ROSS NORMAN – Gold Nudges $3500 – Are we in a bubble ?
ROSS NORMAN – Gold Nudges $3500 – Are we in a bubble ?
It is not often that the precious metals markets find themselves in what might be considered “bubble territory” so we are perhaps not best acclimatized to recognizing one. How do you know if you have been at the kool-aid too long ? Many in the industry like to see the gold price as the “grown up in the room” amongst financial assets which quietly yet firmly reflects the sum of all fears – unlike its rather more excitable cousin, bitcoin.
.. but just now gold is behaving in an uncharacteristic fashion … it seems to have de-coupled from many of its traditional drivers, even from many of its traditional buyers … and has its eye on just one metric … and in a word that is “uncertainty”.
News as it affects the global financial system seems to come faster and less predictably which however you read it, undermines confidence in the underlying … and how do you construct an investment portfolio which could be undone with a single tweet ? Sensible short answer, you don't try and second guess and you simply go to a time honoured safe haven for shelter.
And here's the thing ...
This gold rally has not, to date, been driven by retail investors buying coins and bars, high net clients clamouring for physical, nor institutions buying the gold ETF, not even speculative flows to any great extent This has been an incredibly low participation rally. A stealth run even.
CFTC Net Speculative Gold Positions
Two things are pretty clear – firstly much of the important price action occurs during Asian hours and secondly it appears likely that the primary buyers are sovereign nations or central banks who are discretely acquiring significant amounts of gold, likely in lieu of dollar-denominated assets. And note the cautious words … evidence or data to support this view is thin... and it is largely anecdotal. But the price action … its cadence … and periphery data seem to support this view. Gone are the days when central banks report all of their purchases after or even before the event (nice one Gordon).
Back to the question … are we in a bubble … ? In my view no, but likely we are nearer the end than the beginning of the move. For sure the rise could almost be described as parabolic which we know cannot be sustained mathematically. Do we have irrational exuberance, massive speculative flows or are we divorced from fundamentals ? Not yet.
Gold is simply recalibrating to reflect the world's view on it economic and political prospects …
A good question would be "why might I be wrong ?" And the only thing that comes to mind is because silver does not agree. Slow to rise and rapid to fall, silver does not follow the gold narrative at all. The relative abundance of silver to gold in the ground is 14:1 which should be reflected in the price differential … which is 104:1 … suggesting either gold is massively over-priced or silver significantly underpriced.
In the move this morning (in Asian hours) as gold nudged the $3500 level silver went the other way, giving gold a disapproving look from across the room. And gold listened. It reversed off fresh all time highs.
For sure gold is not entirely itself these days in terms of how it behaves price action wise with regards to traditional drivers ... but what is clear is it is listening to a different economic drum beat … and that's not always good.
Ross Norman
CEO : Metals Daily
www.MetalsDaily.com
ross@metalsdaily.com