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Main » 2020 » January » 15 » Rate of gold on the exchange. Gold supply and demand of the puzzle. What and how to affect the price of gold?
Rate of gold on the exchange. Gold supply and demand of the puzzle. What and how to affect the price of gold?

Gold - the most ancient and legendary asset known since time immemorial, the curse and the blessing of mankind. Precious metal once performs the function of money, but lost its appeal in recent years. Equivalent value around which revolves a lot of legends, conjectures and unverified rumors. Asset investment, which can be a source of profit and be a source of frustration. Without claiming to be a comprehensive study, in this article, we try to understand who is responsible for the movement of gold prices, how to earn and save, but do not lose.



The dollar and gold as an equivalent value. History and Present


First, look at the facts. As you know, in July 1944, when World War II was drawing to a close, the international conference held in Bretton Woods, the United States, the world's main reserve currency was declared the US dollar, which has become the underlying asset for the other currencies, exchange rate, which was determined on the basis of the exchange parity . In this case, the dollar itself was tied to gold, whose price was set at US $ 35 per troy ounce (31.1035 grams.). Thus, one gram of gold was worth $ 999.9 1.125. Currency parity was maintained by central banks, however, already in 1968, was set double gold market, where the price of gold was determined in accordance with supply and demand.


In August 1971, US President Richard Nixon, declared a moratorium on the exchange dollars for gold at the official rate of the central banks, and already there was a devaluation of the dollar in December 1971, and the price of gold rose to $ 38. In fact, it meant the US bankruptcy. Further more, in February 1973, the US devalued the dollar to $ 42.2 per troy ounce of gold, and in fact the era of the gold standard came to an end. On Jamaican international conference in March 1973, was formed by the FX market and exchange rates in relation to each other began to be determined on a market basis, but the dollar remains the world's reserve currency, which subsequently allowed the US to run the printing press, in its sole discretion.


Since then, it took 48 years, and one ounce of gold rose in price to $ 1475, an impressive growth in the 42.14 times or 4214%. However, hardly anyone is planning investments places them with a horizon of 50 years. For us acceptable in the shorter term 5, 10 and 20 years. At the same time traders interested in even shorter periods of time, often one year, quarter or even month. So the greatest effect on the price of gold and how to determine the direction of the price? Try to understand this article.


The main sources of production and consumption of gold. Supply and demand of gold


As you know, fundamental analysis of financial markets plays an important role in relation to the value of gold, often speaking even replacement of technical analysis. As you know, in terms of market pricing in the price affects the law of supply and demand. If you follow the data from the trusted public sources, such as data from the World Gold Council (World Gold Council), what are the main sources of demand: - the jewelry industry, the technology sector, investment and central banks (Figure 1). 


In 2018 the jewelry industry has consumed 2241 tons, 335 tons of technology required, the investment sector has bought 1164 tons, and, finally, central banks bought 656 tons of gold. In turn, gold production amounted to 3,501 tonnes due to production and 1,177 tonnes of gold has returned to the market as a result of recycling. The major producing countries gold, according to the data for 2018 are: China (404.1 tons), Australia (314.9 tons), Russia (297.3 tons) and the United States (221.7 tons).


Fig. 1: The main consumers of gold.


As you can see from the WGC data it is a major consumer of gold jewelery industry with a consumption share of 51% in total. It is also clearly visible that the jewelry industry is a major buyer of gold for many years, which would seem to have an influence on the gold price, but not so simple. Indeed, the price of gold is affected by demand for jewelry in the United States, India and China, but this influence is more on the long-term factors such as demand and central banks or of production growth in the world of electronics. 


Among the factors that affect the price of gold can be divided into four main categories: 

  1. increasing prosperity and economic expansion;
  2. market risk and uncertainty; 
  3. the opportunity cost; 
  4. pulse and positioning. 


The first two factors are particularly important in the long-term gold price and form the basis of strategic reasons for buying and investing in gold.


Between the price of gold and economic growth there is a connection. Population growth causes an increase in the welfare of jewelry consumption, increased demand technology sector, inflation causes investors to invest in gold and gold-bearing assets. In the United States, India and China, gold is a luxury item and means of accumulation.


In the case of the market, geopolitical and other risks investors view gold as a highly liquid asset shelter protecting them from currency depreciation. The price of gold significantly affect policies of central banks and stock positioning, which can lead to a significant increase or decrease in the price of the precious metal.


And there are multivariate models assessing the prospects for the gold price, which accurately allows to predict the direction of prices, where the price of gold is determined by the interaction of the driver. However, the complexity of these models, as well as the absence of timely and accurate information that is not possible to use them for daily trading or investment decisions. At the same time, the accuracy of these models does not provide the growth of the expectation of a positive outcome with an increase in labor costs for the design. Always remain unknown variables that could disprove the hypothesis and to prevent the realization of the forecast. Therefore, we need a simple tool, based on certain assumptions, which with high probability will help to create the right forecast forex gold.


Speculators. London against New York and Chicago.


As shown by my long-standing practice, the main source of demand for gold, which affects the price is the investment demand in the so-called "paper" gold. "Paper gold" are called derivatives, based on gold, for example, the share of exchange trade funds and futures contracts on commodity exchanges. In other words, despite the relatively small portion of total demand, only about 26%, in the short and medium term, the main impact on the price of gold have the buying and selling of speculators. 


On the one hand, it's not good for investors, faced with the possible manipulation of the gold market. On the other hand knowledge of this fact greatly simplifies the lives of ordinary traders, who can simply observe the positions of speculators (Managed Money) on the Chicago and New York Mercantile Exchange.


First of all, let's see how it happened that the price of gold is formally defined in London, but in fact in the United States, on the Mercantile Exchange CME - COMEX? 


For a long time it was believed that the greatest volume of trading in gold are concentrated in London, but this assumption is not confirmed by real data that have been kept secret. In autumn 2018, the first time ever, the London Market Association precious metals (LBMA) has published data on the volume of the gold market. According to these data for the week 16 and 22 November, the volume of trades gold was 4696.7 tons daily or traded 939.37 tons of the precious metal on the average. As it turned out the trading volume, although it is far ahead of Shanghai, but inferior in the trade turnover of Chicago and New York, which merged into a conglomerate.


Comparable data on the current trading gold in London and New York. According to the LBMA published December 16, 2019, the turnover of trades in gold during the week 11 to 16 December 2019, amounted to 160 million. Ounces, based on the stock futures contract is 1 million. 600 thousand. Contracts (Fig.2). At the same time the volume of gold trading on CME - COMEX, according to the stock exchange for the same period amounted to 1 million 719 thousand contracts...


Figure 2: The volume of the weekly trade gold LBMA 


A simple comparison of trades between the LBMA and CME-COMEX shows that the volume of comparable transactions, and claim that London does not affect the pricing, would be a significant simplification, but due to the lack of reliable information on all parameters of interest to us, without some simplifications, unfortunately, do it is impossible. In addition, all markets are interconnected and can not be developed in isolation, so the change of trading options in London, is instantly reflected on the dynamics of trading in Chicago, and vice versa. However, in consideration of the price of gold on the volume on the CME purchases of Governors (Managed Money) Medium - COMEX can get an interesting relationship, which then successfully used to analyze the direction of gold prices.


Commission and the Commodity Futures US Report Commitment of Traders 


The essence of this dependence is that the gold price often varies with the dynamics of long positions to manage the funds, which trade on the Stock Exchange CME - COMEX (Figure 3), which reports to the US Commodity Futures Commission (Commodity Futures Trading Commission - CFTC). According to the rules of the CFTC, traders sell futures contracts on a weekly basis shall submit to the Commission a report on their open positions - Commitments of Traders (COT). Thus, observing the positions of traders in the COT report, we can weekly receive truthful information about the actions of the various categories of traders in futures contracts for gold, and analyzing them to do for themselves operational conclusions.


According to the classification of the Commission on the US Commodity Futures, Funds Managers (Managed Money) are in the futures market, the main buyers of gold, which, according to the chart 3, is true. Taking into account the fact that the volume of trading on the CME Exchange - COMEX is greater than or equal to the volume of LBMA trades, we can conclude that in velichenie demand from major buyers leads to an increase in gold prices and demand reduction causes prices to fall. 


Observation of Managed Money positions gives us a clue as to what is actually happening in the gold market, ie. A. Of the aggregate position data are a reflection of the collective mind, where every single buyer is acting in accordance with their preferences, but all together they determine the direction of price movement by the law of supply and demand. 


Feed unverified or even false information every day attacks the unsophisticated investor, and many "experts" give their advice on the purchase of an asset. This is often done specifically in order to lure traders into a trap. 


Known story that in 1993 George Soros to spread rumors about the purchase of gold by the Chinese government, urging investors to take advantage of this information. When gold reached its lowest in 10 years, prices in the $ 326, Soros has bought a 10% stake in Newmont Mining Corp., it has led to an increase in prices of up to $ 414. But then the "gold rush" has abated, and gold fell to $ 361. As it turned out, the Soros sold gold at the peak of prices artificially fueling rumors through the media.


Now about purchases at that price you can only dream of, but believe me, if investors were not amused. Analyzing the position of large speculators on the stock exchange CME-COMEX, as well as the inflow and outflow of capital in futures contracts, you will never fall for the bait numerous "Soros". Try to trade the Forex with gold, show Soros "gruel"!



Figure 3. Positioning of Managed Money market CME-COMEX futures


As can be clearly seen from the chart 3, the price of gold is moving almost synchronously with long positions Managed Money, open at the exchange CME - COMEX. However, in order to convince the skeptics that it is buying speculators in the futures market and the purchase of gold exchange trade funds, which are often the same, lead to an increase and decrease in the price of gold in the short and medium term, I will provide additional evidence based at the World Gold Council statistics for the third quarter 2019.


The WGC report dated November 5, titled "Trends in demand for gold in the third quarter of 2019," said:

  • In the third quarter, assets in ETF secured gold reached a new historic high of 2855.3 tons .. The holdings rose by 258.2 tons., To its highest level since the first quarter of 2016. 
  • Central banks added to their reserves of 156.2 tons. In comparison with the same period last year there was a drop to 38%.
  • Jewelry demand fell by 16% to 460.9 tons. 
  • Investing in bullion and coins fell to 150.3 tons. 
  • gold supply increased by 4% to 1222.3 tonnes. 


At the same time, despite the many negative factors, the price of gold in the third quarter of 2019 continued to grow, reaching new multi-year highs. At the same time in the futures market saw a three-year maximum Number of Managed Money, followed by an influx of new money into the market. Collective Intelligence showed us speculators, increasing demand from customers and the growth of open interest to all-time highs to say that the market come new wishing to place their money and to cash in on the growth of prices. At the same time, all other factors, such as demand from central banks and jewelery industry, showed a decline in activity, even declining investment in physical gold and gold demand in the market has grown. 


Data from the World Gold Council (WGC), we prove that one factor of interest on the part of speculators, outweighed all other factors, resulting in the price of gold has updated the 6-year high. This knowledge is expensive. Simple observation of the actions of speculators can provide us with invaluable information to correctly interpret that we can get an idea about what is happening in the gold market. This is a real insider information in the right hands and with proper management can become a significant income.


Based on materials from LiteForex



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