What Can We Really Learn About The Price Of Gold From Government Action?

Friday, June 17, 2016

Gold forecast

If one were to take a step back, one would recognize that governments are the last actors within a society.  Laws and regulations are promulgated usually as a response to something that has occurred in society for the which the public seeks some corrective action through our law making process.  In fact, I have not yet seen the government take a pro-active approach to any of society’s problems, as they only seem to react when we reach an extreme.  As a result, it is often the last actor within the chain of events.

Government Selling Marking Prior Gold Lows

As it relates to the financial markets, nothing could hold more truth.  In fact, when it comes to the gold market, we have often seen major lows being created just as governments complete major sales of their gold supplies.  Again, they have often been the last actors within the selling trend of gold.

The last bear market in gold lasted from 1980 until 2002. Between 1999-2002, when gold prices were at their lowest, Gordon Brown, who, at the time was the UK Chancellor of the Exchequer, decided to sell approximately half of the U.K.'s gold reserves. As we now know, that marked the end of the gold bear market, followed by a strong rally into 2011 which saw gold increase in price by over $1,600. The price multiplied by over six-fold from the low in 2002. This became known as the "Brown Bottom."

Buying Low

In September of last year, we began to see indications of bottoming in the mining complex, which often precedes a bottoming in the metals themselves. In fact, we launched our EWT Miners Portfolio that month due to these bottoming signals, and began buying certain miners which we viewed as bottoming.  As some of the examples of our purchases around that time, we bought RIC on September 16th for $2.59 and SA on the same day for $5.81.  We added to our positions in October, with ABX being one of our purchases on October 23rd for $7.64. 

Since that time, RIC has soared as high as 9.35, SA rocketed to 15.50, and ABX has struck as high as 20.44.  And, take note that we have taken a rather conservative approach, at least until the long-term bottom in the market has been confirmed.

Recent Government Selling

So, with potential bottoming in the mining complex, I began to look around for news of a government selling their gold.  And, in October, I wrote an article suggesting we are approaching a major bottom in the complex, and noting how Venezuela could be selling more than 3 million ounces of gold reserves before year-end. The country has more than $5 billion in maturing debt and interest payments due before year-end without the ability to repay it.  This was the first anecdotal potential for an approaching long-term bottom that came up on my radar.

And in January of 2016, it seems that Venezuela sent $1.3 billion worth of gold bars to Switzerland, according to data from the Swiss Federal Customs Administration. In fact, it seems that the Central Bank of Venezuela has reduced its gold holdings in 2015 by 25%, and this is even before hearing about this transfer in 2016.

Then, in March of 2016, we found out that the Bank of Canada's gold reserves have been reduced to nothing.  As amazing as it sounds, that is a fact.  Canada has now sold its gold, which is an event similar to what occurred in 2002 with the UK’s sale of gold.

With the technicals suggesting that the long-term bottom may have been struck (we are looking for final confirmation), the anecdotal evidence of governments again selling at the bottom would add support to what the technicals may be suggesting.  Maybe this time it will be known as the “Maple Leaf Low.”

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Avi Gilburt

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net); a live Trading Room featuring his intraday market analysis (including S&P500, metals, oil, USD & VXX); interactive member-analyst forum; and detailed library of Elliott Wave education. Visit his website:https://www.elliottwavetrader.net. You can contact Avi at info@elliottwavetrader.net.