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Ignore Gold’s “Group Think” Trend Followers – Just Keep Accumulating Gold Bullion and Coins
We’ve talked a lot about Wall Street’s blind spot about gold – how they tend to be trend followers who keep projecting “more of the same” (up or down), missing the bullish or bearish turns – but even seasoned gold analysts who have been trading metals for decades often tend to display herd mentality by mirroring each other’s annual price projections for gold and silver in their annual precious metals price forecasts.
In particular, 28 professional metals analysts were polled by the London Bullion Market Association (LBMA) in late December. LBMA asked for an annual low, high and average price for gold and other metals. The results were published on January 21, but the projections were made in late December.
For 2014, LBMA analysts predicted an annual low of $1067, a high of $1379 and an average of $1219 per ounce. By now, with gold around $1350, the striking fact from this survey is that all 28 projected lows may turn out to be too low, if gold stays above $1200 for the rest of 2014. Not one analyst in 28 picked a low over $1200, even though the lowest London pm fix of 2014 so far was $1225 on January 2.
As for gold’s 2014 high point, only one analyst (Martin Murenbeeld of Dundee Capital Markets) picked a high over $1500 – at $1550. Only six of 28 (21%) predicted a peak above $1400, and not one analyst saw an average price for the full year of over $1315, a price that gold has already surpassed. Therefore, it is possible that all 28 analysts will under-bid the annual low, annual high and average price of gold in 2014.
Last year, by the way, these same forecasters predicted an average price of $1753 (vs. an actual average of $1411). Last year (and this), they merely looked at past performance and projected the same trend in the future. That’s the safe path, to be sure, but markets seldom blandly follow historical averages. We often see a dramatic rise (as in 2010) or fall (2013), but seldom consecutive years of the same increase.
The Curious Case of the Bi-Polar Dow Jones Publications
During the week of February 24 to March 2, two major Dow Jones publications (Barron’s and The Wall Street Journal) seemed to be arguing with themselves over whether they wanted to be gold bulls or bears. In one bizarre case, the same author wrote contrary positions on gold on two consecutive days.
First came a February 24 article in The Wall Street Journal: “A Word of Warning on Gold: Investment Fear is Fading,” by E.S. Browning in the “Moneybeat” column. The article quotes a pair of Wall Street analysts who advise selling gold into the current rally, due to lack of any major fears. Ironically, within a week, Russia invaded the Crimean peninsula of southeastern Ukraine, fueling gold’s “fear play” again.
Then, on Friday, February 28, Tatyana Shumsky and Ira Iosebashvili wrote a positive article on gold in the Journal: “Gold Bugs Return after Last Year’s Rout.” The article began: “Investors are buying gold again. Gold is up 11% this year and wagers on rising prices are at a four month high in the futures market.” The Journal reported that SPDR Gold Shares (GLD) added 10.54 metric tons* to its gold holdings in February, the first net monthly purchase of gold by that leading gold ETF since late 2012.
The next day, Barron’s (also published by Dow Jones & Co) attacked gold in their Commodities Corner (“The Gold Rally’s Fatal Flaws”). Ironically, this article was written by Tatyana Shumsky, a co-author of the previous day’s praiseworthy paean to gold. She began: “Gold has staged an impressive rebound in 2014, but few market watchers expect it to last.” She based this bearish conclusion on two questionable assumptions – (1) tighter Fed monetary policy and (2) “cost-sensitive gold buyers in emerging markets.”
On the other side of those arguments, “tapering” is hardly tightening. The Fed’s balance sheet has grown over 400% in just over five years, and a slower level of monetary growth amid near-zero interest rates is hardly hawkish behavior. In addition, global markets are not slowing down due to higher prices. China’s gold imports rose 326% in January of 2014 vs. January 2013, and other emerging markets are turning to gold as their currencies collapse. The Argentine peso, Russian ruble and other key currencies are falling rapidly, so their citizens – and those in other “Fragile” economics – turn to gold to protect their assets.
And finally, if Dow Jones readers aren’t confused enough, the same issue of Barron’s (March 3, 2014) included a review of the pros and cons of gold by Mark Hulbert, entitled “Grasping at Gold: It’s Not Quite Time to Say the Bull is Back for Bullion.” He presented a fair balance of arguments – a welcome relief from the bi-polar analysis by other journal writers and one two-headed bull-bear, Tatyana Shumsky.
P.S. On Monday, March 3 – the day these Barron’s articles were published – gold surpassed $1350 for the first time since October 30. We also learned that day that Wall Street had finally returned to gold:
Gold Demand is Finally Returning to Wall Street
The Monday, March 3, 2014, Bloomberg reported** that for the week ending February 25 – even while The Journal was quoting some Wall Street analysts who advised selling gold – the “Commitments of Traders” data from the Commodity Futures Trading Commission (CFTC) said that net long (bullish) gold futures and options positions on the COMEX came to 113,911 contracts, a 64% two-week increase, and the most bullish position on COMEX in over 14 months, since the week ending December 11, 2012.
Last December, at gold’s bottom, there was a 3-to-1 ratio of shorts to longs – with 26,700 long positions vs. 80,000 short lots. That was the highest number of short positions since 2007, when gold was around $700. (Both 2007 and 2013 were excellent buying opportunities!) In February, by contrast, gold rose 7%, with a good share coming from short-covering as well as tax-related buying after the 30-day “wash” rule. (Those who sold GLD in December for a tax loss had to wait 31 days or more to buy GLD shares back.)
Physical Gold Buyers “Stole a March” on Wall Street’s Short-Sellers
In late February, the World Gold Council’s (WGC) report on Gold Demand Trends for 2013 revealed a year marked by record-high physical gold demand eclipsed by the panic selling of paper gold investments on Wall Street. In 2013, WGC said, 880.8 tons of gold were sold out of the warehouses of various gold ETFs in a panic attack that began over the weekend of April 12-15, when over 100 tons of gold were sold.
Despite last year’s paper gold panic, 2013 marked the largest one-year increase in consumer gold demand since the WGC began keeping records. However, record-high physical demand (primarily from China) could not match the panic selling of leveraged paper gold investments on Wall Street. But now, 2014 may be the year in which Wall Street changes its momentum-oriented group-think to embrace the bullish case.
So far in 2014, China demand is rising so fast that they need to build more storage facilities. The Chinese Gold & Silver Exchange Society (CGSE) in Hong Kong plans to build a 1500-ton depository and open a new physical bullion trading exchange in the “free trade zone” of Shenzhen in order to offer the mainland Chinese a new “mini-Hong Kong.” (There are already about 4,000 jewelry makers in Shenzhen.)
Most of the physical demand for gold last year came from individuals, not central banks or other large institutions. The WGC noted that many institutional 400-ounce Good Delivery bars had to be broken up into smaller units, because most of the demand in 2013 was coming from individuals, not institutions.
This goes to show that smart gold investors just keep accumulating the physical product – gold bullion bars and coins – without paying overdue attention to the schizophrenic trend followers on Wall Street.
*A metric ton (or tonne) equals one million grams, or 2205 pounds avoirdupois, or 32,150 Troy ounces. Whenever we refer to “tons” of gold in this report, we are referring to the commonly-used metric tonne.