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V I T A L S T A T
I S T I C S
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Latest Commitment of Traders,
June 23 |
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Gold |
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Large Speculators |
53% |
8% |
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Small Speculators |
13% |
6% |
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Commercial Hedgers |
23% |
75% |
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Offsetting Spreads |
11% |
11%
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100% |
100% |
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Click here for actual figures for the years 2002-9 (and
earlier). Click here for recent comparative
report
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(COMMENTS BELOW ARE
UPDATED AS OF THE U.S. CLOSE ON THURSDAY, JULY 2)
TECHNICAL FORECAST: Short term
indicators continue to tend toward negative.
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Gold
Summary: Gold fell back today (Thursday), still not far from
the lowest point in over a month. In the
past year the price made several
attempts to
get past $1,000 but each time has fallen back. A sustained
rise above $1,000 would tend to be positive but the
declines of the past two weeks are turning the indicators
downward.
The number of
long speculators in the gold market is beginning to fall back after
increasing in the past month. Based on the
latest weekly report (as of June 23), the number of long speculators was at
246 thousand, down 7,000 contracts in the past
week, but more significantly down almost 50,000 contracts in the
past 2 months,
suggesting that more speculators are selling than buying, a
potential source of pressure on the gold price if this trend
continues.
A significant factor is the
outlook for the stock market since commodity prices have recently
been influenced by the sharp moves in the stock market. As of the end of May (latest
available) the price earnings ratio on the S&P 500 was
134, the highest since records were kept
on the index in 1936. The stock average remains overpriced in relation to
earnings in the extreme, a very negative indicator since stock prices
ultimately depend on earnings. The ratio is
very high when compared to an historical
average of closer to 15 or 20 times earnings (click
here for a chart of past price earnings ratios). A
falling stock market is potentially bearish for the gold .
The number of long
speculators in the New York gold futures market hit the
highest point in history at 315 thousand contracts last
year. (Click for actual figures for the years: 2002 - 2009 2001 2000
1999.)
The number of total open contracts
now (as of Wednesday) was 378 thousand contracts, higher than last
month but still significantly below the record hit a year
ago at almost 600,000 contracts, indicating less interest
than there was last year when gold hit its high over $1,000.
An important factor is that under
present economic circumstances, there is less money with which to
buy jewelry or to invest in commodities, gold included. This is
reflected in the low level of demand in the
latest reports. (Refer to the tables which show
demand in tonnes, rather than dollars to get a more
accurate picture.) Demand for jewelry which
usually represents about 70% of demand for gold was down 24% in the latest
reported quarter (first quarter of 2009).
In spite of the recent rally, a
resumption of the decline could potentially take the gold price down
significantly if the U. S. Dollar resumes its rise. Click for a chart
of August Gold, the most active contract (scroll beneath the chart for a computerized technical
analysis) Click
here to put recent activity in a longer term
context. (Click here for recent futures
quote) ( here or here or here or here or here or here for 24 hour spot
price).
The gold price could potentially
fall to near $500 in a relatively short time. As an example,
after gold rose sharply in 1979-1980 to $850 it was almost
immediately followed by a drop to near $500 in less than 2
months. It will not be surprising to see the gold price
take a similar loss in a short time (click
here for a long term chart).
Demand for physical
gold has decreased in the latest reported quarter (1st qtr of
2009) mostly due to a large decrease in the demand for
jewelry.
The AUGUST Crude Oil contract (now the most active
contract) settled today (Thursday) at $66.73 from $69.31
yesterday. It was largely the rise in the Crude Oil price
which helped bring gold to its recent high levels - now the Crude
Oil has fallen back from last year's highs. Although Crude Oil
rose in the past month, it is only half of what it was less than a
year ago. (Click
here for a 2 year gold chart - click
here for a 10 year chart).
Demand for physical gold was at its
highest during the bull market in stocks in the 1990's when public
interest in investment was at its highest and there was more money
around with which to buy gold jewelry. Since then demand for physical gold has
been mostly declining. Now that the global economy is mostly
slowing, it is likely there will be even less money available to buy
gold jewelry.
The number of total open contracts in the New York
gold futures market hit the highest in history on January (2008), at
593,953, over four times as many as normal and the highest
number of open contracts since the Comex began trading gold in
1975. The number of open contracts has since fallen back
to just under 300,000 (but has since risen to 378 thousand contracts
in the past few months).
The potential still exists for a large rise
in the gold price in the longer term (although increasingly unlikely
in present circumstances) if the U.S. Dollar
resumes its weakness. The potential exists for gold to rise
well over $1,000, possibly as high as $1,500 or even $2,000 or
higher if the gold resumes its uptrend. (Under
almost similar circumstances in 1979-1980, the price of gold and
silver tripled, or more.) One significant
factor so far remains different - interest rates soared in 1979-1980
but that has not been the case now (at that time longer term
Treasury interest rates were over 15%, while the prime borrowing
rate reached 21%).
As the gold chart shows, the
gold price rose to highs not seen since 1980. The 9 day
relative strength is typical of other indicators as well - it would
normally be overbought between 70 and 80 (although it could go
higher) and oversold between 20 and 30. Now (Thursday) it is
at 44 from 51 yesterday, still below its
previous high of 87 (hit on September 2007) and above its low in
2008 at 12.
Long speculators outnumber the
shorts by 66% to 14% (as of June 23, latest
available).
The September U.S. Dollar Index was lower today (Thursday), closing at 80.49 from
79.87 yesterday, still a long way from its high around
120.00 which it traded at in February 2002. (Click here for
more info about the U.S. Dollar Index and click on the "U.S. Dollar
Index" in the right column. Click
here for a longer term chart of the Dollar.)
The gold price is heavily influenced by
day traders in the futures market. Usually 95% or more
of the trading is done by day traders.
Because of the high volatility gold traders may consider the use
of gold options. A good place to get futures and options
prices is at the New York Mercantile Exchange, the largest and most
significant market for gold futures trading.
(Another good place for gold option prices is on this link - click on either
Call or Put in the far right column.)
The September Canadian Dollar settled today
(Thursday) at .8610
from .8710 yesterday.
The September Australian Dollar settled today
(Thursday) at .7910 from 8050 yesterday.
Keeping your money
safe:
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During these uncertain
weeks ahead, for those who may want to stay all or partly on the
sidelines, the safest place to keep your money and get
near the highest interest rates (usually but not always) is
in U.S. Treasury obligations. You can open your own account (minimum
$100), free
of any commissions or any other costs (excepting an annual minor maintenance
fee). To go directly to their site,
click TreasuryDirect (a
U.S. government web site). You will find out
everything you need to know. You can also call at the number they
furnish - they are usually very helpful. Interest on U.S. Obligations are
exempt
from State or local income taxes. but subject to Federal income tax.
Interest rates now (January,
2009) are near the lowest in history but are usually higher during less volatile
times.
Some physical gold
fundamentals:
For the latest available supply and demand figures for physical gold,
the World
Gold Council has published actual figures for the past several
years.
Demand
figures for the full year of 2007 show total demand for the year was up
4%, but maybe more significant is the latest reported quarter, (4th
quarter of 2007) total demand was down 17% for the quarter (843 metric
tonnes vs. 1,013 last year), largely due to a 17% decrease in jewelry
demand. This was a period during which the dollar was
making new lows, widely thought to increase gold investment, but so
far it has not. The lower demand may be due to the big increase in price,
suggesting that higher gold prices will decrease the demand.
A very fundamental issue is whether the gold can continue to rise when
supply is up and demand is down and remains at relatively low levels
compared to the demand during the 1990's (click for
latest supply
and demand figures).
When the gold price did in fact
break out and soared in 1979-1980, there was actually a demand for physical
gold and a rise in price was justified. There were often long lines
at gold dealers as many people rushed to buy Krugerrands and other gold
investments. Nothing like that is happening now as so far the demand
is mostly confined to the futures market.
Demand for gold was helped by the bull market in stocks during the 1990's
when there was more money to buy jewelry. For example, global
demand for gold jewelry was over 3,700 metric tonnes in 1996 compared to
only 2,425 in the year 2007.
As an indication of the public's
interest in gold now, following are the figures published by the U.S. Mint
showing the amount of gold sold by the U.S.
Mint in the form of "American
Eagle" coins bullion sales (in no. of ounces):
|
No. of Ounces |
|
1997 |
771,250 |
| 1998 |
1,839,500 |
| 1999 |
2,055,500 |
| 2000 |
164,500 |
| 2001 |
325,000 |
| 2002 |
315,000 |
| 2003 |
484,500 |
| 2004 |
536,000 |
| 2005 |
449,000 |
| 2006 |
261,000 |
| 2007 |
198,500 |
| 2008 |
860,500 |
| 2009 (thru April) |
460,000 |
There has been an increase in demand for U.S. gold coins in the past
few months, but this increase is made up for by a decrease in jewelry
demand.
There doesn't seem any reason that
anyone can worry about a shortage of gold now or in the foreseeable
future.
(Most of the remarks below are repeated:)
To put the recent rise in context of
what the gold has been doing, click here for
the price going back to 1974.
Click
here for the gold price chart since 1971 in several different
currencies.
The number of contracts in
the gold futures market grew to record numbers, not seen since gold
began trading in the New York Comex in 1975, and stayed there for all of the past
year as
many funds and other speculators stayed in the market longer than they
have during ordinary rallies.
Recent differences with
countries with whom close economic cooperation is necessary has cast
uncertainty on future trade activity and its affect on the value of the
dollar. This type of uncertainty is
not too much unlike what occurred in the late 1970's, although with one
major difference, interest rates, had then soared as high as 15% for long
term Treasury Obligations. In spite of that, the U.S. Dollar continued to
fall and it was not until 1980 when a new administration was evident that
things turned around.
Confidence in the future
stability is a principal factor determining the value of the Dollar and
with it, the gold price. With uncertain relations with previously strong
allies whose trade and cooperation is needed to maintain the stability of
the Dollar, the strength of the Dollar cannot be relied on, particularly
since it is in a downtrend which began 4 years ago. The future is
unpredictable and uncertain.
The precious metals futures
markets have reacted along with the U.S. Dollar, beginning to rise as the
Dollar declines, a situation similar to the late 1970's. So far the
reaction is minor compared to the runaway we saw in 1979-1980, but an
acceleration is possible, particularly if gold can surpass previous
resistance at the $420 - $430 area (these figures refer to when this was
written, about the beginning of 2004, four years ago).
Industry Hedging:
There has been a lot of talk about
some mining companies planning not to hedge as much as they have in the
past. Of course there have always been some companies who don't
hedge believing in the long run that prices will average out.
However, if mining companies have cutback on their hedges, it is contradicted by the present
position of industry hedgers.
The
futures market exists for the benefit of miners to take advantage of high
prices when they occur in the futures market. A miner can lock in a
good profit in the futures market when prices are right.
If a mining company passes up the
opportunity to lock up a good profit, he will then be speculating
instead. Sometimes he will be right and other times he will be
wrong. The subject of hedging has been discussed for centuries and
there are many different attitudes toward it. However, most
businessmen agree that if you can lock up a profit rather than speculate,
you should do so.
Those miners who decide to speculate
rather than hedge at a profit put their companies at risk if the price
goes the wrong way. For an ongoing business not to hedge in a good
profit, would be considered irresponsible or just plain greedy by
some. Solid, long lasting companies are
usually not based on speculation.
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What influences the gold
price?:
A constant issue in the gold market
is what influences the price. Most people logically believe
the supply and demand figures in the physical gold market will determine
the price.
However, the futures market in New
York is the single largest place in the world where more gold contracts
are traded than any other. The price at which the physical gold
changes hands, in almost all cases, depends on the price at the New York
exchange. Practically all gold bullion and gold coin dealers will
base the price of their transactions on this price.
Therefore, the supply and demand at
the NY exchange is probably the single most important factor (at least in
the short term) in determining the outlook for the gold price. We
can see large changes in the supply or demand in the physical market, but
if the price does not first change at the exchange it is not likely
to change the price of the physical gold.
Of course, in the longer term,
supply and demand in the physical market will cause the futures market to
change accordingly, but significant and sustained changes in the physical
gold market are few and far between.
************
To get a better view of the gold market, click on
the Weekly gold chart or the
Monthly gold chart.
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OTHER GOLD MARKET PAGES
ON THIS WEB SITE:
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years
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every Friday evening)
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*Prices are those on the New York Commodity Exchange (Comex), part of
the New York Mercantile
Exchange, the principal market for gold futures.
*Commitment of Traders percentage figures rounded off.
** Open interest figures refer to the previous day's trading since they are not released
by the exchange until the following day. |