It is not often we see such a disconnect between less than stellar economic news, including a potentially dire financial collapse (i.e. default) looming on the horizon, on the one hand, and falling gold prices and gold producer shares, on the other.  Normally these focal sets of financial information run inversely to each other.  What is going on?  To be honest, I’m not exactly sure.  All I can do at this point is spell out the divergence.  Consider the following charts:

1. Central banks are buying up gold for the first time since 1988, adding more than 100 tonnes of bullion to their reserves in each of the last 7 quarters; and they are looking to buy more according to recent reports.  This should help stabilize gold prices.  Central banks, to be fair, have a horrible record at timing their gold buys/sells.  Still, since it is normally in their best interests to prop up the currency of their countries, the fact that they are hoarding gold is telling.  It is a sign that something is up:



2. Gold demand in China is up, up, up as a  more affluent class buys jewelry and the government seeks to back the yuan.  A recent Forbes article states that China is, in very quiet fashion, adding up to 5,000 tonnes to its stockpiles.  This also, especially once it is confirmed publicly, should help give a bid to gold prices:



3. Stockpiles of physical gold are down, way down.  You know the old supply and demand curve: when supply is down and demand is up (see chart 2), prices go up…way up:



4. Gold has always tracked debt ceiling hikes.  Here we are on the verge of another debt ceiling raise yet the price of gold has been falling sharply.  So why the grave disconnect?


(source: Bloomberg)

Just what IS going on with gold?  Again, I’m not sure…but I smell an opportunity shaping up.  Maybe a “back up the truck”, “once in a lifetime” kind of opportunity.  For some reason that only smarter heads will know, gold is being bought up with a passion, yet gold prices continue to fall.  That disconnect cannot last much longer.  Will keep you posted…

Blessings, TC


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