We've seen gold retrace from the 430 highs recently to 403 last night. I was actually expecting a move back to 390 MAX where I would be a strong buyer. Such a move would have been needed to flush out those who were hoping that 400 wld hold & the move would have likely corresponded with EUR/USD back to 1.2000... making buying gold at that level ideal.
However latest news out of Japan may have changed the dynamics a little. Please read.
Reading between the lines, I can only imagine the REAL reason for a sudden change in heart to favor gold is that THE JAPANESE ARE NEAR THEIR TOLERANCE LIMIT FOR ABSORBING TREASURIES. I may be wrong but if I am right, gold is going somewhere soon enuf.
By stating the word GOLD specifically & that its purchase "might affect the gold market"... believe me, the Japanese have intention to buy... the question is how much. What choice do they have? Buying into any other currency eg the EUR would see the ECB scream into their ears. That is, buying Gold is the only option which will not see retaliatory actions from a counterpart central bank!
Statistically, Japan only holds 1.5% of their reserves in gold -- roughly the percentage Mauritius does & a little more than Sri Lanka's percentage holding (serious). We certainly do not expect the Japanese to bring this portion up to 40-50%, the level of some of its G7 compatriots, the US (58%), GERMANY (45%), FRANCE (55%) & ITALY (47%). Note: only CANADA (0.2% - hello, isnt this gold country?) & BRITAIN (9%), stand out with low gold reserves. click
But let's say Japan does bring its gold reserves to a mere 5% from 1.5% presently. In value terms this would be $34 bln (5% of total reserves of $673 b) of its reserves. Less the $10 bln they already have in gold, the BoJ will be looking to buy $28 bln worth of gold. At today's gold price, this would be 68 million troy ounces or 2115 tonnes (admittedly less as prices go higher). That's how much the Japanese would be taking off the market for its reserves.
How much gold is there in the secondary market? I don't know. But I do know that it should be much less than that stated below...
" ...if you could somehow gather every scrap of gold that man has ever mined into one place, you could only build about one-third of the Washington Monument". i.e. 10 billion ounces. The Japanese purchase would be 0.6% of all the gold ever mined--> ONLY ONE DECIMAL FIGURE & not 0.0000006% etc as one would expect!
Better still... "the annual worldwide production of gold is something like 50 million troy ounces per year" i.e. the Japanese will be buying ALL the gold mined for the next 16 months to put things in perspective! click
Should we be buying now? I can say that I WAS very confident the downside should be limited to $390, at most $380, & was waiting patiently. Now I am worried people who see the Japanese statement as a question of HOW MUCH rather than whether they will do it or not, will stake gold higher from here. Already, gold has diverged from the EUR since the announcement a few hours ago.
What to do now?
2 strategies from here:
(1) For those who can stomach the possibility that gold may yet retrace lower or choose to cut losses, nibbling around here at $410 is probably advisable. My OWN plan is to accumulate at these levels & if gold breaks higher, I will add on a break of 413 (recent range top), 417 (year open level) and above 430.
(2) If gold does not break 413 & retreats, then I will want to start to slowly accumulate on the way down at 400, 390 & even maybe 380. (basically my original intention).
You may want to double check my calculations cause I am rushing (so excited)... can you imagine if the Japanese sought to buy 10% or even... 15%.. 20%...?
Take care all,