Gold Tries to Cut Through the Noise

The back-and-forth argument for owning gold continues as another large hedge fund long (Elliott) has echoed Stanley Druckenmiller's advocacy that you have to own it while bank analysts still see the downside. I have been in the camp of owning some for insurance in a world where central bankers have no clue about stimulating growth or an exit to present policy. Negative rates in Europe and Japan are scary, but possibly not as scary to global growth as the $19 trillion U.S. debt, which is a drag on the major growth engine. I disagree with banks that are forecasting Fed tightening before the election, as this Fed does not care about asset bubbles at the risk of strengthening the dollar. I do not agree with the World Gold Council assessment that central banks like China and Russia are in the market building gold reserves. These central banks are building reserves by taking internal production and putting it into official reserves, so not buying in the open market but limiting supply to the open market. The physical buying has really slowed as it is price sensitive, but the ETF buying has continued to rise, which is offsetting the weaker Indian demand. In the absence of governments promoting fiscal policies to stimulate growth, the present malaise will put more pressure on central bankers to mover further into negative rate territory. The past few days for precious metals have been noise, as they have been for equities, but the mining stocks are seeing some pressure with polymetallic producers getting hit hard as investors show preference to energy-related equities. Base metals continue to retreat because of too much supply. It has been a while since industrial barometers like copper and oil have had such a price divergence, but the copper producers have done little to cut production and have actually increased on back of lowering their production costs and local currency depreciation. News that copper premiums in Shanghai have reached their lowest level since January 2015 due to slowing demand is not helping copper bulls. The HVAC and home appliance demand onshore has been especially weak. Copper will lead base metals out of the current downdraft, but it remains unclear what Chinese infrastructure spend is going to do to metal demand and the high inventories. Like iron ore, as positioning gets too short, especially in the front of the market, you may get a price spike, but the divergence of the onshore yuan and offshore yuan (weakening faster) shows hedge fund bets are that the Chinese economy is not recovering fast enough. Oil breached $47 this morning on back of the DOE report of a 3.4-million-barrel crude draw and 2.2-million-barrel gasoline draw in PADD 1. This was opposite to the builds the American Petroleum Institute reported Tuesday night, so traders are getting whiplash from the continued mixed messages. The International Energy Agency's monthly report said crude production increased by 330,000 barrels per day in April due to Iranian production coming to the market much faster than anticipated. This combined with a rise in United Arab Emirates and Iraqi production, which offset disruptions in Libya, Nigeria and Venezuela. Demand picked up in April in stronger-than-expected Indian imports. U.S. shale production fell to its lowest levels since September 2014 at 8.8 million barrels per day, but the market still has an inventory glut to work through. One flow that may help the forward-curve contango widen will be if companies going into bankruptcy like Linn (LINE) and Penn Virginia (PVAH) will be forced to buy back hedges. Whatever the case, even though I think the downside in crude is more vulnerable over the next month, the unspoken truth is that the Saudis may talk the market up until the Saudi Aramco IPO, but that is the conspiracy theorist in me speaking.

Gold Tries to Cut Through the Noise

Physical buying has slowed, but the ETF buying has continued to rise.

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