Saturday, February 15, 2014

Tumbling US Dollar Boosts Gold -- But that's Just ONE Factor

Here's an updated chart of the Powershares DB US Dollar Index Bullish Fund (UUP), which I've been following all week.  The breakdown in the UUP and the US dollar gives us two targets ...

(Updated chart)

The dollar is falling because downbeat economic reports -- industrial output, unemployment claims, retail sales -- cast doubt that the Federal Reserve will keep scaling back its QE stimulus at each policy meeting. So it is likely that the U.S. dollar will move lower, and UUP will fall to one of thse target supports I've noted on the chart.

The question becomes, how high will gold go by the time the U.S. dollar bottoms?

Importantly, the U.S. dollar is only one driver in gold now.  A more important driver is demand from China. Another more important driver is sellling by ETFs that hold physical gold.

So let's go over those.

After a massive, record year for Chinese gold demand in 2013, Chinese demand for gold in January was again staggering. SGE data shows that withdrawals from the Shanghai Gold Exchange vaults in January 2014 accounted for 247 tons. This is an increase of 43% compared to January 2013. It’s also more than monthly global mining production and an all-time record. And this is happening even as Chinese gold production climbs to an all-time record.

Assets in the SPDR Gold Trust (GLD), the biggest bullion-backed exchange-traded product (ETP), rose by 0.9% to a two-month high of 806.35 tons earlier this week, then dropped to 801.25 metric tonnes on Thursday. Still, it was the highest level since December 20. Holdings are 1.2% higher this week and headed for a third 5-day period of advances, after losing 41% in 2013. A total of 553 tons was withdrawn from the GLD last year.

In the last month, says Julian Phillips of, there have been no sales from the GLD and more than 500K ounces of purchases. “This is tremendously significant because sales of physical gold from these U.S. gold ETFs and from the leading U.S. banks totaled 1,300 metric tons in 2013 ... This formed a key source of supply for gold. All of it went east to Asia never to return again.”

And reports that the last time ETF investors were this bullish was on October 4, 2012 when GLD recorded 9 tonnes of inflows. At the time gold was trading just under $1,800 an ounce. The strong inflows are in stark contrast to the one-way bet gold became among ETF investors: GLD recorded only 17 days of inflows all of last year and almost 540 tonnes left the fund.

Remember, gold doesn't have to go up. And if you believe Ted Butler, JP Morgan's manipulation of the gold market is blatantly obvious.

However, all that said, it sure looks like bullish forces are lining up for precious metals and miners right now. Here's an updated version of a chart I posted earlier this week ...
(Updated chart)

If you want to read more about the irresistible forces driving gold, read my column from Investment University this week. 

And for more chart action, I recommend this post at the blog.

Remember, do your own due diligence before investing or trading in anything. Good luck next week.

Best wishes,


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