Despite heightening geopolitical worries around the world, capital is not flowing into safe haven assets as has been traditionally been known to happen. Recent news headlines have highlighted escalating violence in the Israeli-Palestinian conflict, denials from China that a $200 billion trade concession had been made to the US, and North Korea’s threats to walk away from a potential peace summit with US President Donald Trump. But not only did the precious metals market not rally, gold declined in price and fell below $1,300 per ounce for the first time in 2018. Last week, Gold futures settled at 1,291.70, finishing its worst weekly performance since December and is headed for its first consecutive monthly loss since last year. It appears that traders who have been bullish on gold are now losing patience while they have been waiting for a rally like what we saw in 2016.
According to the Commitment of Traders Report (COT) from the US Commodity Futures Trading Commission (CFTC) last week, large speculators, including money managers, reduced their net long position in gold futures and options by 40% to 107,133 contracts, which is the lowest figure since last summer.
Without any catalyst to drive gold higher, traders are rightfully nervous about maintaining long positions in gold, since the most heavily traded gold futures in the US are denominated in US dollars, and the US Federal Reserve Bank is on course to hike interest rates. A tightening monetary policy will hurt gold, since higher rates will dampen inflation. In addition, the Federal Reserve is also scaling back its monetary stimulus by either selling or not rolling over its balance sheet of US Treasury securities which it had purchased during the Quantitative Easing program. Without fresh supply shocks to make investors scramble to accumulate gold, the market is now focused on monetary policy which is clearly favoring a stronger domestic currency. That is not good news for gold since it has historically been a hedge against a weakening currency.
But there are reasons to believe that gold prices may still be contained within a larger consolidation and not have much room to fall because of shifting supply concerns. Last week, Mr. Ian Telfer, the chairman of a large Canadian gold producer told the Canadian media that all the world’s gold deposits have now been discovered and annual gold production may begin to decline. He reasoned that since gold production has been steadily rising for 40 years, that there is a possibility that we have reached “peak gold”, the theory that maximum global production of gold has been already been attained. If supply were to decline, then either gold must decline in price or new demand must be met from existing stockpiles.
There is now evidence that increasing Chinese demand is being met from US stockpiles. According to the US Geological Survey, gold exports from the US to Hong Kong more than doubled in February to 15.5 metric tons. And it is not just Chinese demand, because total US gold exports also jumped 40% because of increased demand from the UK and from Switzerland.
And according to the World Gold Council, annual gold production from mines have only been increasing incrementally, from 2,744 metric tons in 2010 to 3,298 in 2017. But the year on year increase from 2016 was less than 1%.
Mr. Telfer’s comments could have impacted the market more if prices were in the process of bottoming, but since gold has already been consolidating at the high end of 2017-2018 prices, traders may have decided to wait for further consolidation before making further bullish bets for 2018.
In the daily chart below, last week’s price decline brings gold closer to the volume weighted average price (dotted yellow line) of the expanding symmetrical triangle pattern (solid yellow line) which began forming last year from April 17th at 1297.4 and May 9th at 1228.7. Gold prices have been consolidating since. And now that the bulls have lost their patience waiting for a further rally, it may well have to travel down to at least the dotted yellow line before it can try to form another bottoming pattern before the bulls will try again.