By Ben Cross
The bull market in stocks still hasn't pulled gold prices that far off Monday's high levels, although it does have some observers talking about a much larger pullback.
The main reason is the excessive length in the market, which is now at 34 million ounces. On the pullback Tuesday, open interest in gold futures dropped 2 million ounces to 630,000 contracts.
In addition, the 16 tons of outflows from global exchange-traded funds Tuesday -- the largest one-day decline in three years -- has people anticipating that the money which has been flowing into the sector is not "sticky."
The drop put ETF holdings of gold at 64.4 million ounces, vs. the recent peak of 64.7 million ounces. The main reason (besides futures positioning) that I am bit nervous is that the high prices have made Indian physical imports fall into the abyss, so it is going to take a continued uptick in Chinese and Japanese speculative buying to offset this drop.
Technicians will tell us that gold has made a double top at $1,375 an ounce and now will fall back to test the 200-day moving average at $1,295, but I can not give up so quickly. I still believe that portfolio management -- whether it is performed by a retail investor or a sophisticated pension fund -- needs some safe-haven hard assets in the current environment of "free money" that global central banks have created.
So far the yen and the negative yields on Japanese government bonds, as well as the speculative demand for hard assets in China, has more than compensated for the Indian shortfall. Observers attributed strong Chinese buying of precious metals overnight to geopolitical worries after an international tribunal rejected China's claims of sovereignty over the South China Sea. The Market Vectors Gold Miners ETF (GDX) , which tracks large-cap gold mining stocks, has rallied back to within 1% of its highest level since 2013.