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Gold Breaks Through Technical Barriers & Confounds Wall Street
On Valentine’s Day, gold received a trio of gifts from a world that is clearly in love with precious metals – thereby defying Wall Street and a legion of other doubters. First, gold closed above $1300 per ounce for the first time in over three months, since November 8, 2013. Secondly, gold crossed its all-important, widely-followed 200-day moving average for the first time in about a year. Thirdly, February 14 marked the 45th day of the New Year, the day on which hedge fund managers must disclose their holdings to the Securities & Exchange Commission (SEC). Many gold investors were waiting on pins and needles to see whether some major Wall Street gold believers (like John Paulson or George Soros) had sold some gold.
Not to worry. Paulson & Co. declared that it held onto all of its 10.2 million shares of SPDR Gold Shares (GLD) throughout the entire 92 days of a disappointing fourth quarter in which gold fell from $1341 to under $1200 per ounce. Paulson’s gold shares lost over $120 million on paper last quarter, but nearly all of that loss was recovered due to gold’s 10%+ rise in early 2014. Meanwhile, Soros Fund Management added some 6.3 million shares (worth $111 million), plus call options, in Canada’s Barrick Gold, the world’s #1 gold miner. By contrast, PIMCO cut its holdings in SPDR Gold for a fifth straight quarter.
Gold confirmed another buying signal in 2014. In addition to crossing its 200-day moving average, gold also carved out a clear “double bottom” chart pattern, another powerful bullish omen. Using the London gold price fix, gold touched a bottom of $1192 on both June 28 and December 23, 2013. (On the last day of 2013, gold touched $1182 in intra-day trading, but its final London closing of 2013 was $1201.50.)
Gold’s 200-day moving average and double bottom are clearly outlined on this 12-month price chart:
Gold demand has skyrocketed lately. Using UBS’ data, gold ETF holdings rose by 240,000 ounces on February 13, the largest daily rise since October of 2012. Holdings in SPDR Gold Shares, the world’s largest gold ETF, rose by 7.5 metric tons that day alone, and by a net 15.9 tons in the three weeks from January 27 through February 14. In addition, monthly sales mushroomed to 246 tons on the Shanghai Gold Exchange in January, mostly in celebration of the Chinese (lunar) New Year, falling on January 31. We are also seeing gold vending machines in the Middle East! This year, we’ll probably see between 60 and 70 new ”Gold to Go” vending machines placed in airports and shopping malls in the Middle East.
Most of Wall Street was caught Flat-Footed with Gold’s Sudden Move
At the end of 2013 – as we have previously reported – most Wall Street firms predicted “more of the same” in 2013, i.e., a continual decline in gold’s price. Most predicted a low of $1050 to $1180 per ounce, with very few predicting any rise at all. A year or two earlier, some of these same firms were predicting outlandishly high prices, due to the bullish momentum at the time. For example, in September 2012, the chief foreign exchange analyst at Bank of America Merrill Lynch predicted prices of “between $3,000 and $5,000 an ounce going forward. Certainly not within the next few months, but on a long-term basis we are on a well-defined uptrend, and we have got more room to run before that runs its course.”
Alas, gold’s “well-defined uptrend” ended abruptly on Friday, April 12, 2013, when a huge (125 to 400 ton) short sale pushed gold down from $1548 on the April 12 morning London setting to $1378 just two trading days later. After that, Wall Street began changing its tune on gold. Going into 2014, most major Wall Street firms predicted lower gold prices in 2014. The median forecast among nine gold analysts tracked by Bloomberg was for $1165 gold in late 2014. Bank of America Merrill Lynch cut their forecast by 11%, from nearly $1300 to just $1150, with a possible drop to $1000 along the way. Goldman Sachs predicted a drop to $1050 and possibly $1000. Morgan Stanley cut its 2014 gold price target to $1160. Standard & Poor’s predicted $1200 prices through 2015, citing “negative investor sentiment” in gold.
Of course, they were referring to their own sentiment, not the sentiment in China, India, Europe, and most of Heartland America, which was loading up on physical gold at lower prices. Wall Street seemed to be surveying the negative sentiment their brethren on Wall Street, predicting “more of the same.” That’s not serious analysis. That’s polling. Instead, they could have looked at physical demand at home and abroad, China’s record year of gold imports, the rising number of central banks buying gold, or the closing of many gold mining operations due to lower gold prices, limiting the amount of new supply on the market.
Germany’s Commerzbank seemed to be alone among institutional bankers last December in seeing higher gold prices in 2014. Commerzbank predicted an early-2014 drop in stocks and bonds that would push some “speculative financial investors” into gold by the second quarter of 2014. Historically, European banks have been more open-minded to gold, perhaps due to their historic battles with inflation, but Wall Street seemed uniformly blind to the chance that gold could rise in 2014, after a huge (28%) loss in 2013.
But now that gold has risen sharply in the first two months of 2014, Wall Street is changing its tune again. For instance, technical analysts at both Citi Futures and RBC Wealth Management now see gold rising to $1400. UBS also raised its guidance for gold to $1350 in mid-February, up from their previous forecast of $1100, saying that “Gold has started to shed its stigma” (among other banking analysts, that is).
Later this year, we could conceivably see “melt up” among gold speculators, pushing the price of gold up too fast, creating potential short-term shortages in warehouse gold. Jim Walker, CEO of Asianomics, told CNBC that “physical gold is disappearing off the market at a terrible rate. As soon as that really starts to hit, I think gold goes through the roof.” It may not happen, of course, but such a buying panic could teach Wall Street a valuable lesson – not to be so polarized in their views on the short-term prospects for gold.