The gold price has had a bumpy ride since peaking at $2,790 at the end of October, with the yellow metal down more than 8.2% from that high at the time of writing, but according to some analysts, traders shouldn’t lose hope, as gold has always operated in a category all its own and could soon see a return of the demand that sparked the biggest gold rally in decades.
“Gold has its own laws in trading. The most emotional of all financial assets is traded unlike anything else,” wrote analysts at Pretiorates. “Unlike any other commodity, every ounce newly mined adds to the existing stock of Gold. It moves from vault to vault, in various forms. Occasionally it is melted down and given a new form as jewelry, ingots, coins or something else. It is thus not consumed and is not lost. Every year, around 3,500 tons of new Gold are mined, which are added to the existing stock.”
The analysts noted that this is quite different from the market for other raw materials, such as silver, copper, and other metals, “which are constantly being lost due to their consumption or processing.”
“Unlike Gold, other metals are not recycled at a rate of around 99.9%,” they underscored. “A large proportion of the annual production is therefore consumed and does not return to the market.”
“This means that demand can rise and fall for various cyclical reasons,” they explained. “The more the price rises, the lower the demand, because it is now considered too expensive. The more the price rises, the more willing Gold owners are to realize their profits. This makes it increasingly difficult for the Gold price to rise.”
When gold price falls, the analysts said gold holders become less willing to sell “because they perceive it as too cheap.”
“That the Gold price can thus rise to USD 10,000, as certain market observers dream, is thus a very difficult proposition,” they said. “Many Gold owners would be overjoyed to sell their holdings at USD 5,000 an ounce. But the higher the price rises, the fewer investors are willing to buy at these prices.”
Gold proponents have long argued that gold holdings have historically always increased, the analysts noted, before adding that “the same could be said of financial assets such as equities.”
“But equities rise and fall with the company’s earnings per share,” they said. “If a company’s earnings per share rise, a higher price is justified. This is not the case with Gold. There is no earnings per ounce and no interest rate. It is the pure perception of the investor as to whether the ounce is currently too cheap or too expensive.”
Thus, when gold price rises rapidly, it gets trapped in a purgatory-like state where holders are eager to sell, but buyers are unwilling to purchase.
“Naturally, an investor views an ounce of Gold at around USD 2800 as expensive if the price has risen by 30% or more in recent months,” the analysts explained. “This makes the owner of the Gold more willing to sell it. The opposite applies to potential buyers: the more the price of Gold has risen, the less willing they are to pay the now high price for an ounce of Gold.”
“We have arrived at this level in recent weeks,” they said.
“Before the US elections, the high level of uncertainty meant that there was still a willingness to pay a much higher price,” they noted. “After the elections, which were obviously decided clearly, there are clearly fewer reasons to invest in Gold. At least in the short term.”
The selling pressure has intensified so much over the past ten days “that the Smart Investors Action in Chinese Gold trading has reached a massive level of ‘exaggeration,’” the analysts highlighted. “This alone suggests that a countermovement is likely. Potential sellers have missed the ideal moment to sell, while potential buyers could increase their exposure at much lower prices.”
After highlighting the “seesaw” nature of the stock market in recent weeks, they noted that the “selling pressure has been so strong recently that the ‘market pendulum’ has fallen to its lowest level in over eight months.”
“This also indicates a high chance that the Gold price will recover in the coming days,” they said,” adding that “the euphoria of the last few weeks has come to an end with the strong correction.”
Harkening to the investing adage to ‘buy when there is blood on the streets,’ the analysts noted that “The sentiment indicator also shows that Gold trading is at its most pessimistic level in almost three quarters,” suggesting that now is a good time to place contrarian bets on the yellow metal.
Addressing the pause in purchases by the People’s Bank of China, which was instrumental in gold’s rally to new highs, the analysts explained that “Chinese investors are no longer willing to chase the sharply risen Gold price. Accordingly, the Gold price in Shanghai is trading at a discount compared to Western markets.”
“And the West, which basically missed the rally in precious metals, continues to show no major action,” they added. “The small movements of the ‘Smart Investor Action’ suggest indifference.”
With the “‘market pendulum’ of the market price swinging to an “extremely low value” recently, the analysts said this also “suggests nothing other than a stronger countermovement.”
And looking at the “After open action” in western markets, which has also “reached a negative extreme,” the analysts said, “This suggests that the big investors – who usually trade after the opening (After Open Action) – could now be jumping on the long-term precious metal rally.”
As far as the miners are concerned, the analysts noted that the correction in gold led to mining company stocks falling “to a hard floor,” but said, “here, too, the ‘balance of power’ is shifting: the indicator fell to a multi-month low – a countermovement is on the horizon.”
“The last word belongs to palladium: although the market price recently fell back below USD 1000 per ounce, the massive reduction in short positions in futures positions by ‘non-commercials’ (investment funds) shows that sentiment here is changing from deeply pessimistic to confident again,” the report concluded.
Source: Jordan Finneseth Kitco
