It was in my email inbox when I got home last night… a short and long-term analysis of the gold market. Here is the long and the short of it. First, foreigners are getting in: “Tanaka Holdings – the operator of Japan’s largest bullion retailer – reports gold sales jumped another 60% last month from their already high levels. As Tanaka general manager Eiichiro Kato told Bloomberg this week, gold’s lack of yield isn’t a big deal for investors when 90% of Japanese government bonds have negative yields.”

Second, there’s this: “…most of the world’s 1.6 billion Muslims don’t invest in gold. This is because under Sharia law – which governs the personal and financial lives of Muslims around the world – gold’s status is “murky.” Physical gold can be owned as jewelry or as a currency or medium of exchange. But there is disagreement over whether it can be owned and traded as an investment… meaning most popular gold investments, from exchange-traded funds (“ETFs”) to gold-mining stocks, have generally been off-limits. That’s about to change. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which establishes Sharia standards for Islamic finance, and the World Gold Council (WGC), are currently drafting a “Shariah Standard on Gold.” Natalie Dempster, a managing director at the WGC, says that they plan to release it by the fourth quarter of this year. This new standard could clear the way for Islamic investors to participate in gold’s current rally. The world’s 100 million Islamic savers and investors hold almost $2 trillion in assets today, and analysts estimate it could grow to $5 trillion or more by 2020. This represents a huge amount of new potential gold demand. A recent report by Ernst and Young stated that 93 percent of Islamic financial assets are held in nine core markets – Bahrain, Qatar, Indonesia, Saudi Arabia, Malaysia, United Arab Emirates, Turkey, Kuwait, and Pakistan. Since there are virtually no Sharia-compliant gold products right now, money managers in these core markets are generally limited to investing in Sharia-compliant assets in equities, real estate, and Islamic bonds. It makes sense that Islamic investors will embrace gold for the same reasons other investors do: The lack of low-risk alternatives in a zero interest rate world, stock market volatility, global economic concerns, diversification, and as a form of insurance. They may not all rush into buying it once the standards are accepted, but growing interest from Islamic investors should give gold prices long-term support.”

That was the good news for the longer term, now for some short-term perspective we all need to be aware of: “The Commitment of Traders (“COT”) is a government report that classifies different types of traders and tracks their positions. All you need to know about these reports is that there are two main groups of traders: industry professionals and speculators. The two groups usually bet in opposite directions. And when the speculators take extreme positions, they’re often wrong. COT reports led us to issue a warning about the extremely high price of oil near its peak in 2014… and to predict a big rally in oil near its low early this year. They have helped us time lots of profitable trades. And right now, the COT reports for gold and silver show that speculators are making record numbers of bullish bets. We’ll start with gold. Speculators now have more bullish positions on gold than they’ve ever had before.

If the COT wasn’t warning enough, then there’s this: “The “Bullish Percent Index” (or “BPI”) tracks the percentage of stocks in a sector that are trading in a bullish pattern. It ranges from zero to 100. The BPI flashes a buy signal when it reaches 30 or lower (oversold territory) and then turns higher. And it flashes a sell signal when it reaches 80 or higher (overbought territory) and then turns lower. 100% of gold mining stocks (tracked by the BPI) are trading in a bullish pattern. In the eight-year history of the index, it has never reached 100 before. A sell signal doesn’t come until the index turns lower. But it went from its lowest possible reading (of 0) to its highest possible reading (of 100) in less than a year. This is another big, sharp move. These indicators aren’t perfect. Sometimes these extremes can get much more extreme. Prices could continue to soar. It has happened before, and it is sure to happen again. But usually when we’re at these extremes, short-term reversals soon follow.”

There you have it, we have reason to believe more upside is out there, and the Bull will remain alive, healthy and strong.  But, in the very near-term, between the COT report and the BPI for gold stocks, caution would be strongly advised at this time. I’ll add my own interpretation in my next post. I think you’ll find it most interesting!

Here’s to your accumulation of real wealth!
Harold F Crowell


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