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Gold Will Never Die

Summary

Gold is a chemical element with the symbol Au (from Latin: aurum, "shining dawn", hence adjective, aureate).

Gold standards have provided a basis for monetary policies.

Has this safe haven had its day ?

Gold is a chemical element with the symbol Au (from Latin: aurum, "shining dawn", hence adjective, aureate) and a transition metal. Gold is soft, shiny and has served as a symbol of wealth and a store of value throughout history. Gold standards have provided a basis for monetary policies. Gold was replaced after World War II by a system of convertible currencies following the Bretton Woods system. Gold standards and the direct convertibility of currencies to gold have been abandoned by world governments, being substituted by fiat currencies in their stead. Switzerland was the last country to tie its currency to gold; it backed approximately 42% of its value until Swiss joined the International Monetary Fund in 1999.
Gold suffered a big drop. Gold prices descended to five-year lows as a rapid sequence of selling across Shanghai and New York markets during the illiquid early Asian trading hours triggered a crash. Multiple sell orders shortly after the Shanghai Gold Exchange opened sent the U.S. gold futures contract GCv1 down to as low as $1,077 per ounce.



An estimated 33 tonnes of gold in Shanghai and New York worth $1.3 billion changed the counter within minutes. A lack of liquidity, with Japanese markets closed for a holiday, accelerated the slide.
All of London's main listed gold miners, Randgold Resources, Fresnillo, Petropavlovsk and Acacia Mining, were hit by the sell-off. In addition, Goldcorp Inc., the world's biggest gold miner by market cap, fell to a decade low per share. Shares of Barrick Gold Corp., the world's biggest gold producer tumbled to a price not seen since 1989. Eldorado Gold Corp. also fell to a 52-week low. see HUI



Is gold really over?


Gold/USD
The gold price normally falls when the dollar strengthens, see Usd index vs. Gold



The inverse relationship continue because a rising dollar decreases the value of other countries currencies. This decreases the demand for commodities including gold and decrease the gold price too. When the U.S. dollar starts to lose its value, investors look for alternative investment sources to store value. Gold is an alternative. Furthermore the Australian dollar has a high correlation to gold due to Australia's extensive gold mining operations. The key to trading positively correlated assets, is finding a direction from one of the underlying assets before making a trading decision. If traders are seeing the AUD/USD push to lower lows, this could easily be the signal for a bearish bias on Gold. Conversely if gold is going upwards, this could also be a signal of a new uptrend on the AUD/USD currency pair. Traders that are bullish on Gold could choose to trade the AUD/USD instead of the metal itself.


Gold/Oil Ratio
The world's most important commodity, crude oil, has fallen. The price levels of gold and crude oil are related. Simply oil is relatively expensive and gold is relatively cheap when the ratio is below 9, and right now oil is relatively cheap and gold is relatively expensive because the ratio is above 20.
There is a very close relationship between this ratio and the strength of the global economy, specifically the US economy. When the ratio is falling, it implies that oil is becoming expensive in a relative sense to gold. This typically happens in a strengthening economy, when improving macro economic conditions increase the demand for crude oil, while at the same time reducing demand for safer assets such as gold. Those who trade in the ratio are selling gold and buying crude oil, which means the ratio will fall.
From 1973 to 1974 oil prices were up almost 97% while gold prices were up 58.13%. The following year oil prices actually fell from 1973 - 1975 oil was up 61% while gold was up 65% but then in 1976 gold fell and oil took off so that by 1978 oil was up 214.7% and gold was up 98.6%. Once again when the ratio indicated that gold was overpriced oil performed better. If you had bought gold from 1970 -1973 switched to oil from 1974-1976 and back to gold for 1976-1980 instead of just being up 1600% you would have been up about 3600%.


Gold/Bitcoin
Given the recent macroeconomic announcements and news, from the slowing global economy to the Fed's monetary policy stance, both these assets seem to be responding in a similar way to other exogenous variables. All this could suggest that bitcoin is maturing into a commodity asset, like gold. Bitcoin may be the last safe haven of the global economy.


Gold/Fed



This picture shows that the reserve bank credit and the gold price are correlated, but what is behind this two variables that they are both being pushed by the same momentum: a slowing economy. It causes the Fed to start quantitative easing and investors to buy gold. The reserve bank credit has gone upright since 2008. Monetary policy plays a big role in gold's price action and so the strategies put in place by the central banks around the world need to be watched very carefully. The Fed has also stated that it will raise interest rates end of the year 2015. The problem arises when the economy falters, unemployment rises and inflation turns into deflation. In the absence of a major event we would anticipate that the Fed will go ahead and end QE. So the point is that if and when the Fed decides to take action on interest rates then gold and the associated mining stocks will take a deep fall.
The Fed constantly reminds us that they are data driven and should the data turn soft then we could see the re-introduction of QE in 2016. This would indeed be the turning point that we have been waiting for and the signal, that just isn't there at the moment, to push gold prices higher. Once we are sure that this sort of action is on the cards then we will hit the acquisition trail, until then we will continue to trade to the short side. In addition, there is also the currency implication; with QE by the ECB potentially further weakening the Euro it therefore strengthens the USD as a knock on effect. It is harder for gold to rally in USD if the USD is getting stronger.


Gold/Interest Rates
There is a close relation of the gold's price to the 10-Year Treasury yield. In the case of the gold-interest rate correlation (Erb and Harvey) over the last decade the r-squared is very high -0.78. High negative correlation between gold price and real interest rate relates only to a period of 15years. With longer periods, the correlation falls to only -0.31. Much more interesting is the ratio of gold's price to the level of the consumer price index. Since that ratio historically has averaged 3.4-to-1, a rule of thumb could be that gold is overvalued when the ratio is above that level and undervalued when below. Currently, the gold-CPI ratio stands higher, suggesting gold remains quite overvalued. That in turn suggests that gold's fair value is just under $833 an ounce.


Gold/China
Another strong factor in gold's price action is the rise of Asia as a trading hub for gold. Traditionally, Western markets were at the center of trade but in recent years, we have seen increased interest in trading hubs in the East, including the establishment of the Shanghai Gold Exchange, the Singapore Gold Exchange as well as Asian-tailored product launches by the CME. Chinese margin debt has risen 123% year-to-date, reaching a new record of 2.3 trillion yuan ($370 billion) on June. Margin debt in China has reached 8.5% of the value of China's tradable shares, see chart margin lending in china has skyrocket, investors have started to pull out of the market on concerns the government could be looking to rein in this debt-fueled rally.




Meanwhile, more and more analysts are also sounding louder alarms about the over-heated China market. The Chinese stock market has crashed, see SSEC. And China's 1.4 billion people are the biggest buyers of gold in the world.



The world's biggest gold buyers be troubled with a major liquidity crunch. Many won't have the cash to buy anything, not even gold. Worse, hundreds of Chinese stocks are halted and huge numbers of investors are facing margin calls. That means that many who own gold will be selling because it's the one thing they can get a bid on.

In sum, the price of gold is affected by various mechanisms of artificial price suppression, arising from fractional-reserve banking, naked short selling in gold and particularly involving the London Bullion Market Association, United States Federal Reserve System and banks such as JPMorgan Chase. Gold market observers have noted for many years that the price of gold tends to fall artificially at the start of New York trading and trader developed seasonal trading strategies for gold. Important price variables for gold are bank failures, low or negative real interest rates for example the stagflation that occurred during the 1970s. Lastly war, invasion, crisis because in times of national crisis, investors fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset and a safe haven. So with the risk of Greece which will influence the world markets and with a Chinese stockmarket crash, why is gold struggling ?
Net long positions in Gold have dropped to their lowest since Dec. 2013 and outright Gold short positions went up for a sequence of seventh weeks to the highest since data began in 2006. Gold shorts have never been higher.



Actually, investors are not prepared for investing in gold because they anticipate the Fed raising rates. I think in the next three months we'll see a downside risk below $1100 an ounce is likely. Has this safe haven had its day?
The bigger macroeconomic picture is also bad for gold, as central bankers across the world prepare the ground to raise interest rates for the first time in nearly a decade. Bank of England Governor Mark Carney also capped increasingly hawkish noises with recent comments that markets should be on the alert for a rise around the turn of the year.
Furthermore good news for the dollar is generally bad news for gold. The metal may be a store of wealth in more turbulent times, but when other assets are offering higher returns, why hold it. Precious metals will slide until the liquidity crunch in China passes. We saw the same constellation in 2008. But when this reversal happens, the rebound should be even sharper. Unlike most Americans or Europeans, Chinese people do see gold as an important form of wealth protection.
If the gold price will continue to fall below USD 1100 it is conceivable that a strong rebound will occur. Instead of borrowing all this money from themselves by having their central bank buys bonds directly from its member governments, why don't Europe, Russia and China spend their gold instead of doing Quantitative Easing (QE) ?
QE allowed primary dealers not banks, such as Goldman Sachs, JP Morgan Securities and Morgan Stanley to sell treasury bonds to the central bank (Fed), which would then print money to cover the cost of the treasuries. Ideally, this money would then be used to make loans, buy stock options, conduct normal business and help the real economy.
Surely instead you would go down the Chinese route and buy precious metals as a money that no central bank can print. Then as the central bank system inflate away the value of fiat paper money and their rising debt you will hold the only money everybody can still trust to have value. Caveat emptor. Gold will never die.

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