2019 Just the Start for a New Bull Market in Gold

Will gold prices end 2019 on a high or low note? Joe Foster is confident that it will be the former, and explains his rationale here.

In a recent report, Joe Foster, portfolio manager and strategist at VanEck Gold and Precious Metals Strategy, contrasted this year's price breakout in the gold market against similar fireworks that happened in the first half of 2016. As Foster notes, the first half of 2016 saw gold prices advance by roughly $260 before pulling back and staying fairly range bound over the next three years.

Foster believes that investors are aware of the price action from a few years ago and are wary that the same thing might be happening again. However, the analyst dismisses these fears as unfounded, stating in the report that gold's performance in 2019 is nothing like the metal's previous price explosion.

Perhaps the most important thing to note is that gold has held onto the bulk of its gains with a little over two months left to the year. In comparison, gold prices began pulling back early on in the second half of 2016. Gold remains up roughly 17% since the start of this year, having held onto the critical support level of $1,500. As the end of 2019 draws closer, Foster also points to the many strong drivers that suggest a long-term move upwards for gold.

The strategist finds the factors that are propelling this year's gains to be much more pronounced. Whereas 2016 featured a hawkish Fed board and significant optimism in regards to the domestic economy, this year has painted an opposite picture. With little notice, Fed officials performed a policy U-turn around the beginning of summer and began cutting interest rates as a response to the protracted U.S.-China trade war.

Those global banks whose bonds weren't already in negative territory were quick to follow suit, with the European Central Bank's benchmark rate most recently dipping below zero. This has created a new norm of plummeting real rates and a record, rapidly-expanding $15 trillion of negative-yielding debt.

That demand for bonds, even in this environment, shows just how concerned investors are of the longest-running equity bull market in history finally changing course, adding to warnings that stock valuations are severely overblown. Global growth has also been a major concern, as factory data from some of the world's top producers hints towards a severe economic contraction in the near future.

To top things off, there have been multiple red flags signaling that a U.S. recession is on the way. Many have cited the latest inversion of the Treasury yield curve as a guarantee of an incoming recession. Those who doubt this omen may instead place their faith in the Federal Reserve, as the central bank has recently placed the risk of a domestic recession at its highest point since 2008.

Looking at the technical picture, Foster noted that gold will remain in an uptrend as long as prices hold above $1,365. While the metal has pulled back from its six-year highs, Foster and his team are certain that corrections such as these represent a minor bump in the road for what may very well be a multi-year bull market.

Analysts Say Win-Win Situation is Forming for Gold

Despite the dollar's recent gains, ScotiaMocatta sees gold recapturing its haven appeal.

In the latest edition of ScotiaMocatta's monthly Metal Matters report, the bank's analysts examined gold's prospects amid various geopolitical escalations. After falling for much of 2017, the U.S. dollar managed to rebound in December and has since attracted the attention of safe haven-oriented investors.

According to a recent article on Kitco, ScotiaMocatta sees gold eventually winning against the greenback and recapturing its haven appeal. A notable part of gold's tepid summer was a lack of response to risk factors that would otherwise warrant a price boost. But now, with a clear bottom forming on the chart, the analysts are certain that gold will receive its long-overdue benefits from the myriad of risks on the horizon.

Among them is a well-publicized tariff battle between the U.S. and two of its main trading partners in China and Canada reports Kitco. The Asian nation has seen over $200 billion of its exports to the U.S. incur higher levies and has pledged to retaliate in kind. Meanwhile, Canada finds itself facing a possible exclusion from the trillion dollar-worth Nafta agreement, which would greatly complicate trade with its U.S. and Mexican neighbors.

Iran has also been a source of concern, as the country saw its economy placed into question by sanctions imposed by the U.S. over nuclear disagreements. The situation will likely worsen towards the end of the year says Kitco, when further sanctions are scheduled to take place.

ScotiaMocatta also expects flare-ups in emerging markets to make an impact on gold's price, noting that the strength of the dollar has highlighted the weakness in various emerging economies. According to the article, the recent economic upheaval in Turkey has taken center stage, with the country experiencing a hyperinflation scenario similar to that of Venezuela. The presence of several European banks in Turkey raised concerns that the crisis could spread across the entire eurozone as well as complicate the region's handling of migrants. The analysts listed Argentina, South Africa, Russia, Brazil and Italy as other potential sources of risk, whether due to issues with their respective governments or those stemming from U.S. interference.

To ScotiaMocatta, this is a win-win situation for gold, as renewed safe-haven demand will be further strengthened by lower price levels. Likewise, emerging market crises could make the world's leading central banks, including the Federal Reserve, hesitate to continue applying their tightening policy writes the article.

The bank listed $1,241 an ounce as a key level to watch out for in the gold market. According to the analysts, a holdout above this threshold, coupled with any sign of weakness in the dollar, could trigger an aggressive price rebound in the metal as funds rush to cover their positions.

China May Secretly be Adding Gold to its Reserves

Officially, Chinese bullion reserves sit at 1,843 tons of gold. However, their hoard could be much larger than the numbers released.

If history is any indicator, we could be nearing an announcement that the People's Bank of China (PBOC) expanded its gold holdings substantially, reports Newsmax. Officially, Chinese bullion reserves sit at 59.24 million ounces, or 1,843 tons of gold. The figure has remained unchanged since October 2016, shortly before Donald Trump was elected President.

However, according to the article there are signs that suggest China has quietly been adding to its reserves over the past two years. This means, they could be boasting a gold hoard much larger than the numbers given to the public. Before mid-2015, irregular updates by the PBOC weren't considered unusual as the country had only updated its official figures once between 2009 and 2015. Then suddenly, the PBOC revealed a 57% increase in bullion holdings over a period of six years.

The shift towards monthly updates since July 2015 coincided with stricter International Monetary Fund regulations, as China wanted to have the yuan included in the Special Drawing Rights basket. The updates ceased almost immediately after the yuan became part of the SDR in October 2016.

Analysts have little doubt that China's gold holdings have indeed grown since the last update states the article. In fact, Philip Klapwijk, managing director of Precious Metals Insights Ltd., views bullion acquisition by the PBOC as a strategic imperative.

Klapwijk referred to heightened trade tensions between the U.S. and China as the biggest reason why the latter would want to have as much bullion as possible. According to the article, the threat of escalation puts into question the future of China's massive export figures, and bolstering the central bank's bullion reserves would give the government more freedom amid economic constraints.

Klapwijk also pointed out that China's government has plenty of room to amass bullion even in the absence of international purchases. The people of China consistently rank among the top buyers of gold jewelry in the world, in large part because the average citizen is inclined to treat gold ornaments as an investment. If needed, the article writes that the PBOC could access the people's jewelry holdings to obtain a significant amount of bullion. Furthermore, as the world's largest gold miner, China retains the option to simply purchase its own ore rather than export it.

Mark O'Byrne, research director of precious metals broker GoldCore Ltd., is certain that China has already increased its gold holdings by a wide margin over the past two years. To O'Byrne, it's only a question of how large the figure will be when the update is finally revealed.

Expectations that China may have quietly added to its gold hoard over the past two years fit into a general view held by many market participants that China's bullion reserves are actually far greater than reported. Given the nation's propensity towards gold, both on a state- and consumer-level, some have speculated that China's true bullion holdings could be twice as large as the officially reported 1,843 tons.

Gold to Emerge as an Important Asset for Current Times

Despite a tame month, gold is set to remain a key part of any portfolio.

Although multiple factors converged to push gold prices lower in April, an article on Financial Express says the metal could still emerge as the year's marquee asset due to the state of the global economy.

Besides temporary relief from geopolitical tensions and a rise in bond yields, a stronger U.S. dollar was also a major contributor to a tame month for gold. After a prolonged decline that raised eyebrows with both domestic and foreign investors, the dollar index finally caught some respite and reversed its trajectory. According to the article, the greenback now sits at multi-week highs, a position largely influenced by the Federal reserve's hawkish stance.

Having left interest rates unchanged during their latest meeting, the Fed nonetheless affirmed their previous forecast for a total of three rate hikes in 2018. Officials also expressed their desire to continue with the monetary tightening for the foreseeable future should current economic conditions persist. And while successive rate hikes are generally seen as negative for gold, there are ways that the metal could reap the benefits from this aggressive policy says the article.

To some, the Fed's current course is analogue to taking away the proverbial punch bowl. Given the loose monetary policy of the last decade, a sudden shift to a more austere approach could shock the laid-back markets. Among the worst to suffer this effect could be the long-soaring stock market states the article, which recently begun to show cracks after seeming invulnerable. The Fed's goal of reducing their balance sheet by $420 billion this year and $600 billion the next could slowly introduce discord into equities. Despite tax cuts and other encouraging developments, 2018 could see investors' optimism dwindle as they wake up to the reality of a lesser money supply.

Inflation expectations could act as another source of gold's strength. The Fed is confident that it can maintain the targeted inflation rate of 2%, and much of their current agenda rests upon it. But many are quick to forget that inflation was moving in the opposite direction for some time, raising concerns that the reversal was achieved too quick. Given that the ideal 2% have already been surpassed, the Fed could find itself struggling to deal with soaring inflation. In this environment, the article says gold would quickly become a most-desired commodity.

The economic tug of war between the U.S. and China will also continue to remind investors that gold is a key part of any portfolio. Despite the seeming calmness in recent weeks, the situation is only beginning to develop, and the leaders of both countries are unlikely to back down. Global growth, industrial metals and energy will all come under attack should the threat of a trade war return.

The article states that this would harm bond yields as investors shun U.S. debt, and the rapid expansion of the latter has already placed the dollar's long-term purchasing power into question.

Regardless of short-term happenings, the ongoing lack of equilibrium in the global economy along with constant geopolitical flare-ups are sure to preserve gold's favor among risk-averse investors.

Silver is Shining Bright, Sales are Through the Roof

People see the perfect buying opportunities for silver and have been stockpiling the metal. Demand is currently through the roof, so, what will this mean for the future of the metal? Find out here.

Reuters reports that the global silver-coin market found itself under an unprecedented supply squeeze. Both the U.S. and Canadian Mints had to set weekly sales quotas in July because demand was too high. Australia's Perth Mint responded to a record of 2.5 million ounces sold in September by rationing supply of a new line of coins.

When North American and Australian coin producers could no longer keep up, demand spilled over to Asia and Europe, creating a worldwide “domino effect”. Roy Friedman, vice president of sales and trading at a large U.S. coin dealer, says he never witnessed demand spilling over to other markets in his 35 years as a precious metals dealer.

“Silver [coin] demand is absolutely through the roof,” said Perth Mint wholesale manager Neil Vance. “There seems to be a bit of frenzy as people think there is a shortage of silver. But in fact it is a (crunch in) manufacturing capacity.”

While the U.S. Mint in West Point is operating three shifts and paying overtime, the Austrian Mint had to increase production of silver blanks and has begun allocating sales of its Philharmonic coins. But what is really driving the frenzy?

As the article notes, some investors like using these precious metals to protect themselves from volatility, especially in currencies and stocks. Since the Chicago Board Options Exchange (CBOE) Volatility Index briefly jumped to its highest since January 2009 earlier this year, it's easy to see why one would want to seek shelter for their assets.

Regardless of investors' reasoning, the industry will continue feeling the effects of increased demand for the time being. “We can only get a fraction of what we could sell,” said Terry Hanlon, president of Dillon Gage, with dealers adding that this buying binge has lasted longer and been more pronounced than previous ones.

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China Begins to Report Their Gold Reserves Monthly, But Are They Massively Understated?

Beginning in the last month, China has begun to report their gold reserves monthly. But with many questioning the accuracy of the numbers, what could be China’s ultimate goal? Find out here.

Most countries report their gold holdings to the International Monetary Fund (IMF) on a monthly basis. Until recently, China was among the few who elected not to do so, having created no such reports in six years.

But within the past month, that has changed. Now, they seem to have adopted the monthly report system in an effort to get in the IMF's favor and thus increase the chances of the yuan being included in the Special Drawing Rights (SDR) basket.

China hasn't just been criticized about the lack of reserves reports. Their first report after six years was met with widespread disbelief, as most analysts estimated that their holdings were high above the 'official' figure of 1,658 tons. It would be strange for China to have such small reserves considering how they view the metal. While the West recognizes the value of gold, many Asian countries – with China perhaps at the forefront – go a step further and see it as the ultimate money.

At any rate, Lawrence Williams finds the way China reports their gold reserves to be in stark contrast with how the West does it. Whereas Western countries will inflate their reserves by including leased and swapped gold in the figures, China seems to be hugely understating their holdings by using “non-reportable” government-controlled accounts.

Williams writes, “It also seems to be the situation that in China, a very substantial gold holding – far above the currently stated ‘official’ figure – is considered to be a prerequisite for attaining a stronger position for the yuan in global trade.” Despite this, it seems as though China prefers to avoid “rocking the U.S. economic boat” with a report of massive reserves – at least for the time being. But what happens once the yuan finds its way into the SDR basket is anyone's guess. After all, Williams does point out that Chinese gold holdings “magically” increased by 600 tons from 2009 to 2015.

Aside from frequent holdings reports, China is also devaluing the yuan in response to the IMF's recent criticism. Yet should the IMF delay the yuan's inclusion for too long in spite of China's efforts, Williams notes that the Chinese could see this as an unfriendly act and respond accordingly by trying to destabilize the U.S.' global position using their forex holdings.

While the time might not yet be right, Williams warns that “the game could change” should China's plans of joining the SDR be thwarted. “China thinks long term in a way the West mostly does not. It may lose the odd battle but ultimately aims to win the economic war,” he says.

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India’s Hunger for Gold Continues, Shows No Signs of Slowing Down

In India, gold consumption continues to rise. With a holy day further driving demand, their thirst for the yellow metal does not appear to be slowing down any time soon.

The Chinese stock market situation might have caused gold to lose some steam recently, but not all parts of the world are following suit. China and India have long competed for the spot of the world's top consumer, with China usually coming out ahead.

But now, with many Chinese investors being locked in the stock market, Business-Standard.com reports that India finally edged out China for the top spot after 6 months of relative equality.

Retail investment in India remained steady year-on-year at 50 tons. However, the biggest drive for gold demand proved to be the Akshaya Tritiya, a holy day in the country – gold purchases notably surge ahead of most Indian holidays. Overall, gold demand in India rose 2.5 percent year-on-year, bringing India's share in the global gold demand to 24.21 percent.

Indians are also stockpiling gold for this very important reason. Find out here.

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Why Gold Prices Took a Hit Last Week

Gold prices hit their lowest levels in five years last week, trading below $1,100. What was the real driving factor behind the price's decrease?

Without a doubt, many will use recent developments in the global economy as an excuse. The Grexit no longer looks like a certainty thanks to a bailout of questionable sustainability. China's gold cravings seem to be lesser-than-usual. There's also the looming threat of an interest rate hike and a subsequent strengthening of the dollar.

Yet, upon further examination, none of these seem to be the guilty party that sent gold plummeting. China's gold demand is strong despite day-to-day deviations, and the U.S. rate hike isn't nearly as 'around the corner' as many believe. Most importantly, perhaps, gold is fundamentally different from other commodities, having different demand drivers.

Instead, Mining.com's Frik Els points out two recent events that he refers to as a 'one-two punch that floored gold price'; one from the U.S. and one from China.

Els argues that the U.S.'s part in gold's fall came via speculators in the Commodity Futures Trading Commission slashing their net-long positions, with managed-money accounts significantly reducing their exposure to gold futures. Many of these sales came as a result of uncertainty regarding the direction that the gold market is heading in.

Similarly, Els notes that China played its part by performing a massive gold sale worth $2 billion in just a matter of minutes. Due to its size, the Monday Shanghai Gold Exchange sale of 4.7 tons immediately caused gold to drop by 4.3 percent – gold sales usually average no more than 96 kilograms a minute on the SGE.

Els adds that these seemed an "almost concerted cross-continental effort to push price through support levels that the metal has bounced off numerous times before." Yet despite these drawbacks, gold still managed to bounce back to $1,100 almost immediately.

While such falls in the price of gold are universally viewed as negative, many buyers still see them as little more than a buying opportunity. As gold fell by over 3 percent in both India and Turkey, consumer interest in these markets grew – the metal's low correlation with other assets makes it ideal as a safety-net investment to diversify one's portfolio.

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China's new gold fix to rival the establishment of the West

For years, the gold fixed has been based in London. But with increasing concerns of manipulation, China is seizing an opportunity to take over the reigns.

With the recent introduction of the London gold fix, there has been some speculation in the markets that China would also participate in the new system to price they yellow metal. However, recent indications are that the country is in fact now looking to have a pricing system of its own. Reuters reports that China is already working on a yuan-denominated gold fix, which is expected to go live later this year.

The yuan gold fix would launch on the international platform of the Shanghai Gold Exchange (SGE), with the SGE acting as the medium for the trading. This is somewhat in contrast to the existing London gold fix, whose trades are done between banks without a governing body. That said, the SGE did work with major Chinese banks (and even some foreign ones) when creating the benchmark.

Despite the process already being significantly underway, a participant directly involved in the testing told Reuters: "No final proposal on the fix has been given yet. This was like beta testing and there is still some room for discussion."

This step is seen as yet another move meant to establish China as a global financial force. With the country being among the top in the world both in terms of gold production and consumption, it's not too surprising that they are using the yellow metal to establish their currency by imposing their own benchmark on any Chinese gold trades. Indeed, considering its share of the global gold market, much of this decision stems from China feeling entitled to its own fix.

While the creation of an additional fix itself isn't a direct move against the existing gold pricing system, it's possible that the Chinese gold fix might end up pressuring and competing against the one currently based in London.

It's probably no coincidence that China is pushing for its own gold fix at a time when the established pricing system in London has found itself under heavy criticism due to lack of transparency. To counter such claims against its own system, and reduce concerns about potential manipulation, the SGE will look to trade a 1 kilogram contract a few minutes every day.

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