Physical Gold Trading To Kill Sub-$1,300 Price Levels
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In a report published on Monday, Reik said that weakness in gold futures markets like COMEX, otherwise known as “paper gold markets”, have been historically reversed by strength in physical markets.
“After a lot of late-March huffing and puffing in COMEX markets to achieve a month-end close for spot gold below $1,300, trading in physical gold markets proved especially robust during the first week of April. To us, this suggests gold’s sub-$1,300 spot price is destined to be short lived,” the report said.
Spot gold has been trading range-bound since late March, hovering around the $1,290 an ounce level and then climbing to trade at $1,303.50 an ounce on Tuesday.
Reik noted that gold price weakness has traditionally gained momentum in the highly levered COMEX environment, only to be reversed by strong demand in the traditional physical markets, of which the two largest are India and China.
“In this manner, global physical markets set lows for corrections in paper gold markets. Indeed, in evaluating the role of Western-type futures and options in global gold markets, it is instructive to highlight just how far removed COMEX trading actually is from anything having to do with physical bullion,” the report said.
The report cited Indian ex-duty premiums, which measure the premium paid by Indian gold importers in excess of the sum of global gold spot plus Indian import duties, as a barometer for the strength of physical gold demand.
In the six days ended March 29 the Indian ex-duty premium averaged $5.12 and doubled to $10.05, which Reik described as an “unequivocally bullish sign.”
“To put this in perspective, it is as if Indian gold buyers, who import more bullion than any other country in the world, sent a signal to COMEX gold bears, ‘Hey, just add $172 (in duties, taxes and premiums ) to the spot price of whatever you want to sell and send it over to us. We’ll take it all!’,” the report said.