Doubts about the strength and longevity of the gold boom, because it appears to a financial markets event based on trading in derivatives, have been raised by one of the gold industries best placed observers, Ross Norman.
Chief executive of Metals Daily, a London-based website and gold trading forum, Norman has a history of asking provocative questions about the metal in which he specialises.
Earlier this year he was first to identify heavy-duty Chinese private sector buying as a gold-price driver, with individual traders picking up where their government left off.
Norman’s latest assessment is that “this is a most peculiar bull run, and even harder to explain,” he wrote on his website.
The early rush by Chinese investors into gold started with physical buying and then shifted to speculative trading in over-the-counter forwards, future, and options.
Swimming With The Tide
“And they bought in massive size, confident that they were swimming with the tide,” he wrote.
The view of the traders was that they would win when interest rates started falling or they crashed the U.S. economy “so it was a question of when not if”.
“The idea that the market is derivatives led makes sense in many ways, why else would gold rally to an all-time high just as inflation falls and quickly, the dollar gains, treasury yields gain, all normal surefire leading indicators of the opposite.
“And that’s the thing about a derivatives position, it can be largely agnostic (doubting) of market signals.”
Other signs about the gold market being driven by derivative trading is an end to a rally in India which followed a reduction in import duties, the absence of traditional buyers, Middle East gold buyers opting for reduced quality jewelry and reports from Chinese jewellers of a significant decline in trade.
“In the U.S. and Europe it is worse,” Norman wrote.
“Physical (gold) dealers in Germany, often second only to China in size on gold coins and bars, has been worryingly thin”.
The speculative phase led by China has more recently been joined by U.S. traders with futures long positions at a near four-year high creating a market which is largely unswayed by normal drivers.
Norman is not forecasting a quick end to the boom which has seen gold rise by 45% over the past 12-months to its latest price of $2667 an ounce.
“Derivatives by their nature often have a long leg towards expiry and as such, no immediate price correction is in prospect,” he wrote.
No Shorting This Rally
“That’s a long way around saying that even though I don’t believe this rally, I would certainly not short it.
“Gold will almost certainly go higher and I would not be surprised to see $3000/oz this side of Christmas.”
Next year, however, could be a different story and if a gold-price correction takes hold Norman will be able to say he was first to ring a warning bell.
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