Action in the Gold Market

Gold bars

Here’s a good reason why you should mostly ignore daily explanations about why markets did this or that. It’s also why I tend not to spend too much time discussing market moves on a daily basis. It’s just guesswork and not very valuable.

Overnight, not much happened. Markets were up a bit in Europe and down a bit in the US. The main action was in the gold market, which reversed all of yesterday’s big losses and finished up around US$20 an ounce.

Here’s the Financial Times’ take on the market action:

US stocks failed to maintain an early push into record territory although participants were hoping that results from Apple, due after the closing bell, could reinvigorate the market.

But European stock markets enjoyed a stronger session as hopes grew that a reshuffle of Greece’s team of bailout negotiators could pave the way for a deal to unlock much-needed funds for the cash-strapped nation.

Got that? European stocks were up on hopes of a breakthrough in negotiations over Greece’s bailout funds.

But according to, the gold price was up on continuing fears about the Greek situation…oh, and weakness in the US dollar too. That’s despite the US dollar also being weak yesterday, when the gold price actually tanked.

Buy stop orders triggered in the futures market helped accelerate the rally in gold. Worries about the Greek-EU/IMF debt talks prompted some safe-haven demand for the metal. The U.S. dollar index also sold off during the trading session Monday, which was another positive for the gold market.

So the driver for both stocks and gold was an opposing view of the situation in Greece. Great. Either way, both explanations aren’t very useful.

The action in gold was a little more intriguing though. Two big moves in two days didn’t make much sense, and the explanations given by the media certainly didn’t shed any light. So I decided to dig a little deeper.

It turns out that a $1 billion gold swap occurred on Friday between Venezuela and Citibank. That means Venezuela swapped physical gold for $1 billion in US dollars. Citibank took the gold, and very likely had to hedge its exposure by selling gold futures.

That would be a plausible explanation for Friday’s big drop and today’s rally, given there was no data-driven reason for the sell-off in the first place.

Taking a step back from the day-to-day price action, you can see from the chart below that gold in US dollar terms remains in a bear market…although there are constructive signs developing.

The moving averages in the chart below (the blue and red lines) remain in a downtrend. And the gold price is struggling to trade above these moving averages, which it needs to do consistently to turn the trend around.

On a positive note, however, there is strong buying support around US$1,180, which is where prices rallied from overnight. If you see more follow through buying this week, it could indicate the start of a trend change in gold and the beginning of the end of a long bear market.

As I’ve been pointing out for months now, the story for gold in Aussie dollar terms is much different. It’s been in an uptrend for most of the year, and at a price of more than $1,500 an ounce, most Aussie gold miners are making healthy margins at these levels. That’s why I’ve been adding a few gold stocks to the Sound Money. Sound Investments. portfolio and why I’ve got a few more on the watchlist.

The good news for gold is that there is still very little investor interest in the market. In short, gold is not cool. That’s exactly how bear market’s end and bull markets start.

But gold isn’t the only uncool investment on the radar. Jason Stevenson, editor of Resource Speculator, is fired up about a little known explorer that he thinks could deliver big gains from a successful drilling program. The metal he’s talking about is probably even more out of favour than gold. And that’s saying something.

Greg Canavan+,
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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