Gold swoon temporary?

July 26, 2018

Pat Heller

As I discussed last week, the World Gold Council estimates that at the end of 2017 gold exchange traded funds (ETFs) and similar investment entities held about 80 million ounces of the metal. At prices last week, that would have been worth about $100 billion.

In the middle of last week, the price of gold fell to its lowest levels since May 2017, while silver dropped to its lowest price since July last year. Everyone is trying to figure out what is going on.

For instance, Mark Hulbert established the Hulbert Gold Newsletter Sentiment Index (HGNSI) to gauge whether the overall market expectations are for higher, stable, or lower gold prices. When this index is strongly negative, that indicates that almost every potential seller has left the market and that prices are probably at a base. When the index is strongly positive, that tends to indicate that almost everyone who might purchase gold has already done so, signifying a top in price.

Hulbert’s latest index is almost exactly on neutral, meaning that the price of gold is not necessarily at its bottom. After that latest update of the index, the gold price did fall further.

I don’t know exactly what is happening right now. Two weeks ago, I wrote about the mystery of why more than 50 percent of all currently maturing COMEX gold contracts are being settled by “Exchange Futures for Physical” (EFP). Settlements by this means require the party fulfilling the contract to not only provide the contract owner with another commodity futures contract for the same amount of gold but also a cash payment in addition. Since such settlements are the most expensive way to fulfill such contracts, you normally would rarely see this option used.

Looking at the strange activity of settling COMEX gold contracts with EFPs, I questioned whether there could be a looming major shortage of physical gold, especially, since neither the New York COMEX nor the London gold markets seemed to be experiencing significant withdrawals from their warehouses.

One of the reasons now being stated for the falling gold price is that the gold ETFs are experiencing abnormally large net withdrawals. In times past, large net withdrawals from gold ETFs have been interpreted by “experts” as a decline in the demand for gold, which led to lower prices.

This situation leads me to an alternate speculation, for which I don’t have any supporting evidence.

Is it possible that these ETF withdrawals now occurring are being used to ultimately settle a lot of these COMEX gold contracts that were settled by “Exchange Futures for Physical?” If that is what is really happening, that would be a sign that gold demand is far outstripping supplies. That would be a sign that current lower gold prices are likely to be only temporary. It could also signify much higher prices in the medium term.

So, while prices do have the potential to fall somewhat further from where they are today, is this actually a sign of a coming gold price surge? We shall see.