Gold Buyers Losing Their Patience

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.