Physical gold demand picks up as Europe teeters on edge

"Speak of the devil" is a common idiom, which in full is "Speak of the devil and he doth appear."  In the same way one feels wary of commenting upon a possible economic collapse in Europe and the destruction of the euro, for fear that it just might precipitate the event... despite the fact that we are all acutely conscious of the possibility. A case of the thought becoming mother to the deed. However, if gold is a barometer of just such an event then the temperature is nudging higher.

Gold saw tsunami's of physical gold demand in Europe in 2008 and 2010 when the availability of anything below a 400 oz. gold bar (worth $660,000) was simply not to be found for a several months. After a quiet first quarter, there are grounds for supposing that another wave of retail investment demand for gold might be just on the horizon.

In the year that we commemorate the loss of Titanic, it is worth reflecting the crucial role of lifeboats in a crisis. Gold is a particularly small market and were you to liquidate an entire year’s gold mine production at current market prices, it would have a market cap of less than Vodafone — yet it is compared along with such investment mammoths as the US dollar, the FTSE 100 and the DJIA. Gold still represents less than 1% of total assets under management (AUM) and to rise to the levels of the 1980's (or by 2% of global financial AUM) would require the creation of 85,000 tonnes of new investment demand or 30 years of mine production. It is still significantly under-owned.

Gold is currently in a protracted period of consolidation and expecting a break-out. Technically it is unclear which way the market could go — but fundamentally it looks likely that a sharp move to the upside is a distinctly possibility based upon rising economic tensions in Europe.

From a technical perspective, the long term gold charts seem to be saying something big is going to happen, but unable to say clearly which way. The short-term patterns have been quite negative, prompting some long liquidations (what you might call a "fake-out") but there is a larger and more important chart shape emerging. The strongly bearish scenario is formed by a remarkably steady trend line back to 2008 which, if $1,613 and $1,600 were to be breached, would suggest an important shift in market behavior. Furthermore, gold has a descending triangle which technical analyst Peter Brandt suggests would be 'resolved' by a move downwards to $1,525... a game changer. The bullish argument is that gold could be forming a massive "reverse head & shoulders pattern." The symmetry of this pattern, coupled with falling open interest, suggests a likely continuation considerably higher. A breach of $1700 would then be confirmed by a close above $1,800 with a target to breach $1,920 (the previous all-time high) topping out at $2,080.

The gold market has been characterized by flat prices and declining open interest, as speculative interest fades. Usually the gold market finds equilibrium or a "bottom" before the primary trend reasserts itself - this seems to be what is happening now.

About the Author
Ross Norman

Ross Norman is owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.

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