Sunday, November 30, 2014

Swiss Voters Reject Gold Referendum; India Ends Restrictions on Gold Imports

It was reported by Reuters this morning (Sunday) that the proposal stipulating the Swiss National Bank (SNB) hold at least 20 percent of its balance sheet in gold was voted down, according to projections by Swiss television SRF as of 1:00 p.m. local time. The initiative “Save Our Swiss Gold” also would have prohibited the SNB from ever selling any of its bullion and required the 30 percent currently stored in Canada and the U.K. to be repatriated. Polls, including one by gfs.bern, had correctly forecast the Initiative’s rejection.

However, in a surprise move mid-day on Friday, India announced that it has scrapped a rule mandating traders to export 20 percent of all gold imported into the country. This action is expected to cut smuggling and raise legal shipments of gold into the world's second-biggest consumer of the metal after China. India had introduced the so-called 80:20 import rule tying imports to exports of jewelry last year to bring down inbound shipments and narrow the current account deficit that had hit a record.

"It has been decided by the Government of India to withdraw the 20:80 scheme and restrictions placed on import of gold," the Reserve Bank of India (RBI) said on Friday, without giving a reason for the change in the rule.

Traders said before the decision on Friday that India's gold imports could climb to around 100 tonnes for a third straight month in November as dealers bought heavily ahead of the wedding season.

October shipments to India, the world's No.2 gold consumer behind China, jumped to about 150 tonnes from less less than 25 tonnes a year earlier and 143 tonnes in September, according to India's Finance Ministry. The October jump follows a 450 percent increase in September imports to $3.75 billion.

The rejection of the Swiss Gold Referendum is clearly a blow to gold bulls. However, since this negative result was widely expected, perhaps India's bullish surprise announcement late Friday may be at least partially offsetting. It's not hard to imagine that if the Swiss Gold Referendum had passed, the Swiss National Bank would have found a way to circumvent the Referendum's constraints by using the derivatives market in some creative way. India's announcement may actually be more bullish for gold when all the dust settles early this coming week. Last year, India imported 825 tonnes of gold. In the January-September period, gold imports stood at 525 tonnes. With almost 300 tonnes imported in October and November, total gold imports for all of 2014 will almost certainly exceed last year's total!

Postscript (Sunday 5:15 PM CT): In the futures market, Gold just opened down about $8.00/oz. If you are long gold, you never like to see it down on the day, but given this morning's negative vote on the Swiss Golf Referendum, this decline seems extremely modest. And I think it is fascinating that there have been more than three dozen stories today so far on the Swiss vote to reject its Gold Referendum, but NO stories all weekend long on the much more important shocking news out of India that its 80:20 import rule has been totally scrapped! If the Swiss Gold Referendum had been approved, the Swiss National Bank would have had to buy a minimum of 25 tonnes of gold per month for the next five years. Imports of Gold into India are on a pace to exceed 900 tonnes this year, or 75 tonnes/month on average (more than triple!). Since total global mined production this year will probably not exceed 3,000 tonnes, India is now on pace to import more than 30% of total annual mined production this year alone!

Sunday, November 23, 2014

Update: Gold And The U.S. Dollar

Following an avalanche of bearish articles and forecasts for gold from the financial media and Wall Street "research" analysts in early November near the exact bottom in gold prices, a few brave souls have finally surfaced in support of the yellow metal this week. Barron's Magazine is front and center now with two recent articles that strongly suggest that a major bottom may now be in place for gold and precious metals mining shares. Links to these articles are attached here.

In the interest of full disclosure, I am long precious metals mining shares and short the S&P 500 Index.

I think it may be noteworthy that the price of gold was up more than 1% last week despite the fact that the U.S. Dollar Index (DXY) was also up sharply (+0.89%) on the week. The U.S. Dollar Index is now up 11.91% since May 9th, 2014 (see chart below), but gold prices have remained resilient against the backdrop of the most negative sentiment that I have ever witnessed in my 36-year career in the securities industry.

Was November 7th THE major bottom in gold and silver prices? Yes, I think so!

Will Swiss voters approve the Swiss Gold Referendum on November 30th? Based upon everything that I have read about this issue (and all the latest poll information), I believe that the outcome here is a "toss up" right now. However, in a surprise move, the Netherlands announced last week that it has repatriated 122.47 tonnes of gold from the vaults of the Federal Reserve in New York to the Dutch Central Bank in Amsterdam. This is approximately 4 million ounces valued at about $5 billion. Officially, the Dutch Central Bank said that this repatriation was just part of a larger re-balancing of where its gold was stored. Unofficially, it's not hard to imagine that the Dutch Central Bank has a diminished level of confidence in the U.S. Federal Reserve and that maybe Netherlands is better off having its own gold stored on its own soil. Could this timely announcement by the Dutch Central Bank have any impact on the Swiss Gold Referendum? Perhaps YES! More importantly, however, I strongly believe that even a "No" vote on this key referendum will NOT derail the current rally in gold prices which began on November 7th. And in my view, a "YES" vote on the Swiss Gold Referendum will result in at least a 10% surge in gold prices over the very near term (before the end of this year)!

In terms of the potential outcome, why is the Swiss Gold Referendum different than the Scottish Vote For Independence? Many uninformed research analysts, gold naysayers, and inexperienced journalists in the financial press are comparing the upcoming Swiss Gold Referendum with the recent failed Vote for Scottish Independence. The outcome will be the same they claim, with the "NO" votes prevailing. Swiss Nation Bank (SNB) President Thomas Jordan was out in full force this morning (11/23) strongly suggesting that "The [gold] initiative is dangerous because it would weaken the SNB". Of course, that's the whole point of the Swiss Gold Referendum! The SNB has been printing money at a pace equal to or greater than the U.S. Federal Reserve over the last 5 1/2 years. Interventions by the SNB in the foreign exchange market to effectively "cap" the Swiss Franc against the Euro at 1.20 have resulted in serious ongoing devaluation of the Swiss Franc.The Swiss Gold Referendum won't stop this outrageous and ill-fated action, but it WILL slow it down! The Vote For Scotland's Independence failed because the people of Scotland were threatened using heavy-handed tactics. Older people were actually told they would lose their pensions. Business owners were told they would lose all of their international business (and also business within the UK) because the Bank of England said it would not allow an independent Scotland to use the British Pound as it currency. Almost the entire "No" vote on Scottish Independence came from voters over the age of 55! However, most of the threats that were used to defeat the Scottish Independence Vote are irrelevant and don't apply with respect to the Swiss Gold Referendum. While the Swiss people ARE being told by the SNB and Swiss central government officials that the Swiss economy will suffer and that Swiss unemployment will rise significantly if the "YES" vote prevails, it is my strong view that Swiss voters will see through these trumped up threats of disaster, discount them appropriately, and then seriously consider a "YES" vote to this key Gold Referendum.

The following charts are attached for your review, with all signals from my computer-based trading system reflected on each chart:

1. Gold ETF (GLD) Weekly Chart
2. Gold ETF (GLD) Monthly Chart
3. Silver ETF (SLV) Weekly Chart
4. Silver ETF (SLV) Monthly Chart
5. Pan American Silver shares (symbol PAAS) Monthly Chart
6. S&P 500 Index ETF (SPY) Weekly Chart
7. U.S. Dollar Index (DXY) Weekly Chart
8. U.S. Dollar Index (DXY) Monthly Chart

Recent Gold-related articles in Barron's Magazine: