Gold's Trump Event And India's Weak Demand

Includes: GLD, GLL, IAU
by: Carlos X. Alexandre

As gold reached for the sky, with the interim daily high of $1,920 taking place on September 6, the word spread that the metal was the "thing" to own, and the argument for further gains was plastered all over the media. Then on September 15, Donald Trump accepted a security deposit in gold for a lease by American Precious Metals Exchange, and the event is still reported at the company's website.

For the first time in the history of the Trump Organization, Donald J. Trump will be accepting gold bullion as a security deposit. APMEX, one of the largest U.S. precious metals dealers, will give Mr. Trump Gold Bullion today as a deposit on a 10 year commercial lease for the entire 50th floor at 40 Wall Street, also known as the Trump Building.

On that day, gold December futures opened at $1,821 and closed at $1,779, or a drop of $42, which was a small decline considering the price - but it appears to have been a "Trump Event," similar to a "Shoeshine Boy" moment.

But all kidding aside, some viewed the fact that Hong Kong started to trade gold in yuan as a positive development for the gold market - and I reported it in the article, “Gold Seeing Long-Term Support At $1,540, ” which is now $1,590. But thus far that new demand is not proving to be very helpful. Gold dropped after the announcement, and then rose to an interim high of $1,804, mostly due to dollar weakness, which has since reversed.

What has become apparent is that gold is not holding well as a hedge against instability, and investors may be questioning why the hedge is not working as the world gets increasingly more unstable. In addition, and from a commodity perspective, jewelry and industrial market demand is hardly a growth business, and investment demand has truly been the wind beneath gold’s wings. Thus, the vicious cycle could feed itself, where declining demand from investors will beget yet lower demand from investors.

It has also been widely reported that central bank gold buying was on the rise, according to the Financial Times' article “Central bank gold buying at 40-year high.” However, it’s also known that central banks tend to be late to every party. In addition, gold’s main market is pulling back, as reported by Reuters with the article “Surging gold prices push Indians to rein in, recycle.”

Simone Bora is contemplating the unthinkable - an Indian wedding without lavish amounts of gold after record high prices and a sinking rupee have dimmed her hopes of sparkling at the party.

Although the rupee's devaluation is contributing to the problem, the good news is that the price is now lower, and if cash starts to leave equities and real estate, some demand will be created, unless the dollar is sought as refuge, instead.

The higher prices have taken some of the sheen off Indians' age-old fascination with gold as an investment against inflation - currently near double-digits - particularly as a lot of cash is tied up in laggard equities and real estate markets.

As recently as three weeks ago the sentiment toward gold was positive, according to Bloomberg, and was mainly driven by European instability.

Eighteen of 26 surveyed by Bloomberg expect bullion to rise next week. Holdings in exchange-traded products backed by gold reached a record 2,350.8 metric tons on Nov. 23, now valued at $127.6 billion, according to data compiled by Bloomberg. Hedge funds and other speculators increased their net-long position, or bets on higher prices, for four weeks, the longest stretch since March, Commodity Futures Trading Commission data show.

With the bases loaded, not much has changed regarding the eurozone, and the market is choosing to flee the euro to the benefit of the greenback, with gold’s correlation to the dollar coming into play once again. I believe that the recent rise in the metal’s value was driven by an expectation that both the dollar and the euro would be printed with abandon. But the Fed hasn't provided more paper, and Germany is resisting the exercise, and will continue to do so for as long as it can – or ultimately embrace the fact that debt will find its way into the bankruptcy books.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.