.

    The price dynamics have gone far beyond the laws of any free and transparent market enviroment. This can potentially create a significantly volatile situation as the fundamentals begin to have an impact and paper prices adjust to gold's true fair market value. Such an adjustment will probably be extremely violent and sudden, when it occurs.

    However, as Jim Rogers recently said "The fact gold continues to move lower despite 'continued positive news' would seem to be a highly bearish indicator."

    This might be true in the virtual paper market but it certainly does not seem to support what is happening in the physical market, in which premiums (in Asia) have reached $30 an ounce. In my opinion this is not a bear market when you have central banks buying physical gold at record levels. In a bear market, central bankers would be major sellers not buyers.

    In a recent interview, London gold and silver trader and whistleblower, Andrew Maguire, said that the current precious metals markets are going through a historic transition as market prices shift from being set by paper exchanges in London and New York to prices being set by the physical price of gold in India and, with increasing influence, in China.

    "In 30 years of watching the gold and silver markets," Maguire said, "I haven't seen anything this exciting."

    Maguire and I posit a concerted effort by bullion banks and managed funds to push the price of gold lower on the paper market, even as the fundamentals of physical gold (supply and demand), push the price higher on the physical market. Asians especially, and apparently South Africans, are seizing this opportunity to purchase physical gold and that artificially discounted price set by the artificially manipulated paper gold market in New York.

    Investors didn't buy enough physical gold to completely offset outflows from gold exchange traded funds (NYSEMKT:ETF) in the first quarter, but total ETF gold holdings were still higher than a year ago, and demand for jewelry, bars and coins grew significantly thanks to China and India, according to a report from the World Gold Councilreleased last week.

    · Jewelry: Fourth quarter recovery continued into the first quarter of this year.

    · Investment: The decline in demand relative to Q1 2012 was solely attributable to the net outflows from ETFs, which obscured the strong rise in investment for gold bars and coins at the retail level.

    · Technology: demand has been broadly stable, holding around 100 tonnes over the last six quarters.

    · Central Banks: added 109.2t of gold to their reserves in Q1 2013, the ninth consecutive quarter of net purchases.

    · Supply: At 1,051.6t, total gold supply was little changed from first quarter 2012

    Then why are Comex Gold Inventories Collapsing?

    In a recent report published on Seeking Alpha, I strongly suggested that my subscribers step back and take an objective look at the big picture of what is actually happening in the gold bullion market in terms of supply and availability of the physical metal. All data points seem to indicate some of the most bullish fundamentals I have ever experienced, and yet prices keep falling.

    In the three months covering January through March, gold futures lost nearly 5%, while shares in the largest gold-backed ETF in the US, the SPDR Gold Trust GLD, fell 7.6% during April, while gold futures lost 7.8%.

    "In the first quarter of this year, we saw the first increase in demand for gold jewelry in the U.S. market in seven years," said Karl Schott, a bullion specialist with the Equity Management Academy. "Total jewelry demand climbed 12% in the first quarter, compared with the same time a year ago, according to the World Gold Council's latest Gold Demand Trends report for the first quarter of 2013. Jewelry demand from China was up 19% to a record 185 metric tons. Jewelry demand from India rose 15% and the U.S. showed a significant increase in the first quarter, of 6%, for the first time since 2005."

    I asked Sprott Asset's Rick Rule in a recent interview about what appears to be an orchestrated action to deliberately collapse the price of gold on the paper market in the face of relentless demand for physical gold bullion. He said:

    "I'm not sure it was an attack. I'm not saying it isn't…..I think there is an awful amount of structured prices, which revolve around gold and silver. Structured products become uncomfortable for the holders at the viable end for the holders…."

    I said, "When you say structured, you mean leveraged?"

    "Yeah. People were involved in yen/gold carry trades, which would be an example where people were required to meet margin calls, or as they're called in this area, performance guarantees, as trade went along, an unwinding of momentum-oriented leverage structured plays can be very vicious. It was particularly instructive, I think, to see the downside volatility occurred in the futures in paper markets, while the underlying physical demand was incredibly strong."

    The Best Cure For Lower Prices Is Lower Prices

    As most market investors will agree, when prices are manipulated to an extreme level, natural market forces begin to shift as the economics of price weakness starts to affect the bottom line. As this transition takes place, we can abruptly shift from ample supplies to shortages, literally overnight. I think this is very much the case for the yellow metal as we move forward from the current price levels. Maguire recently said that there are already delays for delivery of physical gold, up to three weeks in some cases.

    I asked Sprott's John Embry recently, if gold stays at this level, do you think production will slow dramatically?

    "That's a really good question. I'm glad you asked me that, because I've been sort of an outlier on this subject for a while. For the longest time I believed we were at peak gold production, and that you couldn't increase the world's gold production to any great extent because a lot of the old open pits are being depleted, and you can't find enough new gold and get it online to replace it. So I thought we'd be do well to stay sort of flat. Well what's transpired recently, I mean, is devastating as the mining sector and gold mining shares have been crushed and I mean all the exploration of any significance is conducted by juniors in that now they have no money and no future. So I think instead of the gold production model staying flat for the next few years, I think there's a very real probability it could fall dramatically."

    Let's take a closer look at the Gold Trust Shares ETF derivative instrument and see if we can identify some short - term swing trading opportunities for next week.

    The GLD SPDR Gold Trust Shares closed at 131.07. The market closing below the 9 day MA (137.70) is confirmation that the trend momentum is bearish. A close above the 9-day MA would negate the daily bearish trend to neutral. With the market closing below the VC Weekly Price Momentum Indicator of 133.75, it confirms that the price momentum is bearish.

    For the bulls, look to take some profits as we reach the 136.48 and 141.89 levels during the week.

    For the Bears, buy corrections at the 128.34 to 125.61 levels to cover shorts.

    For new bulls use these price levels on a weekly reversal stop to initiate new positions. If long, use the 125.61 level as a weekly protective Stop Close Only and go neutral if activated.

    Our models continue to indicate a long-term bottoming action is taking place and extreme caution is warranted on the short side.

    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 herein constitutes a solicitation of the purchase or sale of any futures or options contracts.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGQ, GLD, PSLV, PHYS, GDX, SLW, HL 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.

    Themes: gold-and-precious-metals Stocks: ETF, GLD
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