FYI | Aug 20 2008
Of all the emails that landed in my inbox today, this one simply had to catch my attention: demand for physical gold has never been as high as over the past few weeks, reports one of my sources in Switzerland.
The information carries a bit of extra weight as it is based upon an internal assessment from UBS. This is a not insignificant detail: UBS is by far the largest clearer of gold in the country.
Thus we can safely assume that what goes on at UBS in Switzerland also goes on in India, the Middle East, the rest of Europe, the US and China plus Asia as well. Conclusion: physical buyers of gold believe the opportunity to buy a bullion below US$800/oz is an absolute bargain.
That’s why the physical gold specialist at UBS in Zurich is talking about “the busiest days of my life”. In case you wondered: he has been working over there for the past twenty years, my source informs me.
Last time physical demand was strong, but still considerably less so than at present, was when gold traded around US$660/oz. That was in August last year, the internal UBS report states. We all know what happened next: a few weeks later gold surged and surged and surged and it wouldn’t stop until the US$1000 target had been reached.
Of course, there’s no guarantee this time will see a repeating exercise of what happened last year, but UBS appears very firm in its own internal assessment: physical demand for gold has probably never -ever!- been as strong as over the past few weeks, at least not during the past two decades.
So how to explain this exceptionally strong demand for gold in the light of the recent strong price falls? I mean, those price falls were so severe that many a technical chartist had started to worry about the metal’s long term trend prospects.
Those who have read my previous stories about commodities, and what moves their markets, probably already know the answer, but I’ll leave it to the specialists at UBS to spell it out:
“Long liquidation by investors and speculators trading on the OTC and futures markets”.
Forget about the overall positive environment for gold, it was a combination of speculative liquidation and new short selling that proved the stronger force in the gold market, says UBS, and thus there was simply no way in stopping the gold price from crashing below US$800/oz.
But it only stimulated physical demand even more.
The proof, says UBS, is the fact that gold has clearly outperformed silver, platinum and palladium over the past few weeks and the reason, still according to UBS, is because as the price of gold took a dive, physical demand increased accordingly. The other precious metals had no such support. Their price declines have thus been much greater.
Even if the coming months won’t be an exact copy of what happened last year, one doesn’t have to be a genius to figure out that all of the above is in essence a very positive message for owners of gold. The fast guys with no real conviction are heading for the exits, probably because someone at headoffice somewhere close to Wall Street has decided it’s time to start buying consumer discretionary stocks and beaten down financials instead.
Those with “sticky fingers”, however, have grabbed the sudden opportunity and said: gimme some more!
At some stage the first group will stop selling, simply because there’s nothing left to sell. Do you think the second group will also stop buying?
Precious metals analysts at UBS have kept their one and three month gold price forecasts unchanged at US$850/oz and US$900/oz respectively. Says the internal assessment:
“All that stands in the way of an impressive tactical gold rally is a correction in the [US] dollar. If you are confident that EURUSD has seen its low for the near term, buy gold now.”
To show their confidence in the underlying market fundamentals, the team has decided to increase its short term forecasts for all other precious metals. Platinum is now expected to trade to US$1550/oz in one month and to US$1700/oz in three months from now. The price for palladium is expected to rise to US$300/oz in one month and to US$350/oz in three months. For silver the new price forecasts are US$14.70/oz and US$16.40/oz respectively.
Of course, if UBS’s suspicion (or should that be: conviction?) proves correct, and all this is nothing but a prelude to another break out to the upside for gold, the irony will be that some of the momentum traders who are currently abandoning their gold positions will be scrambling to get back in when the pendulum turns. And by doing so they will effectively help accelerating what has been set in motion by their current exit.
(I know I am supposed to finish all this off with one catchy remark, but all I am capable of at the moment is smile.)
With these thoughts I leave you this week. Till next week!
Your editor,
Rudi Filapek-Vandyck
(as always firmly supported by Grahame, Sarah, Greg, Joyce, George, Pat, Paula, Andrew, Todd and Chris)
P.S. Colleague Greg will be appearing on Business View this Saturday morning, 9-10am on Sky Business.
