martes, 18 de noviembre de 2014

martes, noviembre 18, 2014
Gold Is On Trial And The Verdict Is Just A Few Days Away
             
 
 
 
Summary
  • Two big technical Fridays in a row.
  • Gold tightens.
  • Volatility has increased.
  • Russia adding to reserves.
  • All eyes on the November 30 referendum.

The balance of November puts the gold market on center stage. It starting to feel like Friday is the new buying day for gold. After months and months of bearish price action, the gold market has rallied sharply and given a bullish technical signal on the past two Fridays.

A tale of two Fridays

Last week I posted an article: Gold - A key reversal is that enough to turn a bull into a bear? This past week gold prices came off from the highs made at $1179 on Friday, November 7 until the middle of the trading session on Friday, November 14.

(click to enlarge)

In a repeat of the action on the previous Friday, the gold futures market posted another key reversal day to the upside on Friday, November 14. A key reversal occurs when a market makes a new low from the previous trading session and then closes above those previous sessions' highs. Friday, November 14 marks the second Friday in a row that gold has exhibited this bullish trading pattern.

Validating the moves higher was the volume that traded on these key reversal days, in both cases more than 300,000 contracts traded. From a technical perspective, rising open interest, which has increased from 386,186 contracts on October 10 to 450,363 contracts on November 14 (16.6%), is not only a sign of bullish strength but illustrates renewed interest in gold. While I have been negative on the gold price for some time now due to a rising US dollar and bearish action in many commodity markets, the technical action on the past two Fridays in gold requires reflection. Gold is catching a bid and there are some reasons that it could move higher.

Gold tightens

Recently, the gold market, which tends to trade on a deferred basis at progressively higher prices, has begun to tighten up. Gold offered rates or GOFO rates in London have turned negative out to six months in the future. This means that it costs more to borrow gold. There could be a number of reasons for the tightening - the most obvious would be an increase in demand for physical gold bars.

A pickup in physical buying at lower prices may be to blame. However, Central Banks' pulling back gold deposits from dealers would cause tightness. Another explanation may be a pickup in producer hedging. When a producer sells forward production, the dealer providing the hedge must borrow gold in order to sell and lock in current prices. Another potential explanation for tightness in London is the prospect of repatriation of bullion by a major gold holding government. The bottom line is that there appears to be a shortage of physical gold in London, which is causing the negative rates and market tightness.

Increasing volatility

Daily historical volatility in gold has moved from 8.48% on October 29 to just over 20% on November 14. Higher historical volatility and increased interest in the yellow metal has led to increased action in gold options. Gold last traded on November 14 at $1187.90 and a gold call option, which gives the buyer the right to buy December gold futures at $1200 per ounce, traded up to $12.50 after closing at $2.20 on November 13. These are very short-term options expiring on November 24.

Increasing historical volatility has led to increasing implied volatility as market participants expect wider price ranges. Higher implied volatility has pumped up option premiums.

Russia is adding to gold reserves

Mr. Putin has been having a rough time on the international stage in the second half of 2014. The situation in Ukraine and resulting sanctions have weakened the Russian economy. A bear market in crude oil that has sent prices almost 30% lower has choked cash flow for the Russians.

Traditionally, the Russians sell their domestic gold production to domestic banks, namely Sberbank or VTB. These banks then sell the Russian gold on to foreign banks, however, since the implementation of sanctions, many foreign banks are holding off on buying Russian gold.

This is not to say that the Russians do not have other outlets to sell their gold. Other nations such as China would stand ready to buy Russian gold if necessary. However, rather than sell their gold, Russia has added to gold reserves. The World Gold Council recently reported that Russia has added 115 tons of gold to its reserves so far this year. In fact, the Russian Central Bank has been the biggest official sector buyer of gold over the past ten years. Holdings have tripled to 1,149.8 tons (almost 37 million ounces) since the end of 2004. Russia is now the sixth-largest Central Bank holder of gold. In September, Russia added 37 tons to its coffers. China also continues to be a large official sector buyer of the yellow metal. Owning gold in the current environment decreases Mr. Putin's reliance on other Central Bank foreign exchange reserves and decreases his dependence on the US dollar and euro. One must wonder whether it is Mr. Putin's intention to back his currency, the ruble, with gold to strengthen it during the current period of economic turmoil in the country. The prospect for backing currencies with gold could be yet another reason for recent strength in the metal.

November 30th: Decision Day - The Swiss Referéndum

On November 30, citizens of Switzerland will head to the voting booths to decide on an initiative that would back the Swiss franc with gold. A yes vote on the referendum would force the Swiss National Bank to increase its gold holding to 20% of its official reserves. That percentage now stands at around 8%. The Swiss government currently holds approximately 1040 tons of gold. It would require a purchase of some 1,500 tons over the next five years. A yes on the referendum would prohibit the Central Bank from selling gold holdings and force repatriation of all gold reserves within Swiss borders.

Many Central Banks diversify their gold holdings in order to mitigate geopolitical risk.

Countries tend to hold some of their reserves domestically while storing some in liquid trading centers for gold such as London, New York, Zurich, Asia and Australia. The prospect of a Swiss repatriation could account for some of the current tightness in the London gold market.

Polls in early October showed strong support for the referendum but since then the "no" side has gained momentum, holding a slight edge in the latest survey of voters. Politicians and Central Bankers are strongly opposed to the referendum, saying that if it passes, it will mean a dramatic reduction in their capacity to intervene on currency reserves with disastrous potential consequences for the Swiss economy. If the referendum passes, the ramifications are clear... the Swiss National Bank will more than double their current gold reserves, bringing a new and significant official sector buyer of gold to the market. Additionally, they will bring their bullion back to Switzerland, draining physical metal from the hub of liquidity for the gold market, London.

Gold is on trial and the verdict is coming son

The next two weeks are perhaps the most important weeks for the price and value of gold in years.

Technical indicators are currently bullish with consecutive key-reversal days on the past two Fridays. Russia and China are buying gold and increasing their reserves. The gold market is tightening up due to a shortage of physical metal. Volatility, both historical and implied, is on the upswing as daily price ranges widen. The lead-up to the Swiss referendum has caused gold prices to move higher along with the value of the Swiss franc, which also put in a key reversal to the upside on Friday November 14.

The vote in Switzerland on November 30 could prove to be a watershed event for the price of gold and the metal's role as a reserve asset for years to come. A "yes" vote on the referendum could have contagious results, causing pressure on other governments to consider similar monetary policies. Gold is on trial on November 30 in Switzerland; a "yes" vote means higher prices, while a "no" vote means a return to the kind of trading action we have seen since summer. Keep your eyes on the Swiss election - the fate of the direction of gold lies in this decision.

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