-- Published: Thursday, 6 November 2014 | Print | Disqus
By Ira Epstein, The Linn Group
Gold hasn’t responded to seasonal uptrends, war in the Ukraine or Gaza or economic turmoil.
Now another “prop” is being provided.
Switzerland is holding a referendum at month’s end on whether or not the Swiss National Bank should by law , be required to increase its gold reserves. I present the impact of a “yes” vote below, as a “no” vote shouldn’t have much market impact.
Gold has had every bullish prop provided it in the second half of this year turn sour. It doesn’t matter whether it was economic data, war in Gaza or Ukraine, Iris, Syria or whatever. Seasonal influences just haven’t worked since June, when gold peaked out.
As followers of gold know, gold made a new yearly low just yesterday, right after the Senate election results were announced in the USA. The Senate and House of Representatives now have Republican majorities. However the Senate doesn’t have a 61-vote majority which means there’s still going to be politics at work and when it comes down to a party vote, things won’t get done.
The US vote was a vote directly against President Obama, his leadership and direction for the US government. If the President wants to leave a mark on items such as tax reform, immigration, the budget and so on, the President will have to compromise.Whether or not he compromises will impact gold one way or the other the next two years.
The largest prop gold has left at this time is the upcoming Swiss referendum vote concerning whether or not the Swiss National Bank (SNB) will be directed to hold more gold assets. Currently the SNB holds approximately 8% of its assets in gold. The referendum calls for that number to move up to 20%. The implication would be that the SNG would have to increase its current gold reserves by 1500 tones. The referendum if passed would give the bank five years to buy this tonnage. At today’s prices, this means an additional $56 billion or so of gold purchases.It translates into approximately 7% of world annual global demand, which in 2013 was estimated to be at 4065.5 tones.
Current polls show voters evenly split on the issue.Expect the government and Swiss National Bank to begin soon educating, or “swaying” the public on what a yes vote would mean. Similar to what the U.K. did to sway the Scottish vote. If the referendum passes, the most likely immediate impact would be a surge in the price of the Swiss Franc and a brief rise in gold prices. How much of a rise no one knows but some are talking back to $1350. More important to gold traders, it would likely mean a floor of sorts put under gold until this tonnage was purchased.
A “yes” vote would also mean unpegging the Swiss Franc from the Eurocurrency, which would be a detriment to the Swiss economy as goods priced in Swiss Francs would likely soar in price, making them uncompetitive. This was the primary reason the SNB pegged its currency to the Eurocurrency. To keep Swiss goods competitively priced. That peg, if the referendum passes, will be gone meaning the artificial price of the Swiss Franc will be left to markets to determine, which will likely result in a stronger Swiss Franc.
SNB assets have surged more than a third in the past three years, due primarily to currency intervention needed to keep the peg to the Eurocurrency at 1.20 per Euro. If gold is purchased, funds that were and would be used to peg the Franc to the Euro would be diverted in the short term to gold.
I find one key flaw in the thinking that gold prices would have to rally due to the above summary. Whether the Swiss replace other buyers of gold or not, doesn’t mean gold prices have to rally. For each buyer there’s a seller. Price determines value, not the Swiss referendum. China’s been a major buyer of gold as has Russia. They’ve replaced other buyers but the price keeps falling. All this means to me is that the Swiss would simply replace other buyers.
It would be one thing if gold were in a major bull trend. A yes vote in that environment would add Swiss buying to an already heated market but that’s not the case. So after all the hoopla; a gold rally off Swiss buying would most likely prove to be short lived.
Gold needs a pick-up in world economies. It needs inflation, which is the element that’s been missing for several years as gold has fallen from $1900 down to $1137 an ounce. Fear about economic condition of the world’s major economics has been around a long time, ever since the financial meltdown in 2008. Now deflation is the new fear. That’s not bullish gold.
Seasonal Gold Chart
As you can see on the Seasonal Chart, I’ve labeled where we are as of today. The bottom graph displays how prices act in Bull, Bear and Neutral Years.
I’ve labeled this year a bear year because prices have given back all the gains made in the first quarter of the year and have exceeded last year’s lows. If prices close higher on the year, I could make the argument that 2014 wasn’t a Bear year, but rather a Neutral year. Should prices close sharply higher this year, which I don’t see occurring, it would be a bullish year and the current break was but a buying opportunity.
The most recent seasonal upswing did not work. My experience has been one where when a downtrend year is taking place, rallies, if they take place due to seasonal factors act muted. When they simply don’t work, that’s very bearish.
Price Count Chart
As you can see on the above chart, the Price Count Indicator is currently projecting a series of lower lows. It’s my opinion that these lows have a very serious chance of being seen if the Swiss Referendum fails as that would remove demand for nearly 1500 ounces of gold by the bank. There’d still be demand from others, but those wanting gold wouldn’t be compelled to buy gold as would the Swiss National Bank if the referendum passes and eventually becomes law. The key word here being “eventually”, because even with the referendum passing, law makers are not bound by it. Therefore, while the vote may cause a temporary bounce, I doubt it has serious long lasting meaning unless it passes and becomes Swiss law.
The first projection of 1127.3 should ideally be seen before month end as once the referendum is decided it’s either going to be a situation of go higher or don’t go higher as the prop for prices will be have been determined.
I see no other price props left this year. Energy prices seem entrenched on moving lower. Inflation is for all purposes non-existent. War or threats of war no longer move financial markets. Ebola’s impact is now nil.
If you’d like to get a pdf explaining how to use this study and a “Chart of the Day” with the study on it for free, clear here.
The Weekly Chart lost its Swingline downtrend. That occurred when the pattern of lower highs and lower lows under the 18-Day Moving Average of Closes was broken.
The market has once again plunged, making a new contract low and in the process setting up a pattern on this chart of a higher high at 1251 than the previous high and a lower low of 1137.2. The market has not been able to get back to or over the 18-Day Moving Average of Closes, which is bearish. In addition, momentum is showing an oversold Slow Stochastic Reading (SSTO).
Oversold conditions work themselves either out of being oversold by either rallying or going sideways. They can also remedy the situation by converting the oversold condition by locking themselves into a very bearish condition which I term “embedded”. Embedded occurs when the two lines that make up this oscillator go sideways for several days under 20.
This chart is about to decide whether or not this occurs.
Daily Gold Chart
As you can see, the low made yesterday was 1137.1, a new low for the year. In many of my recent Gold Reports I’ve been warning that I expected gold to drop back to last year’s lows. That’s now occurred.
The question now as it is on the Weekly Chart is whether or not the Slow Stochastic Study embeds or not. The second consideration is what to do if it does in front of the month end referendum vote in Switzerland.
As it takes but three day to confirm an embedded situation and the referendum is at month’s end, I would recommend going with any new short signal that occurs in the next two weeks. What should not occur is a rally taking out 1175.0, the last rally high on this chart. Doing so would likely mean the market is going to try to rally, not embed.
I remain very bearish and am looking to have you go short again.
Resistance on the Daily Chart is against 1175.00, the last Swingline Rally high.
I will issue a sell signal in my Daily Updates if the Slow Stochastic reading embeds.
If the referendum vote fails to pass, look for $1000 an ounce gold, if not lower.
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Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. Chart data is courtesy of LGP-IraCharts. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from The Ira Epstein Division of The Linn Group, Inc. or The Linn Group, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are not indicative of future performance.
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