Gold: Demand Vacuum Has Silver Lining

Since I issued my “book profits now” call for gold several weeks ago, the price has declined relentlessly from the $1360 area high.

Investors want to know if I see signs that a fresh rally could begin. The good news is that gold/silver stocks and silver bullion look better than gold bullion. Some stocks are rallying strongly while gold oozes lower.

This is the main problem for gold right now; a collapse in Indian market demand.

Prime Minister Modi has acted more like Prime Minister Napoleon over the past year. He’s lorded over a collapse in manufacturing, anemic jobs growth, and tanking GDP. He has essentially devolved into what I call a “taxaholic”. He’s maniacally obsessed with expanding government size at the expense of the economy.

Modi has ordered jewellers to file what he calls “Know Your Client” forms on gold jewellery purchases of 50,000 rupees or more. That has helped hammer demand by about 50%. It coincided with major flooding that prevented buyers from going to the stores. 

Over the past few weeks, Indian gold imports have been negligible.  Commercial COMEX traders have sold into that demand vacuum, pushing the gold price down by about $90 an ounce.

Dhanteras marks the start of Diwali on October 17. I expect some pick-up in demand then. Unfortunately, that doesn’t happen for another two weeks. 

The Chinese “Golden Week” holiday is also in play. Gold markets in China close for the holiday. Western gold bugs are finding the holiday is anything but golden for them, as the price seems to melt lower on a daily basis. 

Fear trade selling tends to produce violent price sell-offs. Love trade demand vacuums tend to produce the current“oozing” in the price. It’s not frightening for investors, but it’s disappointing and disheartening.

The bottom line: Physical demand in both China and India is weak, and while buying in the SPDR fund (GLD-nyse) has been solid, it is nowhere near enough to overwhelm total supply.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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