Shares Pumped, Gold Dumped…What Gives?

Gold surprised a lot of people after the Italian referendum by only briefly rallying before falling more heavily.  Likewise shares, even in Europe rallied after an initial fall.  What gives?

We think there are a few things at play here.  Moreover there appears to be a fundamental-less, self-reinforcing, everything is awesome euphoria in ‘risk-on’ markets that sees every event as an opportunity to buy a dip rather than see it as something structurally wrong.  Italy was exactly that.

In an article in Barron’s, Wall Street analyst Michael Block of Rhino Trading summed it up:

“…[Apparently] the pattern of fading a potential crisis and then scrambling to cover and get long when everyone takes a breath and realizes that this time is not the apocalypse either still holds more than ever. I can’t justify any of this. The lesson investors and traders are getting is that everything is a buying opportunity and you need to not miss the boat.  Brexit? Bullish. Trump winning the election? Bullish. Italy saying no to the referendum and the Prime Minister handing in his resignation? Bullish. Heck, all we need is a coup d’etat in India and the entire Belgian banking system to go kablooey and the S&P 500 will be at 3,000 by Christmas Eve.”

We are also starting to see a tangible disconnect again between paper and physical gold markets.  The chart below shows the action on the COMEX futures exchange before and after the Italian referendum results.  What you are looking at in those 2 big volume spikes down the bottom is around $4.7b in notional value of gold, or around 3m oz of paper gold, sold in a matter of hours taking the price down to a 10 month low.  We won’t know until the COT report this weekend but would wager it is the speculative Managed Money sector dumping gold into the clever hands of the Commercials as they chase this awesome ‘Santa Rally’ sharemarket.

But what is happening more broadly with demand for REAL gold is a disconnection from these paper driven prices from what is being paid for the real thing.  As Bill Holter had to say yesterday:

“With just one month left in the year, Shanghai has withdrawn [generally accepted proxy for total Chinese demand] close to 2,200 tons (28 tons just this last Friday [the highest all year]). If you take Chinese and Russian supply out of the equation as they do not export, total global production of gold is roughly 2,400 tons. Shanghai/China have been purchasing nearly all global production of gold over the past several years. This does not account for Indian demand which has historically been another 1,000 tons per year or thereabouts. Nor does it account for the rest of global demand which has been brisk from Europe, the U.S. and elsewhere.”

That physical demand has seen premiums paid over the spot price in China rise to their highest since April 2013 and Indian’s have been paying around US$1700 amid a spot price dancing around US$1170!  The ‘brisk’ US demand he speaks of has seen US gold eagle sales post their highest month all year in November, the 4^th straight month of increases, and are now sold out.

So to recap we have US shares hitting all time highs on hope based euphoria and gold hitting 10 month lows despite rampant physical demand.  Which do you think looks the better buy?

Most commentators don’t give gold much chance of a recovery this calendar year, the Santa Rally phenomenon has history on its side and we still have a US rate hike in a week’s time.  Think of it as a Christmas sale.  Q1 of 2017 is a whole other story, with many bullish about a rebound as Trump is inaugurated and reality biting as the rubber hits the road so to speak.  Remember January & February this year?  The key lesson is don’t leave it too late…