Gold market update: 12-3-2017

Here’s a quick update on both the supply and demand for gold and the performance of various assets in terms of gold.

Gold Supply and Demand for Q3, 2017

First of all, the demand for monetary gold rose during the third quarter as bullion banks built inventory. This is the same thing that happened in Q3 of the previous two years. The full details are below. I have reprinted the analysis of Q2 as well, so as to refresh your memory.

Q1 2017

Supply

Mining output + net producer hedging: 748.5

Monetary Demand
Retail bar & coin demand: 290.9
ETF inflows/outflows: 111.9
Central bank purchases/sales: 82.2
Bullion bank/exchange hoarding: -18.7

Total Monetary Gold Demand: 466.3

Monetary Gold Demand Deficit: -282.2

Q2 2017

Supply
Mining output + net producer hedging: 786.2 (37.7 more than Q1)

Monetary Demand
Retail bar & coin demand: 240.8 (50.1 less than Q1)
ETF inflows/outflows: 56 (55.9 less than Q1)
Central bank purchases/sales: 94.5 (12.3 more than Q1)
Bullion bank/exchange hoarding: 112.5 (131.2 more than Q1)

Total Monetary Gold Demand: 503.8 (37.5 more than Q1)

Monetary Gold Demand Deficit: -282.4 (0.2 more of a deficit than Q1)

Analysis: In Q2 2017, retail bar & coin collectors bought 50.1 less tonnes than the previous quarter and ETFs bought 55.9 less tonnes than the previous quarter. This is a total of 106 tonnes slowdown in demand growth.

Central banks bought 12.3 tonnes more than they did in the first quarter and bullion banks/exchanges bought a whopping 131.2 more tonnes than they did in Q1 (it seems to be a trend for bullion banks to increase inventory in the Spring each year). This is a total increase in demand growth of 143.5 tonnes.

After accounting for slower bar & coin and ETF demand, this means that demand for monetary gold still increased by 37.5 tonnes.

Mining output +net producer hedging also increased by 37.7 tonnes.
As a result, the monetary gold demand deficit increased by 0.2 tonnes and the price fell by $5.
Basically, supply and demand and price were both flat over the course of the quarter.

Since then, the price of gold has risen tremendously (the dollar has fallen in gold terms). The data for Q3 explains why.

Q3 2017

Supply
Mining output + net producer hedging: 831 (44.8 more than Q2)

Monetary demand
Retail bar and coin demand: 222.3 (18.5 less than Q2)
ETF inflows/outflows: 18.9 (37.1 less than Q2)
Central bank purchases/sales: 111.0 (16.5 more than Q2)
Bullion bank/exchange hoarding: 231.3 (118.8 more than Q1)

Total Monetary Gold Demand: 583.5 (79.7 more than Q2)

Monetary Gold Demand Deficit: 247.7 (34.7 less of a deficit than Q2)

In Q3, mining supply increased by 44.8 tonnes. Demand for retail bars and coins and ETFs also fell for a combined 55.6 tonnes. Combined, this meant an extra 100.4 tonnes being made available by miners that was not wanted by investors.
However, Central Banks and Bullion banks purchased an additional 135.3 tonnes when compared to the previous quarter. Thus, they bought all of the extra gold plus an additional 34.9 tonnes. As a result, the monetary gold demand deficit (the supply of gold available to price sensitive jewelry and technology buyers) fell by 34.9 tonnes, and the price went up.

For more information on how to understand the supply/demand dynamics for gold, see this article.

Technical analysis for U.S. Dollar priced in gold.

The last time I did an analysis was in May. At that time, the dollar had just hit its long-term trend-line from 2011 that had been providing support. I argued that I expected the dollar to rise from there. This is indeed what happened in early May.

However, after rising for a while, it reversed and briefly broke this trend-line. It then bounced immediately from a horizontal line at 0.769 mAU/USD (0.000769 Troy Oz./USD or 1300USD/Troy Oz.) and went back up.

After rising through all of June, the dollar then reversed again and crashed through the trend-line decisively, falling all the way to 0.736 mAU/USD before bouncing again. We can now say that the symmetrical triangle the dollar has been trading in since 2011 has been broken.

Where is it likely to go now? At this point, the dollar uptrend is over but a falling trend has not yet begun. Instead, what we are looking at is a sideways range.

There are two lines of support that hold the bottom of this range up. The first is at around 0.740 mAU/USD (1350USD/Troy Oz.) and the second is at 0.714 mAU/USD (1400USD/Troy Oz.) As the dollar approaches these lows, there will be tremendous buying pressure that will tend to push it back up. Conversely, if the dollar rises to around 0.962 mAU/USD (1040USD/Troy Oz.), there will be pressure for it to fall again.

Technical analysis for U.S. bonds (long-term) priced in gold.

U.S. long-term bonds, as represented by shares of the TLT bond fund, are in a bearish triangle contained within a sideways range.

If this triangle (the top of which is represented by the red line in this image) is invalidated and bonds break to the upside, they will likely stop at the top of the range around 100 mAU per share of TLT. Conversely, if the bearish triangle remains in effect, it will eventually break the bottom of the range at 94 mAU per share of TLT.

Technical analysis for U.S. stocks priced in gold.

For the past three years, U.S. stocks have been trading in a sideways range, going nowhere. This appears to be changing though, as this past week they broke above their long-term point of resistance.

It remains to be seen whether this is a false breakout or the real thing, but we may be about to see a huge rally in stocks.

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