Gold Down In February – Weak Hands Sell

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Gold fell 5% in February due to dollar strength, reasonably positive economic data, aggressive selling of paper gold on the COMEX, and poor sentiment.

Despite the very negative sentiment, gold was more resilient in other fiat currencies. In euros and pounds, gold only fell by 1.1% and 0.7% respectively. For the month, gold fell just over £8 from £1,049/oz to £1,041/oz and from €1,225/oz to €1,210/oz.Gold is oversold on a host of benchmarks, including the relative strength index (RSI), and sentiment is the worst we have seen it in recent years. Therefore, gold is due a bounce. Support is at $1,540/oz and below that at $1,470/oz.

It is worth remembering what the genesis of the sell off was. Once again, more speculative players on the COMEX sold gold futures aggressively during and after the Chinese New Year. Gold was vulnerable at this time due to the complete absence of Chinese demand for physical for those few days.

Gold fell 5% in February due to dollar strength, reasonably positive economic data, aggressive selling of paper gold on the COMEX, and poor sentiment.

Despite the very negative sentiment, gold was more resilient in other fiat currencies. In euros and pounds, gold only fell by 1.1% and 0.7% respectively. For the month, gold fell just over £8 from £1,049/oz to £1,041/oz and from €1,225/oz to €1,210/oz.

This initial selling and gold weakness may have contributed to record liquidations in the SPDR gold ETF in February.

As did the misguided belief that the worst of the crisis was over and it was time to jump into riskier assets like stocks again. Gold sentiment deteriorated after the initial falls and continued to worsen after the loud pronunciations of the end of the bull market by Goldman Sachs and some other banks and the much heralded ETF liquidation by Soros in the fourth quarter. Soros’ trumpeted liquidation in the fourth quarter was very small compared to the net inflows of $3.5 billion into GLD during that same quarter.

The significant ETF liquidations in February underscore the weakness in gold sentiment among retail investors that has been prevalent recently.

Our trading desk was the busiest it has ever been on the sell side in February as retail investors sold out of nervousness due to the price falls. High net worth selling was minimal and wealthier clients were more active on the buy side – especially this week.

Panic selling by weak hands and lack of conviction in gold investors and especially speculators tends to happen near market bottoms and suggests we are close to a bottom. Central banks, some hedge funds, institutions and high net worths will have used this latest dip as another opportunity to diversify into gold at cheaper prices.

Concerns about ultra loose monetary policies in the U.S. and around the world have not abated amongst many institutions, pension funds, central banks and more aware investors. The significant risk of currency debasement and inflation remains and will likely deepen in the coming months.

Gold May Be Set to Catch-Up to Higher Inflation Expectations – Bloomberg

Gold prices have closely followed market inflation expectations throughout the past year. A key relationship to monitor during the next few months is investor interpretation of where inflation is headed. While gold has been weaker in recent months, inflation expectations have moved higher.

Were the historical relationship to hold, gold could begin to play catch up soon.

Contrary to many politicians and Keynesian economists’ views, deficits do matter. While they are manageable in the short term, high deficits for a number of years can destroy economies and currencies.

Gold Likes Deficits as They Beget Money Supply Growth – Bloomberg

Deficits matter to economies and to currencies and therefore of course matter to the gold market. High deficits over a period of time lead to a consistent growth in money supply and we are seeing that today in the U.S. and internationally.

Gold prices have tracked global money supply growth very closely in the last ten years.

Global Money Supply Growths Correlation With Gold Prices (2003-2013) – Bloomberg

The Federal Reserve and other central banks claim that their money printing and near zero percent interest policies was a response to the global financial crisis in 2007 and 2008 and was needed to prevent deflation and economic collapse. The above chart shows that this claim is bogus as money supply in the U.S. and globally had been increasing quite rapidly in the period 2003 to 2007, prior to the crisis even beginning.

With central banks such as the Fed, BOE and ECB confirming again this week that ultra loose monetary policies are set to continue, gold’s bull market seems assured.

The worst case monetary scenario remains hyperinflation. It is feared by those with a knowledge of monetary history and by many investors and savers internationally who have experienced the dreadful effects of hyperinflation – especially in Germany. The risk, while still quite small, is real and it is imprudent to completely dismiss it as a possibility, especially given the scale of debts in the world today and the scale of currency debasement today.

At the very least, these policies are set to stoke inflation and stagflation in many economies globally. It is not a question of if, but rather when.

Gold and Inflation – U.S. CPI (1971 to 2013) – Bloomberg

For those already owning gold, now is the time to remain brave and hold on to your position and possibly even add to it. For those with no allocation to gold – you now have an excellent buying opportunity and should consider dollar cost averaging into a position to protect against further short term weakness.