Deutsche Bank: "Gold’s Downturn Is Almost Over"

Key Concepts

• Gold ETF Outflows: Reductions in the amount of gold held by Exchange Traded Funds.
• Correction: A temporary decline in asset prices after a period of increase.
• Volatility Normalization: A decrease in the degree of variation of a trading price series over time.
• VAT (Value Added Tax): A consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.
• Inelastic Demand: Demand that does not change significantly when the price of a good or service changes.
• Western Paper Selling: Refers to selling of gold through financial instruments and derivatives in Western markets.
• Eastern Physical Demand: Refers to the demand for physical gold (coins, bars, jewelry) in Eastern markets, particularly China.
• Ceasefire: A temporary suspension of fighting in a conflict.
• Cold War: A state of geopolitical tension after World War II between powers in the Eastern Bloc and powers in the Western Bloc.
• Financial Weapons of Mass Destruction: A metaphorical term for financial instruments or strategies that can cause significant disruption to economies.
• ETF Puking: A colloquial term for significant outflows from Gold ETFs.
• Catching the Falling Knife: A trading strategy where an investor buys an asset that is rapidly declining in price, hoping it will rebound.
• Corporate Analysis: An examination of a business or industry from a financial and operational perspective.
• Non-monetary Gold: Gold that is not primarily held for its value as currency, such as gold used in jewelry.
• Shouai Jewelry Market: A significant jewelry market in China.
• Projecting Buying Power Outward: A strategy where a country aims to increase its influence and economic leverage on a global scale.
• Liberalize Gold Ownership: To remove restrictions on individuals and entities owning gold.
• Financialization of Gold: The process of making gold more accessible and usable within financial systems, such as through insurance products.
• Bricks Area: Refers to the economic bloc of Brazil, Russia, India, China, and South Africa.
• Vault Convertibility into Renminbi: The ability to exchange gold held in vaults for the Chinese currency.
• Shanghai Gold Premium: The difference in price between gold traded in Shanghai and gold traded in Western markets, indicating higher demand in Shanghai.
• Arbitrage: The simultaneous purchase and sale of an asset in different markets to profit from a price difference.
• Naked Shortselling: Selling a security that the seller does not own or has not borrowed.
• Jewelry Rehypothecation/Fabrication Rehypothecation: Complex financial practices involving the use of jewelry or its components as collateral for loans or other financial instruments.
• Trading Floor: A physical location where financial instruments are traded.
• Jewelry Exchange: A marketplace for trading gold jewelry.
• SGE SHF (Shanghai Gold Exchange, Shanghai Futures Exchange): Major platforms for gold trading in China.
• CME Globex: An electronic trading platform operated by the Chicago Mercantile Exchange.
• Ring Fence: To isolate or protect a particular market or asset.
• Measured Move: A technical analysis concept where a price target is projected based on the size of a previous price move.
• CPI (Consumer Price Index): A measure that examines the weighted average of prices of a basket of consumer goods and services.
• PPI (Producer Price Index): A measure of the average change over time in the selling prices received by domestic producers for their output.
• Veterans Day: A U.S. federal holiday observed annually on November 11th.
• Fed Speakers: Representatives from the U.S. Federal Reserve who give speeches about monetary policy and economic outlook.
• Ledge: In technical analysis, a horizontal support or resistance level.
• Echo: A repeated pattern or price movement in a chart.
• Tamped Down: To suppress or control the price of an asset.
• Stablecoins: A class of cryptocurrencies that are designed to maintain a stable value relative to a specified asset or basket of assets.
• CBDC (Central Bank Digital Currency): A digital form of a country's fiat currency that is backed by the central bank.
• G7 Central Bank Reserve Asset: An asset that central banks of the Group of Seven industrialized nations hold as part of their foreign exchange reserves.

Gold ETF Outflows Slowing, Signaling Correction End

Deutsche Bank's latest analysis suggests that the correction in gold prices is nearing its conclusion. This is supported by a significant slowdown in Gold ETF outflows over the past three days. The bank anticipates gold to stabilize above $3,900 as market volatility normalizes.

China's VAT Rules and Gold Demand

The impact of China's new VAT rules on jewelry is expected to be modest. Gold demand in China is characterized as inelastic, meaning it is not significantly affected by price changes. Furthermore, gold imports remain steady, indicating that the new tax will not substantially disrupt the market.

Western Paper Selling Easing, Eastern Physical Demand Strong

Data indicates a decrease in selling pressure from Western paper markets, while physical demand from Eastern markets, particularly China, continues to absorb available supply. This dynamic is reinforcing gold's underlying strength as the year-end approaches.

Market Rundown: November 10th

Vince Lansancy provides a morning market update for November 10th, 7:45 a.m., highlighting key financial and precious metals news.

Market Performance Snapshot

• Tenure Yields: Up 4
• Dollar: 99.57, up 1
• S&P 500: 67.89, up 48
• Nasdaq: Up 198
• VIX: Down 54
• Gold: Up $94 at $4,94
• Silver: Up $1.74 at $50.05
• Copper: Up almost 9 cents at $5.
• WTI: Up 19 cents
• Natural Gas: Up 164% above $4
• Bitcoin: Up $0.00 at $105.xx
• Ethereum: Marginally up at $3591
• Platinum: Up 32 (2.3%)
• Palladium: Up 36
• Soybeans, Corn, Wheat: All up, with wheat leading.

Analysis of Market Movements

The news of the potential end to the government shutdown was expected to be bullish for stocks and slightly bullish for the dollar. However, the simultaneous rise in gold, silver, copper, oil, and natural gas, particularly gold's significant jump of $94, suggests that factors beyond the shutdown are driving these markets. The speaker posits that China's re-engagement in the market and the ongoing "cold war" dynamic, where gold acts as a "financial weapon of mass destruction," are more significant drivers.

Deutsche Bank Report: Correction Nearing End

Deutsche Bank's report, now in its second iteration, reiterates the view that the gold price correction is closer to its end than its beginning. This assessment is based on ETF flows and the lack of sustained downside momentum.

ETF Outflows and Analogous Selling

The report analyzes ETF outflows, drawing an analogy to a previous period where significant outflows from Western ETFs coincided with a substantial drop in gold prices. The current situation shows a similar pattern: substantial ETF outflows leading to a price drop, suggesting a potential bottom.

Banks Catching the Falling Knife

A key observation is that on a day when gold dropped significantly (around $230), ETFs did not immediately see large outflows. Instead, outflows occurred two days later. This suggests that institutions, potentially banks like JP Morgan, may have been "catching the falling knife," buying gold as it fell because they needed to acquire it.

China's VAT Rules: A Deeper Dive

While corporate analysis focused on the impact of VAT on jewelry demand, a more nuanced perspective is offered regarding China's broader strategy.

China's Gold Strategy

For several years, China has been strategically projecting its buying power outward by:

• Liberalizing gold ownership.
• Encouraging the financialization of gold internally (e.g., insurance products, linking savings to gold accounts).
• Liberalizing gold markets in the BRICS region, including vault convertibility into the renminbi.

Impact on Market Structure and Pricing Power

These actions are fundamentally altering the global gold market structure, unleashing China's pricing power. The premium in Shanghai gold to US gold, which has been observed, indicates this shift. When this premium drops, it signifies that demand is coming out of the market, and the market is chasing the premium higher.

VAT as a Marketplace Consolidation Tool

The change in VAT rules is interpreted not just as a tax on jewelry but as a mechanism to force the domestic marketplace onto the exchange. This move aims to:

• Preserve liquidity: By consolidating demand on platforms like the Shanghai Gold Exchange (SGE) and Shanghai Futures Exchange (SHFE).
• Restrict shenanigans: To curb arbitrage opportunities and potential issues like naked shortselling that can arise in fragmented markets.
• Aggregate demand: To bring all domestic demand onto a centralized electronic platform, similar to how CME Globex consolidated trading.

This consolidation of demand and protection of liquidity pools is seen as a preparatory step for projecting price further outward, with China increasingly determining gold prices.

Related Posts and Future Outlook

• Bank Short Covering Shenanigans: A discussion on how banks might cover their short positions in a less transparent manner.
• Gold Outperforming Silver and Platinum: An analytical firm argues that gold will continue to outperform silver due to its network effects, drawing a parallel to Bitcoin's potential to outperform all assets.
• WGC Central Bank Buyers Price Insensitive: The World Gold Council reports that central banks are now buying gold regardless of price.
• Gold May Still Outperform Silver: A report suggesting gold's continued outperformance, though the speaker disagrees with the logic.
• Catherine Austin Fitz on Stablecoins and CBDCs: An interview with a former central banker discussing stablecoins, their potential to preserve the dollar, and their eventual convergence with CBDCs.
• Bitcoin as a G7 Central Bank Reserve Asset: A commentary suggesting that due to stablecoins, the US will work to make Bitcoin a reserve asset, though this is not seen as a bullish call.

Data on Deck and Market Closures

• Government Shutdown: Potential end of the shutdown could lead to the release of CPI and PPI data this week.
• Veterans Day: The bond market will be closed on Tuesday, November 11th.
• Fed Speakers: Several Federal Reserve speakers are scheduled.

Chart Analysis: Gold and Silver

Gold Chart Analysis

The speaker analyzes the gold chart, noting a previous channel and a newly forming one. A "ledge" (support level) was identified, which gold has broken through surprisingly. The speaker expresses surprise at the strength of the move and revises the analysis.

• Previous Support Level: The area where significant selling occurred and price stopped.
• Current Strength: Gold is up 2.4% to 4% today, suggesting a challenge of higher levels.
• Potential Range: The market might now be working within a new range between approximately $3,900 and $4,100.
• Measured Move Potential: If gold settles above $4,100 today, a move to $4,300 is possible, based on a measured move theory (depth equals distance).
• China's Influence: The speaker attributes the current strength to China's actions, suggesting they are "giving the West the finger."

Silver Chart Analysis

Silver's chart analysis is presented as simpler.

• Previous Range: A similar range was identified in silver, which has also been broken through.
• Measured Move: A potential measured move is calculated from $49 to $46, suggesting a $3.49 move.
• Support Level: As long as silver stays above $49.50, $53 should not be a problem.

Conclusion

The overarching theme is that gold ETF outflows are slowing, indicating a potential end to the current correction. China's strategic moves in the gold market, including the VAT rule changes, are seen as consolidating demand and increasing its pricing power. While Western paper selling is easing, strong physical demand from the East is supporting gold prices. The market is showing significant strength, with potential for further upside, driven by factors beyond typical economic indicators like government shutdowns. The speaker emphasizes that China is increasingly dictating gold prices, while the West's control is diminishing.