Julian Phillips: Gold and Silver, More than Just Debt Ceiling After Thoughts

GoldForecaster.com – Right now the markets are really starting to wind up over the debt ceiling confrontations. The weekend of U.S. political strife is on the world. It is so easy for the markets and commentators to lead us to believe that the gold and silver prices are rising because of this, but we emphasize that they are not! 

The U.S. debt ceiling crisis has grown over the last few weeks into a drama of such proportions that the entire U.S. public is locked onto each scene of the political theater. Outside the U.S., other nations are riveted to the drama, getting to know politicians they have never heard of before. The fact that the U.S. government should put on a dangerous spectacle such as this is appalling and disorderly. After the debacle over the Eurozone crisis, the rest of the world is failing to see the shining example of government so long held up as the correct way to govern.

While we agree that the underlying structural, political, and financial problems are driving up prices over time, the sudden drama is not. If it were the case then we would expect the gold and silver prices to dive once the debt ceiling is raised. We don’t see that happening. A closer look at prices over the last couple of weeks shows that they have not risen in line with the shortening time limit and rising tension. Silver has largely ignored the crises on both sides of the Atlantic. Gold has moved within less than a 1% trading range -governed more by the €1: $ exchange rates than by the buying and selling of silver.

In this fog of spin, smoke, and mirrors, it is important for subscribers to know what really is driving the gold and silver prices.

HYPE OR REALITY

TV presenters are good at their job; they have to capture our interest to keep us coming back for more. They would like to think that they are the key source of information and they often are. But very often, selling the story overwhelms a balanced perspective. The same applies to politicians -they need to be seen as solving major crises and should keep their positions because of their ability to deliver their people from awful events.   Over time they have learned just how to let a problem ferment until it is a crisis. If they solve the problem too early they could be guilty of interfering. So the art is to let it mature into a crisis just as we see lately on both sides of the Atlantic. There have been 74 such debt ceiling crises in the last 50 or so years, but this is the one where Congress has a split power base, so the time has arrived for the parties to gain some kudos. The trouble is that the collateral damage is happening now, and the U.S. continues to demonstrate its inability to govern, highlighting the weaknesses of Democracy to the outside world.  

The crisis is real because politicians are playing games with the reputation of the country for party political reasons. The very fact that they are doing that makes it a serious crisis. The ability to pay or not to pay is not part of the crisis.  

Gold and silver prices have not climbed on the back of the Congressional drama. Before it caught our attention after the latest Greek episode, gold was at around $1,610. As we write this it stands at $1,617. So the Congressional crisis premium is around $7 or less than 1/2 %.  

If one looks at the shares of the gold Exchange Traded Funds in the last two weeks, we saw one day of buying in large quantities, likely from one large buyer. Indeed, speculative buying on COMEX has been large, but futures and options are financial derivatives of gold and not physical gold buying. Only around 5% of these volumes result in physical gold deliveries. As you can see below the major demand shift has been to the Middle and Far East from where more than 60% of gold demand comes.

It is fair to conclude that U.S. investors have not been taking positions against a U.S. debt default, so why should the market expect gold and silver prices to fall?

WHAT’S REALLY MOVING THE GOLD PRICE

We are at the beginning of August, right at the end of the gold year. In the past this was the time gold stood at its lowest levels. Indian farmers were busy in their fields about to bring in their harvest. These people were responsible for 70% of Indian demand, the largest demand source in the world for gold. During the last decade the Indian sub-continent has urbanized to a growing degree, reducing the dependence of Indian demand on the agricultural sector of India. Likewise, the period of the year called the “Doldrums” has lost a good part of itssignificance to the gold price and gold seasons.

Gold Demand by Region

[Jewelry, coin & bar demand only]

India…………………………32%

Greater China……………20%

Europe and Russia…….13%

Middle East & Turkey..12%

North America……………8%

Others……………………….15%

While this was happening another non-seasonal, but growing influence was felt on the gold price -that of China’s mushrooming middle classes. Last week we also mentioned central bank buying, which at least contributes to limiting the downside corrections in the gold price.

These are considerable forces that make any speculative buying on the back of the U.S. or Eurozone debt crisis pale into insignificance in today’s precious metal markets.

In the quiet season of gold, have we seen the gold price hit the low for the year? No, we have seen it reach record highs in all currencies. After the long shallow consolidation below $1,555, we have seen it break upwards to pierce the $1,600 level.  

We now move into the heaviest demand season for gold and are keenly aware that the supplies from mines are tight and unlikely to rise. Some scrap may come onto the market, but we do not expect this to nearly satisfy demand. The result is almost inevitable…

Julian Phillips is a long time specialist analyst of the gold and silver markets and is the principal contributor to the Gold Forecaster – www.goldforecaster.com – and Silver Forecaster- www.silverforecaster.com – websites and newsletters

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