AGE Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. View archives.
8/4/2014: Gold signals bullish shift
Two-tiered trading range
"Inverse head-and-shoulders" pattern
Rising physical demand
Bullish charts for other metals
Great values in classic gold coins
As you may know, gold has been trading sideways for a year, locked in a rather large, two-tiered range following its major correction in 2013. While not altogether unexpected after so many years of rising prices, this stagnation has been a source of frustration to all of us buy-and-hold gold investors. We're reaching out today because we see evidence of an important and potentially bullish shift in the gold market, and we want to let you know about it.
Since the beginning of the summer, gold has been completing what technical analysts call an "inverse head-and-shoulders" pattern, an important chart formation that usually signals a major cyclical bottom and reversal of trend. Gold's fundamentals, too, are pointing towards higher prices to come. This is a very exciting development! In order to understand it, let's take a look back and then a look forward.
Two-tiered trading range
Gold has been range-bound in two-tiered trading for the past twelve months. Looking at the chart below, you can see that it has enjoyed major support at $1,200 per ounce. This support defines the bottom of the lower tier, which we'll call Tier A. Upward resistance for Tier A is at $1,280. Once breached, this resistance level then becomes the support level for gold's higher trading range, Tier B. Primary upside resistance for Tier B lies at $1,350 with major upside resistance at $1,390.
So, these are the two primary trading ranges within which gold that gold has stuck over the last twelve months: Tier A, between $1,200 and $1,280; and Tier B, between $1,280 and $1,350, with occasional brief moves above and below these major support and resistance levels.
Since gold fell below $1,350 last summer, improving U.S. economic news has pressured it towards Tier A. The main driver behind this pressure has been speculation that the Fed will raise benchmark interest rates more quickly if conditions improve, especially in the labor market. Conversely, negative U.S. economic news has buoyed the gold price by reducing the likelihood of rate increases before early 2015. In addition, and increasingly of late, rising world tensions, especially in Iraq, Gaza, and the Ukraine, have pushed gold towards the higher end of these ranges, well into Tier B, as global traders and investors seek safety.
For most of this 2014, gold has been staying in its upper range, Tier B. The wide $200 gyrations of 2013 have now largely subsided. Since February, its range has narrowed to $100 an ounce, between $1,250 and $1,350, holding support at $1,280 for most of this period. The sell-off we saw in June was mild. Gold quickly rebounded from the $1,242 low, so the bottom has clearly been rising.
"Inverse head-and-shoulders" pattern
And that brings us to today's inverse head-and-shoulders formation. This bullish pattern is characterized by a low (the left shoulder), a lower low (the head) and a higher low (the right shoulder.) The key component is the neckline, or primary resistance level. In this case, it runs throughout at $1,350. For gold to signal a true reversal of trend, the price must move and hold above this primary resistance at $1,350. While it did rally to $1,382.50 on Russia's annexation of Crimea in March, it didn't hold above resistance at $1,350. Nonetheless, the subsequent correction in early June set up the right shoulder formation that we now see nearing completion. And fundamentals are improving.
Gold's 2013 plunge from $1,550 to as low as $1,200 was driven primarily by a massive sell-off in the speculative paper-gold markets for ETFs, especially among hedge funds. Many speculators who had piled in after the 2008 financial crisis, driving prices from $1,000 to as high as $1,900 in September 2011, sold last year in two major waves. Gold bullion holdings in global ETFs hit a record 2,632 tonnes in December 2012. During 2013, almost one-third of those holdings, about 880 tonnes, were liquidated as big money managers shifted bets to equities. The first wave of selling occurred during the initial price plunge in the springtime on speculation of imminent increases in interest rates; the second wave came at the very end of the year. These technical sell-offs in paper gold created the left shoulder and head in the inverse head-and-shoulders we're describing today.
This enormous selling-pressure from the speculative paper-gold markets has now dissipated. ETFs are experience inflows again, and supply-and-demand fundamentals in the physical markets are taking precedence once more, which is one reason why the $200 price swings in the second half of 2013 have narrowed to $100 swings this year.
Gold's 50-day moving average recently moved back over its 200-day moving average, an encouraging sign trader's call "the golden cross," which typically signals higher prices to come. Until last week's modest bout of weakness, gold was trading above both its 50-day and 200-day moving averages for the first extended period since the 2013 correction. And it held above short-term support at $1,280 despite this weakness, which is encouraging.
Short-term resistance can be found at the "neckline" at $1,350. Once gold moves and holds above $1,350, something we believe increasingly likely, the pattern will be completed. Gold will then have room to climb to near-resistance at $1,400 and perhaps up to May 2013 resistance at $1,475. In other words, the time of gold being "on sale" may be drawing to a conclusion! The next several months should be very interesting!
Rising physical demand
2013 signaled a sea change in world gold demand as it shifted from paper-gold speculation in the West to physical gold buy-and-hold investment in the East. China eclipsed India as the world's biggest consumer of gold bullion, with physical demand ramping up dramatically after gold went "on sale" in 2013. Thomson Reuters GFMS gold survey reported that Chinese gold demand surged 32% in 2013. While official statistics are elusive, we do know that 1,158 tonnes of physical gold were imported into China from Hong Kong in 2013, more than double the 557 tonnes in 2012. This represents a buying surge of 601 tonnes, or two-thirds of what ETFs shed in 2013.
India's gold consumption was up 5% last year, to almost 990 tonnes, despite higher than normal import tariffs and restrictions. Desperate to trim a gaping current-account deficit, India imposed huge import duties and other measures to curb demand for gold bullion, its biggest import after oil. The World Gold Council estimates that 200 to 250 tonnes of gold have been smuggled into India since the imposition of import controls. With the relaxation of tariffs likely later this year because of a change in government, pent-up demand is expected to cause a surge in Indian gold-buying.
So, while Western nations were shredding gold ETFs at a record pace in 2013, Eastern nations were buying physical gold in 2013 at close to the same rate. This surge in physical demand from Asia has helped the gold price to stabilize and build a solid base above $1,200. And Asian demand is expected to grow more in coming years. The World Gold Council projects that physical gold purchases in China will rise by another 25% in the next three years; Indian demand is expected to return strongly as tariffs recede; and Middle East demand is expected to surge with the establishment of the new Dubai Gold Exchange.
With supply-and-demand fundamentals stabilizing while global monetary policy remains biased towards easing and geopolitical tensions are ramping up, gold is becoming attractive again to safe-haven buyers who were worried about further price declines following last year's tumultuous correction. We're pleased to say that gold's prospects are encouraging as we head into the fall season, when physical demand is typically the strongest of the year!
Bullish charts for other metals
Like gold, silver has been trading in a two-tiered range for the past year. The main difference has been that gold has spent the majority of this time (approximately 8 out of 12 months) in its higher tier while silver has spent the majority in the lower tier.
As you can see in the chart below, silver has enjoyed major support at just under $19 per ounce. This defines the bottom of silver's lower trading range, which we'll call Tier A. Upward resistance for Tier A and support for Tier B, its upper range, are both at $20.50. Upward price resistance for Tier B is at $22.
The recent, sharp rise from $18.75 in early June to the July high of $21.50 is significant for two reasons. First, silver held its major fundamental support level just under $19 despite entering a weak phase in early June. Second, it broke above the blue downtrend line, established by the August 2013 high of $24.50 and the February 2014 high of $22.05. Rising above this downtrend line so decisively signals solid underlying resilience.
Of the four precious metals, silver is the most vulnerable in the current market. It does not enjoy as much "currency-of-last resort" demand as gold, nor as much industrial demand as platinum and palladium, but rather a mix of both. In the last few trading sessions, some weakness has developed to pull silver just under support at $20.50. Its 50-day moving average is rising, though, and may soon cross its 200-day moving average to form a "golden cross" around $20.30. Once this bout of weakness passes, we look for silver to continue in Tier B above support at $20.50 yet below resistance at $22.00. We remain optimistic that silver will generally hold above short-term support at $20.50 but look to buy aggressively on any weakness, especially under $19.50. Conversely, silver must move over $22.00 to signal firmly that it's ready to break out.
Platinum and palladium
Platinum and palladium have shown positive price-action since the beginning of 2014. According Johnson Matthey, platinum consumption for 2014 will exceed supply by 1.22 million ounces, a 32% increase from 2013's deficit of 940,000 ounces. Palladium's 2014 deficit will surge to an astounding 1.61 million ounces in 2014, up from 375,000 ounces in 2013, a 425% increase in just one year.
Since the beginning of 2014, platinum has formed a modest upward channel. The wider gyrations that characterized most of 2013 have dissipated. While major support at $1,360 has been in place for more than a year, a second, higher support level has formed at $1,420 over the past six months. Short-term support currently stair-steps down in $20 increments at $1,480, $1,460, and $1,440.
Upward resistance had been at $1,490 until this past month, when platinum punched back over $1,500 for the first time since last August. As it continues to rise, resistance is likely to be strong at $1,540 to $1,550. Given that price swings in this market tend to be around $80 to $100 per ounce, we expect steps higher to be cautious and choppy. The chart looks very solid, and we anticipate a test of resistance at $1,550 in the coming months. Beyond it, new upside resistance would form at $1,620.
Palladium has been strongest in 2014, a trend we expect to continue with supply deficits driving higher prices. Having eclipsed resistance at $760 in March 2014, it has gained steadily and is now testing resistance at $880. With its strong fundamentals, palladium should break through $880 with relative ease, perhaps go on to challenge the all-time high of $1,090 set in 2001.
Great values in classic gold coins
U.S. gold coins
The current market for classic U.S. gold coins has developed some pricing anomalies that offer exceptional opportunities for savvy investors. We think these market discounts will not last long, so we urge you to take advantage while you can.
1. Premiums for uncertified $20 Liberty gold coins in Almost Uncirculated (AU) grade typically run around 20-30% above gold melt value. Today these large, 100-year-old coins are trading for merely 13-15% above melt, making them a tremendous value for conservative bulk gold buyers. We think they're better than bullion because they offer all of the benefits of bullion plus true scarcity, historical significance, collector interest, and financial privacy.
2. Premiums for certified $20 Saint-Gaudens in MS62 are also currently very low. These extremely popular investment coins typically cost 34-38% more than their gold melt value. Today, premiums have dropped to 25%, which gives them excellent upside potential. Highly recommended for conservative buyers.
3. For greater potential leverage to a rising gold market, the $20 Liberty in MS64 is hard to beat at today's prices and premiums. With a certified population of around 103,000 coins, it is almost twice as scarce the higher-grade $20 Saint-Gaudens in MS65, which has more than 209,000 known survivors. But the $20 Liberty MS64 is trading today at a significant discount to that ever-popular Saint, whereas it typically trades at a 15-25% premium. We view the current discount as a temporary market anomaly and a great opportunity to pick up this outstanding investment coin on the cheap. With a market high of $4,065 in 2009, it also an excellent track record of appreciation in a strong market.
4. $10 Indian gold coins in MS64 offer a superb buying opportunity in today's market. With a total PCGS and NGC certified population of only about 35,600 coins for all dates and mint marks, these coins are much scarcer than most people realize, yet the common dates are trading at about $1,400 per coin today. This price is 10% to 30% lower than we'd normally expect. In 2009, they traded for $3,070, more than double today's price, so they have a proven track record of appreciation when the market is strong. We think they are the most overlooked and underpriced of the eight common U.S. gold coins today.
European gold coins at low premiums
Premiums for classic European gold coins are also lower than usual. These older, mostly pre-WWII gold coins are an excellent alternative to modern bullion coins, offering all of the benefits of modern bullion plus relative scarcity, historical significance, and complete financial privacy. Despite these advantages, they sometimes trade for less than equivalent modern coins, making them a better choice for bulk gold buyers.
1. France 20 Franc "Angels" in Brilliant Uncirculated (BU) grade are currently at a $5 to $8 discount below typical pricing. Minted from 1871 to 1898, they're old, gorgeous, and a great value today. We have a few hundred to offer at these prices.
2. Netherlands 10 Guider "Queens" (BU) are currently trading at the lowest premium over melt since before the financial crisis erupted in 2008. Minted from 1911 to 1933, they are slightly larger than 20 franc coins and much scarcer in the market, but they're trading today for almost the same price. Highly recommended!
Please call us at 1-800-613-9323 if you have any questions.
As always, thanks for your time!
Dana Samuelson, President
Dr. Bill Musgrave, Vice President
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AGE Gold Commentary
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