by James Brumley | May 28, 2014 9:53 am
If you’ve read nothing but gold-related headlines for the past few days, it would be easy to assume gold prices are in a freefall … an assumption easier to make following Tuesday’s report that Hong Kong-routed Chinese imports of gold slumped to their lowest levels in 14 months in April.
In fact, that report was the reason gold prices and the SPDR Gold Shares (GLD) both dipped about 2.3% yesterday.
There’s just one problem with the premise, though: The headlines hardly tell the whole story.
Following Tuesday’s steep decline for GLD and gold prices, it might be wise to take a step back and think about the bigger picture and look at all the data.
As it turns out, Chinese demand for gold might not have fallen off of a cliff.
As mentioned above, Tuesday’s gold hysteria was sparked by a report from the Hong Kong Census and Statistics Department. Specifically, this report indicated that net gold flows (aka imports) into China through Hong Kong fell in April, reaching their lowest levels since February of last year. China only received 67 tonnes of gold from Hong Kong in April, down from March’s total of 85.1 tonnes.
On the surface, those figures seem concerning. If China really is softening its demand for the world’s most precious metal, then gold prices could be headed into the meat grinder.
But look just beyond the surface, and beyond the surprisingly limited scope of the news stories of the report.
Like the fact that not every ounce of gold delivered to China is sent through Hong Kong (presumably most of it is, but not all of it). It also might have been worth mentioning that China’s imports of gold hit record levels in 2013, so expecting 2014’s imports to remain just as hot and/or consistent is not only an unfair expectation, but bordering on unrealistic.
Also, one or even two bad months don’t make a trend.
It’s interesting how the news of China’s falling imports of gold dovetailed so nicely with last week’s report from the World Gold Council.
While overall consumption of gold ticked higher in the first quarter of 2014, a strangely large number of the headlines summarizing the report’s findings focused on its weakest spot: the 26% slump in demand from India. Though to be fair, the media was almost as glad to underscore the fact that China’s demand for gold dropped almost as precipitously as India’s did in the first quarter, according to the WGC publication.
It’s odd, because many of the alarm-ringing write-ups either glossed over or outright omitted the fact that Q1’s worldwide consumption of gold was actually about even on a year-over-year basis.
And just for the record, India’s consumption of gold was also destined to struggle by comparison in 2014. Had the Indian government not put measures in place to crimp gold imports, that country might have seen record levels of gold consumption in 2013. Even with the import curbs, though, the bar is still set high for gold usage in India this year.
So what’s the truth?
A picture is worth a thousand words. The image below plots the broad growth of China’s and India’s consumption of gold every quarter since the fourth quarter of 2008.
OK, first-quarter gold demand from China and India might not have been as hot as it’s ever been. But it’s not exactly careening, either, and the overall trend is still basically one of growth.
Plus, remember: 2013’s demand was enormous for both countries, and overall, gold prices haven’t seen any major setbacks since mid-2013. If demand was crumbling, that should have shown up in the form of tumbling gold prices and GLD by now.
Is it conceivable that the implosion just began in April? Sure, anything’s possible. It’s just not likely. The most likely explanation is a seasonal lull. Remember, the last time Chinese demand for gold was weaker than it was in April of this year was in February of last year, and last year’s demand was a record-breaker. As was said, jumping to conclusions based on one data nugget could be a big mistake.
So, with all of that said, why all the hysteria over one stumble for gold?
Because scaring the daylights out of investors makes for good copy.
While Tuesday’s setback was dramatic, it’s not the beginning of the end. That weakness will likely fade away as soon as memories of the report out of Hong Kong do … probably about 24 more hours.
The bigger concern the gold bugs and GLD owners might want to mull now is the fact that the U.S. dollar is on the rise after breaking above a major resistance line. Even then, however, interest rates aren’t rising with the sawbuck.
Theoretically, gold prices should be trapped between that rock and hard place. And, given how a rising dollar is the only thing working in favor of gold now — and given that there’s actually nothing palpable working in favor of a rising U.S. dollar, the odds suggest the dollar will weaken again and put gold back into an uptrend.
As for where gold prices are apt to make their way from here, the old support and resistance lines still apply — there’s a floor at $1,180, and a ceiling around $1,400. The resistance line around $1,400 also coincides with a key Fibonacci retracement line.
What’s interesting here is how the fireworks started to fly right when volatility was reined in. The evidence is the way gold’s key moving average lines have converged. If the pattern holds true, odds are good we’ll now start to see the volatility widen again to pull those moving averages apart.
The question is, which direction will that renewed volatility push the commodity?
Most likely, upward.
Yes, a bullish move here would go against Tuesday’s grain. This isn’t to say gold prices are going to bolt immediately higher, though. It might take a couple of days for Tuesday’s setback dust to settle. Between Q1’s modest growth in consumption in addition to hints of inflation on top of a U.S. dollar that’s set to slide lower again, the odds simply favor a rally from gold and gold ETFs like GLD.
For traders needing something of a safety net, however, the smart move here would be waiting for gold prices to move back above the convergence of moving averages around $1,295. That’s the move that could have a slingshot-like effect on gold prices.
And should gold make its way beyond $1,400 — which is a distinct possibility — look out above.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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