The Battle for Normandy – won and lost

Now, of course, the result is known. AngloGold has conceded defeat and failed to either extend its deadline or to raise the offer for Normandy and the obvious question among happy holders of gold shares will be how long they have to wait to see the price of gold beginning its promised rising trend.

And among those who are still sitting on the sidelines, “Should I wait for lower prices – perhaps on a firmer rand or even on a lower gold price – before I stake out my own position in the gold market?”

Unfortunately, by gaining control of Normandy, as now seems due to happen, Newmont is not turning a key to immediately unlock the chains binding the gold price. In fact, this development may just spur renewed assaults on the gold price from market players who fear that the promise of reducing Normandy’s forward book may bring more speculative buying into the market.

Recent behaviour in the gold market seems to indicate that demand has already been rising to a level where the ability to control the gold price through selling raids on Comex is challenged. In the past, such a raid, during which tens of thousands of contracts are offered for sale on Comex at prices that invite arbitrage, typically slammed the gold price by about or more and the price then languished at the lower levels for weeks before showing signs of recovery.

Now this has changed. Gold still get slammed down as soon as it approaches 0, but the fall is more controlled and the rebound begins much sooner – often within a day, but mostly within a few days. There are two possibilities that are not mutually exclusive.

The first is that demand has increased to where the amount of physical gold that hits the market as a result of arbitrage is not sufficient to knock the price far down and to keep it there. The second is that there is less physical gold available for purposes of arbitrage.

Unless demand has improved, it would still be easy to knock gold lower purely by the psychological effect of offering a large number of contracts. Over the years, buyers of gold has learnt the painful lesson that when this happens it is better to withdraw quickly from the market as prices are due to head lower. So it seems, first of all, that demand is improving and it may continue to do so now that Normandy seems set to become a determined buyer of gold, no longer a forward seller.

Lease rates for gold at the moment are quite low, indicating that there is no real scramble to borrow gold from the central banks. Since this typically would be the source of gold sold during arbitrage – which would consist of selling physical gold and buying futures contracts, to lock in the price differential – it seems as if leasing activities have slowed down substantially.

With gold readily available, according to the low lease rates, a decrease in leasing can only be due to a reluctance among the players to sell physical gold at these price levels. Yet, good turnover on Comex shows sustained buying of futures contracts. This would imply an optimism among market players that the price of gold is due to rise in the not too distant future and that being long the futures is a good thing and should not be curbed by having a contrary position in physical gold.

Whether this will change again as the price of gold approaches 0 is not known, but it does seems as if the sands of time are running out for the people who have been shorting physical gold for so long. The next few weeks should show how many of rabbits, if any, can still be produced to keep the lid on the gold price.

So the answers to the questions asked at the beginning may well be that there is still some time to accumulate a position in gold, but that it may not be wise to tarry too long if one has no exposure at all.

When gold takes off and the scramble for gold shares does begin in earnest, it will be difficult – and expensive – to acquire a position of some substance.