Commodities | Aug 15 2013
All bull markets need to consolidate gains and this is what we have been seeing. It is interesting that we received market “intel” that the BoE was again in the market liquidating long physical positions. In fact the Bank sold 100,000 large bars to help raise USD50 billion. We are not sure why the bank was in the market and this is perhaps one reason why the Gold price retreated however the sale looks to be completed. Together with this, other macro issues look to be at play and as we attempt to break resistance we look towards other market drivers for more support. In the ETF market we have seen a turnaround in liquidations and the SPDR which is the largest ETF on Tuesday night saw a 2 tonne gain to 911.13 tonnes. This was the first gain since Jun 10. The interesting aspect to the recent rally is that it looks to be supported by the existence of physical demand which is actually seeing a backwardation in futures prices emerging, which in the Gold market, a highly liquid market, is very rare. The October contract settled above the December, which reveals supply tightness.
In addition to this we noted in the last few Bulletins that we are concerned over heightened prospects of inflation. This is interesting, and in an interview the other the day the reporter asked why we had a significant focus on this when inflation around the world was relatively benign. This is true, however our job is not to see the market today but to see it tomorrow. When we look at emerging tightness in the primary input markets across the board, coupled with the Fed about to give the green light on tapering, it sends a clear message to corporations that the economy is healthy and as result it would be safe to initiate expansion programs. As the supply of commodities looks tight the result price pressure to the topside sees the resumption of inflationary pressures. Gold's renown as an inflation fighter will remain in focus and the potential for a healthy rise from here is well and truly on the cards. The only caveat we have is with the Fed's decision to taper in September.
Chart Point – Gold:
Technically, the bounce is supportive of a move higher. We are bullish whilst US1270 stays in play. A break above US1342 sets the trend higher where would angle for US137 as the next target. Momentum indicators support any dips at the moment.
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