The Fed’s current accommodative monetary policy has been the key factor influencing financial markets for several years. Apparently, any major change in the policy will have a dramatic impact on the markets, especially if the Fed decides to curtail it.
The weakness of gold and silver in Q2 2013 turned out to be much more considerable than expected. The prices broke below 2-year lows - $1520/oz and $25/oz correspondingly. Indeed, the price of gold broke below the three levels that were mentioned in the forecast for Q2 - 1450, 1440/35 and 1400. Silver also broke below 24.3, 24.00 and 21.35.
What are the near-term prospects of precious metals? Let’s ponder on this question together with Masterforex-V Academy.
Gold: Fundamental Analysis
Despite the fact that the recent weakness was mainly caused by technical factors, it can also be explained in terms of fundamental analysis, i.e. deflation trends seen worldwide. In particular, the CPIs in the USA, China and Europe were equal to 1,1%, 2,3% and 1,2% respectively. Moreover, a possible cutback in the Fed’s accommodative policy was another factor to drive the markets. As a result, we can see that the global market of precious metals keeps seeing a downtrend. Last week, gold and silver made new year-to-date lows - 1322 and 20.3 respectively.
At the same time, the Fed seems determined to curtail the QE3 program in the near future. Investors look concerned about it and keep monitoring the situation, hoping to get some clues to be able to anticipate the cutback. FOMC members are divided over the issue, which only complicates the situation and adds uncertainty. While Bernanke repeatedly said that the Fed would continue purchasing assets until there are major positive changes in the US economy, he somehow failed to specify the criteria of such major changes (such as exact figures etc.).
Still, lower inflation pressure seen over the last few months makes some FOMC members abandon the idea of curtailing the Fed’s accommodative policy since the rate of inflation is below the Fed’s target of 2.0%. For example, April’s core CPI was just 1.05%.
Despite the fact that the forthcoming FOMC meeting scheduled for the end of July will be closely watched by investors worldwide, it seems like it is too early to cut down on asset purchases. There are several issues to consider:
· The purchases of which exactly assets should be curtailed? Securities, bonds or both?
· How to execute the cutback? According to some schedule, within the period of evaluating economic data or within the scope of some quantitative range?
· What should be the pace of the cutback? Is it better to curtail the program slowly, say, $10-15bn after every single FOMC meeting or fast, say, $35-50bn followed by a pause?
· Expiration date: Is it better to cut down on long-term assets first or to curtail the purchases of all assets evenly?
Moreover, strategically, there was no reason to start curtailing the Fed’s accommodative policy right after the FOMC meeting in June since the previous meeting minutes read that the FOMC will be guided by the rate of inflation and unemployment when considering any changes in the Fed’s QE policy.
The possible cutback in the Fed’s accommodative policy seems to be the key issue for all financial markets at this point. In particular, investor expectations reflected in higher volatility seen across stock and bond markets. Apparently, the US Dollar will be under the influence of these expectations throughout the rest of Q3. If there are further hints at the cutback, bond yields may well make the US dollar strengthen against other major currencies.
Has Gold Reached the Bottom? Masterforex-V Academy’s Opinion:
Sometimes markets reach extremes. At this point, we have all reasons to assume that gold has reached the bottom and is not going to decline below the local lows. Technically, the reversal pattern called “Double Bottom” (June 28th – July 5th) indirectly supports the idea that the market is about to reverse the trend.
As far as the COT data are concerned, the situation looks as follows:
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GOFO (Gold Forward Offered Rates) remain below zero. Fundamentally, it is next to impossible to analyze a controlled and non-transparent market until there is a physical commodity present in it. When the market runs out of physical gold, the control is gone since there is actually nothing to control.
Meanwhile, COMEX’s gold inventories keep diminishing, both total and registered:
ETFs keep seeing sellouts
The information available at this point is just a drop in the ocean, we can actually see just the top of the iceberg. Therefore, the only way to find out what the big-scale players are up to is to apply Sherlock Holmes’s deductive method, i.e. if to take all the facts and put aside the most probable scenarios, we get the truth since this is the only thing left!
There can be several goals:
The main one is to control and operate the market of real money in order to preserve the faith in governments’ paper money as well as the financial system based on the constant creation of debt. It is quite logical to make the market collapse in advance of the crisis, which needs to be delayed.
The second goal: The Fed has faced an unpleasant issue – it has to give 3 400 tons of gold back to Germany. Since there has never been (and will never be) any physical audit of the gold, we may assume that there is no German gold in American vaults. This is logical as well sine the USA has been living in debt for 5 decades, thereby transmitting inflation outside of its territory. What could prevent the Fed from using those gold assets? Apparently, the gold was sold, lent and leased to get the funds to invest in more profitable assets. However, now the Fed has to purchase the gold back. Obviously, the only thing to do it without going bankrupt is to drop gold prices considerably to make the gold they have to buy back a bargain. It is logical, isn’t it?
Even though the Fed talked Germany into extending the period of gold repatriation to 7 years, the Germans are surprised since they haven’t still seen any first tranche. The first 300 tons of gold can be transferred by air. A Boeing 747-8F can carry up to 140 tons.
Gold was depreciated and undervalued. So, everyone who wanted to buy some gold already did it. Well, they can still do it. Apparently, US banks bought right at the very bottom. Such operations are planned very carefully and secretly. Moreover, do not forget that the amount of physical gold is limited. So, when everyone buys, the market runs out of the commodity extremely fast. Yet, gold is purchased by those who have money. For example, the chart below, courtesy of Masterforex-V Academy, reflects the current state of affairs in Shanghai Gold Exchange (SGE), COMEX and London:
While less than 5% of COMEX gold contracts are subject to actual delivery, SGE can boast much higher delivery ratio, which is always over 25%:
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The SGE delivery volume does impress since it exceeds the import of gold through Hong Kong and China’s overall production of gold taken together.
Unofficially, China has turned into the biggest owner of gold assets on the planet. The Fed had to sacrifice gold in order to save the financial system. Still, this is not a long-term solution. The Fed only bought a delay.
The bottom line:
Judging by the logic, the events and the current state of affairs (along with the fact that physical gold is limited) we can conclude that gold has reached the bottom and is now ready to start a major rally. Since the market is controlled and manipulated, the price may well be quickly sent at least to $1500-1800/oz. The bias is clearly bullish. The potential is immense.
Recommendations:
If the rally continues and consolidates above $1200-1300/oz, go long and buy put options after retracements.
