4Q2016 Gold market notes
I am presuming the World Gold Council (WGC) maintains the most accurate statistical records of matters pertaining to gold in the world. However, their excellent data speaks to a different truth than what we often read from the usual names in the media. After reading the 3Q2016 report, the biggest differences I can see are: (1) the so-called “miner peak production” seems to be a myth (2) Recycled gold, which is some 25% of total supply, continues to rise – or is this stolen or illegally mined gold? (3) Investment demand is rising significantly in the ETFs (well surpassing historical records) while falling in total usage for electronics, other industrial applications, and dentistry – at least until the most recent quarter, and (4) Central banks have been buying less, not more gold reserves — unless they are replacing direct purchases with ETFs for liquidity (i.e., trading) reasons.
table-1-total-gold-demand
table-2-supply-and-demand
table-3-demand-for-jewellery-coins-and-bars
table-4-historical-data-for-gold-demand
table-5-physically-backed-gold-etfs
As long as investment funds flow into the capital market at the present rate, pushing the Bull market indexes higher, I believe that the gold price will also move higher. It could be, as many pundits predict, that the new Shariah Law interpretation provides a further push to the gold price. Before I decide on that matter, however, I’m awaiting word from Shariah expert investors and not the pundits whose promotional marketing proliferates the web.
In any case, in all market cycles, there will always be a point where supply exceeds demand, which typically happens after a period of emotion-generated binge-buying of speculative instruments that results in spiked prices, when the bullish price rise thereafter becomes a bearish price decline.
The bullish rise in the first half of 2016 generated more ETF demand, not less. Even after prices for ETFs peaked in the summer when I think that major fund managers decided to take profits and central bank algorithms kicked in, the demand continued from the public; so, I believe that the recent trap waves I have written of will soon revert to a price rally, possibly a very significant one.
I do anticipate the speculative Bull rally to terminate only after the whole world has been talking of buying gold – perhaps after an ounce of gold is priced well above historical highs — but their funds allocated for this purpose (i.e., speculation) eventually dry up.
Moreover, as you have heard from me repeatedly over the years, the next peak in the Gold market cycle will likely once again signal the peak in the Equity market cycle because trading in gold ETFs or any other equity is a matter of perceptions of risk versus opportunity.
When these market cycle events unfold is anybody’s guess. Certainly, the big-name pundits will be selling their gold positions before they announce to you the end of the Gold Bull.
As usual; caveat emptor.
Year-end approaches. In the letters being emailed to my clients today, I wrote the following:
“2016 was also a year where the Consolidated Account of Cara Portfolio Management has enjoyed a gain of +32.7% YTD (to Dec. 7). However, because of their being Gold-based accounts, just over half these accounts grew by an average of over 100% this year, while still heavily weighted in cash befitting the risks and volatility. Clients who held accounts with two strategies (Gold and Growth) had widely varying results. Their Gold accounts averaged a gain of 118.0% and their Growth accounts averaged a much smaller gain of 14.1%. While on the surface, the performance figures may appear to be impressive, the fact is that I am quite unhappy and pledge my best efforts for better management in 2017. Although the worst of any client loss was -2.4% in 2016 and the average was just -1.7%, unfortunately 12.5% of our accounts under management has suffered a YTD loss. No fees will be charged in 2017 to any 2016 deficient account.”
Enjoy your day.
/Bill