Ten-year anniversary of the launch of euro coins and notes

While Saturday marks the ten-year anniversary of the launch of euro coins and notes, the ongoing sovereign debt crisis promises to be one of the most important storylines for the global economy as 2012 begins.

The crisis has led to a situation now where “the euro is at risk of unraveling,” according to a report by Reuters that examined the history and shortcomings of the currency. ”How could it all have gone so wrong?” the article asks.

In the report, Reuters included extensive commentary from many former European officials who contributed to the euro’s development in order to help answer its question.

“The single currency would not have sparked the euro zone debt crisis, they argued, if the pro-European dynamic that led to its creation had continued into its first decade,” the report noted. “But instead of launching an economic and political integration of Europe, the low interest rates and easy money that arrived with the euro led peripheral states on a path of profligacy, widening the gap with frugal, export-oriented economies of the north.”

“Most of all,” Reuters added, “some of the architects now admit that after the first few euphoric years, it became clear the euro itself was a flawed concept, laying a single currency over a group of countries that stuck to national sovereignty over their economies.”

Gold, along with the other precious metals, succumbed to the downward pressure from concerns over Eurozone liquidity

Gold, along with the other precious metals, succumbed to the downward pressure from concerns over Eurozone liquidity. Adding to gold and platinum’s woes has been a bout of year-end selling in Japan due to a new taxation law coming into force from 1 January. Bullion retailers will be required to report physical gold and platinum transactions with the general public, in excess of ¥2m, to tax authorities.

Gold has broken short term support and is vulnerable to a test of 1560

Developments over the past week in both China and India could have bearish implications for the price of gold, according to a recent report by TD Securities.

In a note to clients this morning, precious metals strategist Steve Scacalossi wrote that “After the Christmas weekend the precious metals complex drifted lower. Gold opened right on it’s day highs and never looked back with a deluge of sell orders towards $1,607. This is somewhat surprising given news yesterday out of China where the head of research for the Peoples Bank of China was quoted as saying that the country should buy more gold when prices are relatively low. Support for gold is at $1,575 and then major support at $1,500 as per today’s chart.”

The TD strategist added that “In other news, China has restricted gold spot and futures trading to the Shanghai Gold Exchange and Shanghai Futures Exchange as part of efforts to crack down on illegal buying and selling of commodities.”

As for India, Scacalossi noted that ““Indian gold demand may drop as much as 50% in December after a plunge in the reminbi drives up local prices. Imports may total 35-40 tons this month compared with 70-75 tons a year ago as per the Bombay Bullion Association.”

From a technical perspective, he contended that “Gold has broken short term support and is vulnerable to a test of 1560.”

Drying up of liquidity poses a serious risk to all commodities, including gold

Precious metals, with gold taking the lead as usual, have lost ground as concerns over the Eurozone debt crisis have resurfaced putting upward pressure on the dollar. The higher-than-expected demand for ECB loans (€489bn was borrowed, analysts expected €293bn) has reignited worries over European liquidity. Our barometer of Eurozone money market liquidity (the Euribor/OIS 3-month spread) remains at elevated levels—a drying up of liquidity poses a serious risk to all commodities, including gold.

Liquidity in the Gold space remains light

Liquidity in the Gold space remains light. A much better-than-expected government bond auction in Spain this morning provided strength to the Euro, aiding precious metals marginally higher.

As pointed out yesterday, physical demand remains healthy especially from Thailand and India with the gold price below $1,600. This should support gold on approach $1,560. We maintain that gold below its 200day MA at $1,621, should continue to struggle. Gold support is at $1,565 and $1,550. Resistance is $1,606 and $1,609.

Gold physical demand rebounds

Physical demand for gold has increased substantially over the past few days providing some support as investment demand temporarily retreats. Long liquidation in COMEX gold continued last week, driving the gold price to as low as $1,560. The net speculative length for COMEX gold has declined 51 tonnes to 612 tonnes during the week ending 13 December. At the same time, speculative shorts increased by 11 tonnes to 88 tonnes, leaving the net speculative position long at 525 tonnes. This net position has steadily declined from the highs of 930 tonnes seen in August.

As a percentage of open interest, the net speculative position is now at 24.9%, well below the average of 30% seen over the past three years. In the futures market, deleveraging continues.
Furthermore, while ETF holdings remain close to all-time highs at 75.4m oz, it saw a relatively sizeable decline of 468K oz since Wednesday. While investors are trimming gold long positions, physical demand has picked up substantially since the start of last week. This segment of the market has showed little interest in buying substantial volumes of gold with the price above $1,700 (partly due to the weakness of local currencies, most notably the INR). However, with gold below $1,600, demand has picked up substantially. Indian buying interest has picked up handsomely, but so did buying interest in places like Thailand, Indonesia and China. At the same time, gold scrap sales, though present, remain very sporadic.

This physical demand is evident in the pick-up of our Standard Bank Gold Physical Flow Index (GPFI), which briefly pushed below zero late November, which has now rebounded, indicating that physical demand remains in place, albeit at lower levels than during the period August
to October. We expect this physical demand to support the gold price below $1,600.

Gold is finding good support on approach of $1,560

Gold is finding good support on approach of $1,560. Market activity for gold remains unchanged from yesterday - with the metal below its 200day MA at $1,620 we expect the metal to struggle. We also expect this 200d MA to provide resistance now.

We note that while we expect resistance to a rally the next few days, we still believe the metal will move higher in early 2012 and record all-time highs once again. Physical market demand continues to improve. The demand is not stellar, but much stronger than a week ago. This stronger demand from Asia is reflected in the SGE premium over spot which moved from around $3/oz at the start of the week to $10/oz this morning.

With the possibility of S&P downgrading a number of European countries, we would be surprised to see substantial buying activity within the next few days. The biggest immediate risk to precious metals in general, and gold in particular is not the actual downgrade, but as with the downgrade of the US, a further rise in global economic uncertainty and policy risk. In an environment where confidence is fragile already, the liquidity premium may rise further, especially in Europe, which would be bearish for gold. Also, we would expect the euro to weaken more relative to the dollar, which in the short term would impact on gold and other precious metals negatively.

We believe gold should find support within the $1,510 to $1,560 range. Gold support is at $1,565 and $1,550.

Gold should find support within a $1,510 to $1,560 range

With gold below its 200day MA at $1,620, we expect the metal to continue to struggle. Fortunately, and providing some support, is that physical market demand is improving with the price below $1,600. We expect it to continue. We believe gold should find support within a $1,510 to $1,560 range. Gold support is at $1,565 and $1,550. Resistance is $1,590 and $1,600.

With rumours that the Shanghai Gold Exchange is set to increase silver margins from 15% to 18%, the metal saw additional selling during Asian hours.

Gold Dip Below USD 1,600

Weakness in the gold price continued Thursday morning as the Gold fell $56.83 to $1,575.80 per ounce. Gold remains under pressure. The metal is closing in on its 200day MA. We believe that this downward pressure is likely to remain in place. Physical market demand from India and South East Asia continues to pick up, with gold below $1,650 providing support at this key technical level. However, as pointed out yesterday, the pick-up in demand is from relatively low levels, and overall demand remains well below levels seen in October.

The euro continues to weaken across currencies ahead of the Italian auction today. While gold in dollar-terms is under huge pressure, gold in euro-terms only shed €20. Market sentiment and momentum has also turned bearish on gold, reflected in the short-dated gold skew where puts are in high demand relative to calls.

Gold remains under pressure

Gold remains under pressure. We see a growing risk of the metal testing its 200d MA soon. Physical demand from India and South East Asia has picked up, with gold below $1,670. However, the pick-up in demand is from relatively low levels, and overall demand remains well below levels seen in October. Currencies such as the Indian rupee continue to weaken against
the dollar, hardly helping lacklustre demand. Weaker buying appetite is also reflected in the Shanghai physical premium relative to spot gold which was at $3.00 this morning — down from the levels of $15+ seen in October.

The potential downgrade for Eurozone countries are also hovering over the Gold market. The biggest immediate risk to the gold price is not the actual downgrade, but as with the downgrade of the US, a further rise in global economic uncertainty and policy risk. In an environment where confidence is fragile already, the liquidity premium may rise further, especially in Europe, which would be bearish for gold. Also, we would expect the euro to weaken more relative to the dollar, which in the short term would impact on gold and other precious metals negatively.

Key support for the metal lies at its 200d MA at $1,618. Since early 2009, gold has consistently bounced off its 200d MA. Unless funding issues in Europe deteriorate substantially (from current levels), we expect this support to hold. Apart from the 200d MA, support is at $1,660 and $1,654. Resistance is $1,711 and $1,742.

Gold remain under pressure

As with so many other assets, gold’s near-term outlook remains closely tied to Europe. On its own, we believe that the recent EU summit is not going to save the euro and not going to stop the market speculating against the bond market. But this is hardly surprising. A dusted-down Stability Pact was never going to be the solution. Instead, it was only likely to be the conduit
that might deliver some of the things that might finally end this crisis. At the top of this list seems to be a more helpful ECB.

Long term, we believe that this will benefit gold. At the moment, gold remain under pressure as: (a) the dollar strengthens;
(b) EM currencies such as the Indian rupee depreciate; and
(c) funding stress in Europe remains in place.

We expect physical demand to return in some strength on approach of $1,650. Key support for the metal lies at its 200d MA at $1,617. Since early 2009, gold has consistently bounced off its 200d MA. Unless funding issues in Europe deteriorate substantially (from current levels), we expect this support to hold. Apart from the 200d MA, support is at $1,676 and $1,654.

Gold could be facing a bumpy road ahead in the short-term

Gold could be facing a bumpy road ahead in the short-term, according to VTB Capital analyst Andrey Kryuchenkov.

In comments made to Reuters, Kryuchenkov said that European policymakers “need to convince the market that the crisis can be contained.”

With respect to gold, it “is trading completely against the dollar, moving in the opposite direction … and the physical side of the market is very quietly waiting on the sidelines for a pullback to start buying,” he contended.

“Gold could have a knee-jerk reaction,” Kryuchenkov added, “especially if there is disappointment with the meeting today.”

As for specific gold price levels to keep in mind, Kryuchenkov pointed to $1,680 as a critical support area. If the yellow metal fails to hold $1,680, he predicted that gold could suffer a quick decline to $1,600 per ounce.

Market remains reluctant to sell gold aggressively ahead of the European Summit on Friday

Gold is pushing towards $1,740 amid very thin volumes in the gold market. The market remains reluctant to sell gold aggressively ahead of the European Summit on Friday. As far as investment demand is concerned, funding stress, especially for European banks continues to elevate, as is evident from the Euribor/OIS spread which has moved higher again in recent days.

Gold support is at $1,709 and $1,690. Resistance is $1,740 and $1,752.

Gold at $1,730, appetite is lacklustre

The market is reluctant to sell gold aggressively ahead of the European Summit on Friday. Gold briefly looked to break below $1,700 but US trading pushed gold higher, as support at this level remains very strong. We expect physical demand to return in some strength on approach of $1,650. However, with gold at $1,730, appetite is lacklustre. Gold support is at $1,709 and $1,690. Resistance is $1,740 and $1,752.

Gold continues to slide, with little buying appetite ahead of Friday’s European Summit

Gold continues to slide, with little buying appetite ahead of Friday’s European Summit. As pointed out slightly more than a week ago (see Commodities Daily dated 25 Nov 2011), there are two factors which are putting downward pressure on gold.

The first is weak EM currencies in general, and the Indian rupee (INR) in particular. The second is the funding stress in Europe. We maintain that gold would reach record highs again in 2012, but the two above-mentioned factors could see gold lower. Physical demand is much weaker than it was six weeks ago. Much of the demand weakness is from India where the rupee has
depreciated by more than 7% since the start of November. This has pushed gold denominated in rupees to all-time highs this month. Even now, with gold coming off in dollar-terms, gold denominated in rupees is still very close to all-time highs.

As far as investment demand is concerned, funding stress, especially for European banks remains, as is evident from the Euribor/OIS spread which remains at elevated levels. We continue to believe that the dominant fundamental driver of gold is global liquidity, followed by real interest rates.

Gold support is at $1,708 and $1,694. Resistance is at $1,746 and $1,769.

Gold price and broader markets stabilized following a mixed November non-farm payrolls report

On Friday, the gold price and broader markets stabilized following a mixed November non-farm payrolls report. At 120,000, the jobs data came in modestly below the 125,000 consensus estimate among economists. However, the unemployment rate fell to a two-and-a-half year low of 8.6% and the prior two months of data were revised higher.

Commenting on the jobs report, Miller Tabak market strategist Peter Boockvar stated that “The market focuses on headlines, and if you include the prior two months being revised up, and you think about the three months together, there was more employment than expected.” But “underneath the hood, it’s still sluggish job growth,” he noted. “We’re only averaging 132,000 jobs this year and seeing the biggest drop in the labor force since January, and the participation rate at near record lows.”

As for the gold price, in recent months it has reverted considerably from its primary role as a pure safe haven asset to that of a commodity that provides a hedge against the U.S. dollar. Since reaching an all-time high of $1,921 per ounce on September 6, 2011, the price of gold has largely moved inversely to the greenback and more in line with the euro currency. UBS precious metals analyst Edel Tully wrote in a note to clients that “Our recent meetings suggest clients would prefer for gold to move more convincingly back into the safe-haven camp as its current hybrid state makes it a difficult short-term trade.”

Looking ahead to the coming week, the gold price and broader markets are likely to turn their attention from the recent batch of U.S. economic data to the ongoing sovereign debt crisis in Europe. On Friday German Chancellor Angle Merkel made a speech pushing for tighter restrictions on government spending. She asserted that the 17 nations that use the euro currency must strive to quickly re-establish market confidence by making financial controls stricter.

This week Merkel is scheduled to meet with other European officials at a summit to fortify measures to combat the crisis. Several economists have noted that stricter controls on government spending could pave the way for the European Central Bank (ECB) to provide further aid for governments struggling with their debt loads. Such measures would likely involve additional accommodative monetary policies, a development that could bode well for gold prices.

Gold continues to look towards the Euro for direction on an intraday basis

Gold continues to look towards the Euro for direction on an intraday basis. The Central Bank liquidity changes have seemingly alleviated fears that the metal may be sold-off in a credit-crunch type scenario for the time being however, allowing gold to push higher. Gold is approaching the top of its recent wedging pattern with resistance emerging around $1,760/oz, and may well test that level this afternoon.

Gold has managed to hang on to the gains it made yesterday

Gold has managed to hang on to the gains it made yesterday, as the dollar remains weaker on the back of yesterday’s coordinated central bank action on dollar swap rates. However, Asian markets hardly reacted, with prices remaining relatively range bound overnight. For the most part, this range-bound trading has been extended into this morning, although we have seen
some gains induced by further dollar weakness.

The Dec-Feb spread blew out to $7 as concerns over year-end liquidity seemed to weigh on markets. This spread has however come back in as markets seem to be taking comfort in yesterday’s central bank action. We are not entirely convinced that liquidity problems in the Eurozone have been adequately addressed. To this end, we keep an eye on the 3m Euribor/Overnight swap spread, as a measure of the liquidity premium in Eurozone money markets. Unsurprisingly, this spread has jumped recently and is currently at levels last seen in March 2009. A liquidity squeeze would be detrimental to all commodities, even gold.

After yesterday’s exuberance over easing Chinese monetary policy and the coordinated action from global central banks, it appears that markets are realising the implications of these announcements, i.e. that the global economy must be in pretty dire straits to warrant such announcements. If this feeling gathers momentum, we could see gold surrender some of yesterdays gains, although for now, participants might be content to wait for tomorrow’s nonfarm payrolls for a reading on the strength of the US economy.

Gold support is at $1,715 and $1,683. Resistance is $1,765 and $1,782.

Gold to average US$1,580/oz in 2011, US$2,025/oz in 2012 and US$2,280/oz in 2013

The latest investment bank to raise its gold price forecasts was BNP Paribas, which published a bullish report on the Gold this week prior to the coordinated central bank actions taken this morning.

In the report, precious metals strategist Anne-Laure Tremblay wrote that “Gold’s price rebound in early Q4’11 was short-lived. The metal touched US$1,800/oz on 8 November but subsequently gave back most of its gains…The decline was thought to be largely associated with cross-asset liquidation on the back of greatly increased risk aversion. Sovereign debt concerns spread to the core countries of the Eurozone.”

“Despite price volatility, physical demand for gold has been very strong in recent months, as investors have flocked to safe haven assets,” she added. “Other macroeconomic factors, such as liquidity and inflation, have been less supportive, but we expect these to evolve more favourably in the near future, notably as both the ECB and the Fed may implement quantitative easing measures.”

Tremblay went on to say that “We now expect the gold price to peak beyond 2013. In addition, gold may trade higher than previously expected in 2012 on the back of high uncertainty, and we are likely to see greater price volatility.”

As for specific targets, the BNP strategist noted that “We expect gold to average US$1,580/oz in 2011, US$2,025/oz in 2012 and US$2,280/oz in 2013. Gold may peak in 2014 if the Federal Reserve starts hiking interest rates. Further sharp moves in the price are likely over the next months given the high level of uncertainty, particularly relating to Eurozone issues.”

Gold will remain largely dictated by movements in the euro/dollar exchange rate

After yesterday’s rapid gain, owed in large part to a weaker dollar and improving sentiment, gold has remained largely range bound. PGM ran into selling pressure during the New York trading session, surrendering the gains of the earlier part of the day. However, since then, interest in platinum and palladium has been muted.

For the rest of the day, price action in gold will remain largely dictated by movements in the euro/dollar exchange rate. Although it appears trading activity is lacking at present, making prices relatively stable.

Gold support is at $1,691 and $1,669. Resistance is $1,718 and $1,721.

Gold have enjoyed a resurgence in interest

Gold have enjoyed a resurgence in interest, after market sentiment was bolstered by reports over the weekend that the IMF was preparing a loan facility for Italy. Apparently, the IMF would make €500bn to €600bn available at an interest rate of between 4% and 5%. The IMF has already denied these reports. Nevertheless, the euro has strengthened on the news,
which has relieved much of the pressure that had been weighing down on gold last week.

Optimism over the Eurozone was further enhanced by speculation that headway had been made regarding the European Financial Stability Fund (EFSF). Apparently, EU finance ministers have reached an agreement on how to leverage the rescue fund, according to documents leaked to Reuters over the weekend. News out of the US is also contributing to the more upbeat mood on markets, with preliminary reports from retailers suggesting that it was a good Black Friday weekend. With a slew of US data flow out this week, this optimism over the outlook for US
economy is sure to be tested in the coming days.

ETF buying of gold continued this past week, 11.4 tonnes added. Momentum may appear be slowing (28.2 tonnes were added the previous week) but ETF holdings now stand at 2,430.1 tonnes, a new high for the year. The continued ETF support is encouraging, and underscores the growing confidence in the gold market. After three weeks of gains, ETF holdings in silver fell
this past week, losing a substantial 185.1 tonnes. Once again, it appears that ETFs remain cautious on silver, if not outright bearish.

Gold support is at $1,691 and $1,669. Resistance is $1,718 and $1,721.

Gold prices remained relatively range-bound yesterday

Gold prices remained relatively range-bound yesterday, largely as a result of the absence of US participants celebrating the Thanksgiving holiday. In Asia, there was some support for silver in the form of short-covering, while some two-way interest in gold was evident but overall activity remained lacklustre.

Weakness has begun to creep into markets as the mood once again has swung towards “risk-off”. Asian equities ended the day down, and European stocks are currently under pressure. Gold are suffering under a resurgent dollar, with electronic trading exacerbating the losses, especially for gold. Despite the price fall in gold this morning, we still haven’t seen any significant physical demand coming through. However, as we’ve seen in the past, this buying usually emerges below the $1,650 level, which should then limit further downside. Markets are vulnerable to erratic moves as trade activity remains quite thin (with US participants at best only coming in for half
the day, and many away for a long weekend), and Eurozone uncertainty keeps investors jittery.

Nevertheless, we would view any downside in gold as a buying opportunity, given our long-term view that the metal will push higher in 2012. From a cost-of-production perspective, platinum is good value at current levels below $1,550. Gold support is at $1,677 and $1,675. Resistance is $1,692 and $1,704.

Gold, continued to enjoy support yesterday from a weak dollar and some physical buyers

Gold, continued to enjoy support yesterday from a weak dollar and some physical buyers taking advantage of the relatively low prices. In addition, the IMF’s proposed changes to its existing emergency programme sparked some optimism in alleviating the Eurozone debt crisis, and consequently gave markets a momentary respite.

However, it soon became apparent that this would not go nearly far enough in addressing the current scope of problems in Italy and Spain. Nevertheless, Asian buying of gold continued to provide support overnight, much as it had done the previous day, although, with Tokyo markets closed, it was left to Chinese buyers to keep prices on the up. This morning, support soon evaporated as markets were rattled by weak Eurozone economic data and a poor bond auction in Germany. PMI figures revealed a continued and worse-than-expected contraction in German (47.9 vs consensus: 48.5) and European industrial activity (46.4 vs. consensus: 46.5). This morning’s auction in Germany failed to obtain bids for 35% of the bunds on offer. This is keeping the euro on the back foot — this strong dollar environment continues to make it extremely difficult for commodities to make any solid gains.

In addition, we expect some liquidation ahead of the Thanksgiving long weekend in the US, so the potential for any upside today is limited. Given our long-term bullish stance on gold though, we’d advocate buying on dips to augment a strategic long position.

Gold support is at $1,675 and $1,655. Resistance is $1,712 and $1,727

Gold is looking better after receiving some solid support in Asia

US trading pushed gold down to a four-week low (amid a cross-asset liquidation that has become all too familiar of late) on heightened concerns over the ability of the US congressional leaders to reach agreement on reducing the budget. As it turned out, and unsurprisingly, no agreement was reached and this has thrown into doubt the extension of existing fiscal stimulus programmes that many believe have been propping up the US economy.

This also reignited fears over the US sovereign credit rating facing a downgrade, but overnight investors took heart over announcements by Standard & Poor (S&P) and Moody’s that they would be keeping their respective ratings unchanged. Fitch said that it would be reviewing its rating and provide a conclusion by the end of November — most participants are expecting a change to negative outlook.

Today, gold is looking better after receiving some solid support in Asia, especially on the Shanghai exchange. A relatively weaker dollar is also helping gold regain some lost ground. The other precious metals are largely tracking gold, although interest in PGM is relatively lacklustre.
Physical demand for gold is starting to return at these levels, with our Standard Bank Gold Physical Flow Index once again pushing out of a brief stay in negative territory (indicating net selling). We’ve seen this physical demand return time and again at around $1,650, providing a solid support level.

Gold support is at $1,665 and $1,636. Resistance is $1,726 and $1,756.

Gold, along with the rest of the commodities complex, have come under selling pressure this morning

After a relatively stable Asian trading session, Gold, along with the rest of the commodities complex, have come under selling pressure this morning. Once again, uncertainty concerning the Eurozone is rife, which is keeping the dollar relatively strong despite worries over the upcoming politicking regarding US deficit reduction plans. As expected, Spain will have a new government, although markets remain unsure of the political strength needed to adopt a severe austerity plan that will steer this country out the current debt crisis.

Net speculative length increased again this past week, although only a marginal 9.1 tonnes were added (73.7 tonnes were added the previous week). The change in the net position was largely due to speculative longs being added (13.9 tonnes), with an increase in speculative shorts of 4.8 tonnes, detracting from the net improvement. Although only a marginal increase this week, the sustained improvement in the net position (now at 655.2 tonnes), is a signal that the speculative market is showing a growing confidence in gold’s prospects.

ETF buying continued apace, with 28.2 tonnes added this past week. This brings ETF holdings to 2,418.7 tonnes, a new high for the year. The continued ETF support is encouraging, and underscores the growing confidence in the gold market. Net speculative length continued to climb, with a strong 243.7 tonnes added over the past week. However, while the improvements
of the past four weeks are encouraging, net speculative length, currently at 3,251.8 tonnes (compared to the 2010 average of 6,123.3 tonnes), still looks relatively weak. The increase in the net position was largely attributable to a 219.3 tonne increase in long positions. Speculative shorts saw an unwinding of 24.4 tonnes. Market positioning remains weak, but there
are growing signs that investors are becoming less bearish on silver.

Gold support is at $1,697 and $1,690. Resistance is $1,723 and $1,744.

Investors are once again jittery about the region’s prospects for solving the ongoing debt problems

Along with rest of the commodities, gold have been hard hit by renewed concerns over the Eurozone, as evidenced by soaring borrowing costs in Spain. Investors are once again jittery about the region’s prospects for solving the ongoing debt problems, as Spain moves closer to elections that many say will see a change in government.

Our main concern for commodities is the potential for liquidity squeeze in Eurozone money markets. To this end our barometer of Eurozone monetary tightness (the Euribor/OIS 3-month spread) has pushed significantly higher over the last few days. We caution that all commodities will suffer should money markets dry up, even gold and silver.

Despite concerns over the Eurozone, investment demand seems lacklustre as investors seem to prefer the relative safety of the dollar. This is something we have seen happen often over the past few weeks, but eventually investor demand does again return, so we could see some strength on the Monday open (barring any major developments on the Eurozone front).
Our Standard Bank Gold Physical Flow Index (GPFI) remains in negative territory, indicating the relatively weak physical demand. However, the same thing happened a few weeks ago and physical demand soon rebounded. We are confident that this will happen again as buyers in Asia (more from China, Thailand and Indonesia than India) return to the market at the current
relatively low prices. According to previous seasonal patterns, Indian buying should return around January next year.

Gold support is at $1,703 and $1,678. Resistance is $1,759 and $1,792.

Gold trended downwards yesterday

Amid some volatile moves, gold trended downwards yesterday, once again leading the rest of the precious metals complex. There was a sudden sell-off in COMEX which pushed gold down to around $1,723. The pattern of movement in gold largely mimics that of the dollar, especially in relation to the euro. With the dollar holding its relative strength, it appears as if any upward momentum in gold, and the rest of the complex, will be a lot to ask.

Yesterday’s US consumer inflation came in below expectations, down 0.1% m/m (consensus: 0.0%). While this might be read as opening the way for more monetary easing (something that would benefit precious metals, especially gold) we prefer to focus on what it might imply about the health of the US economy. The short-term economic supply curve would suggest that
when inflation falls faster than expectations, output (in the short-run) should decline too. One data point is not a trend but we would read further price declines beyond expectations as a negative signal for short-term US growth. A weaker US economy could see renewed interest in safe-haven assets, such as gold and silver, which have been at a recent disadvantage to the
dollar.

Our Standard Bank Gold Physical Flow Index (GPFI) has once again dipped into negative territory today, indicating relatively weak physical demand. However, the same thing happened a few weeks ago and physical demand soon rebounded. We are confident that the same pattern will emerge as buyers in Asia return to the market at the current relatively low prices.
Gold support is at $1,746 and $1,735. Resistance is $1,777 and $1,796.

Gold physical demand slows, but still robust

Gold is finding strong resistance on approach of $1,800. Open interest and volume in December COMEX options with strikes at $1,800 are large. As a result the gold market may remain around this pivot point until option expiry on 22 November.

Physical demand for gold has declined from the high levels seen in October. However, in recent days with gold dipping towards $1,760 demand for gold is improving, slowly but steadily. This is providing support to the gold price. Buying interest out of India has been particularly strong in
October. That strong demand has fallen away. But we have witnessed broad-based physical buying interest throughout Asia for most of Q3:11 with physical demand in places like Thailand, Indonesia and China particularly strong. As a result, the drop in demand from India is less detrimental to the gold price than would otherwise have been the case. At the same time gold scrap sales, though present, have been sporadic rather than consistent.

Our Standard Bank Gold Physical Flow Index (GPFI), which briefly pushed below zero earlier this month, has rebounded, indicating that physical demand remains in place, albeit at lower levels than in October. Turning to the futures market, we see room for new longs to be added. According to the latest CFTC data, as a percentage of open interest, net speculative length in OCMEX gold is currently around 23.8%. This is still well below last year’s average of 31.8%. To us this is a sign that the market is not crowded.
We believe gold will continue to push higher into 2012. We target $2,000 in Q1:13.

Market positioning favours gold | Singapore GOLD Investment

Market positioning favours gold | Singapore GOLD Investment

Market positioning favours gold

According to the latest CFTC data, released only yesterday due to Friday’s holiday in the US, we are seeing growing investor interest in gold. Silver is also garnering support, but the market still appears weak.

Net speculative length for COMEX gold increased again this past week, with a respectable 73.7 tonnes added. However, unlike in the previous week, the change in the net position
was largely due to speculative longs being added (72.3 tonnes), with only a marginal decrease in speculative shorts (1.4 tonnes).

Given the sustained improvement in the net position (now at 646.2 tonnes), the speculative market is showing a growing confidence in gold’s prospects. ETF buying continues to gain momentum, with 29.0 tonnes added this past week (compared to the 16.8 tonnes added in
the previous week). This brings ETF holdings to 2,390.5 tonnes, within touching distance of this year’s high of 2,406.1 tonnes. The continued ETF support is encouraging, and underscores
the renewed confidence in the gold market.

Our strategic view remains unchanged: gold will push higher in 2012 with a target of $2,000 in Q1:12. Turning to COMEX silver, net speculative length continued to climb, with 150.1 tonnes added over the past week. However, there is still a long way to go to recover from the 3,060.0 tonnes lost previously, so net speculative length currently at 3,008.1 tonnes (compared to the 2010 average of 6,123.3 tonnes) still looks relatively weak. The increase in the net position was equally attributable to a 73.1 tonnes increase in long positions and 77.0 tonnes shed from speculative shorts.

This brings speculative shorts to a total of 997.6 tonnes — now below last year’s average. Market positioning remains weak, but there are growing signs that investors are becoming less bearish on silver. The improvement in ETF holdings was less substantial this week, with only 24.7 tonnes added, compared to the previous week’s gain of 270.9 tonnes. So, while the gains of the
last two weeks are promising, it appears that, while no longer overtly bearish, ETFs remain cautious on silver.

Although market positioning is more encouraging, we also remain cautious of taking any positions in silver just yet.

Doubts and uncertainty over the Eurozone are sure to resurface which could see renewed interest in especially gold

Despite, or perhaps as a result of thin trading volumes owing to the US Federal holiday on Friday, precious metals enjoyed the rally on the US market open. Not even a much-better-than-expected US consumer confidence could stall the upward momentum.

The University of Michigan gauge of consumer confidence rose to 64.2 according to preliminary estimates for November, a marked improvement on the previous month’s 60.9 and further allaying investor concerns that the US economy might slip into recession.

This morning, we’ve seen a slight pullback in gold as markets have greeted the formation of new governments in Greece and Italy with optimism. However, the weak performance of European equities belies this optimism and hints at some market scepticism concerning the ability and political will of both governments to enact measures that would satisfactorily contain their respective debt problems. In addition, attention is starting to turn to Spain and its rising borrowing costs. To this end, tomorrow’s bills auction in Spain will be a key barometer of investor sentiment.

For today, moderate risk taking could see gold lose some ground. We don’t feel this situation will persist, as doubts and uncertainty over the Eurozone are sure to resurface which could see renewed interest in especially gold and silver. However, we continue to warn that should the Eurozone debt crisis result in a severe drying up of money markets in Europe, we could see all commodities fall rapidly, even gold.

Gold support is at $1,750 and $1,724. Resistance is $1,796 and $1,816.

Gold looks increasingly like a cash cow that’s long overdue for milking

Analysts at Scotia Mocatta presented a rather bearish comment on gold in a note to clients yesterday, contending that lower prices are likely for the gold in the near future.

“The North American market definitely squeezed out some European shorts yesterday but another failure to break $1800 really didn’t bode well for gold’s overall prospects yesterday,” the firm wrote. ”Although there has been some fresh ETF demand in general gold has been walked higher in recent days and frankly it really hasn’t been performing that well.”

Scotia Mocatta went on to say that “With governments falling left and right in Europe if there was ever a time that gold should be pushing the envelope as a safe haven then it’s now and it’s simply not happening – so why isn’t it happening? We think the reason is it remains a very overcrowded trade and if it’s hard to attract fresh buyers in the current environment.”

Couple this with the fact that people need cash in either a ‘risk on’ or ‘risk off’ environment,” the firm added, “and gold looks increasingly like a cash cow that’s long overdue for milking.”

As for specific targets on the downside, the firm asserted that “When $1750 breaks the 100 Day MA at $1692 will past be in play…although there will be pockets of support along the way.”

The firm did not provide a longer-term gold price target, however.

Gold once again succumbed to liquidations across assets

Yesterday, Gold once again succumbed to liquidations across assets, as the market grew increasingly anxious about contagion spreading throughout the Eurozone. Italian 10-year bond yields reached a record high yesterday, only pulling back marginally after an intervention by the ECB. Investors are concerned that a protracted process of political succession in
Italy (and also as in Greece) will worsen the effect of the current debt problems facing the Eurozone. The reaction of markets was most likely exacerbated by LCH Clearnet’s decision to raise margins on Italian debt.

Looking at Eurozone money markets, we’ve seen our barometer of tight liquidity (the Euribor/Overnight Swap) push higher. As we’ve mentioned before, tighter monetary conditions spell trouble for commodities, even gold. This drying-up of liquidity is also associated with gold’s increased co-movement with equities, and heightened volatility.

Some support for gold is evident from resurgent physical demand as seen in Asia. Obviously physical buyers, which have been largely absent the past few days (due to holidays in the Middle East), have returned to take advantage of the current price dip. We see strong buying emerging around the $1,750 level, which could limit gold’s downside, should markets continue
to sell-off.

Gold support is at $1,752 and $1,740. Resistance is $1,789 and $1,813.

Italian Prime Minister Silvio Berlusconi will resign from office

Gold price briefly surpassed $1,800 per ounce Tuesday night (Asia Time) before turning sharply lower amid reports that Italian Prime Minister Silvio Berlusconi will resign from office.

The Gold price hit $1,804.40 at approximately 12:58pm ET, but subsequently tumbled to as low as $1,778.20 before rebounding slightly to $1,785.00 per ounce.

Commenting on the outlook for gold, long-time commodities investor Dennis Gartman wrote in his daily Gartman Letter that ”Regarding gold, we are, we have been and we expect to continue to be bullish of it in non-US dollar terms and most notably in EUR and Sterling terms.”

“Over the course of the past several weeks, gold has pushed steadily upward through €1200/oz, then €1250 and then to and through €1300/oz, where it effectively stands this morning as we write,” Gartman added. ”In dollar terms, there is obvious good selling at the $1800 level as there always is at ‘Big Figures’ such as this and it shall take some sort of news probably to allow gold to make its way upward through $1800 today. Nonetheless, if it does not push through today, it shall push through tomorrow and if not tomorrow then later this week, for the trend is clear and the bears are on the defensive.”

Gartman went on to note that “Interestingly, there is likely to be a greater likelihood of gold pushing upward through €1200 definitively today than there is for gold to press upward through $1800 simply because the EUR is itself so much on the defensive. Oh, and one final note, The GLD ETF reported yesterday that it had added 10.59 tonnes to its stated holdings of 1,255.65 tonnes. This we see as considerable.”

Gold enjoyed good support yesterday as fears over the Eurozone debt situation kept investors in risk-off mode

Gold enjoyed good support yesterday as fears over the Eurozone debt situation kept investors in risk-off mode. Overnight though, trading was rather lacklustre with prices remaining relatively range bound.

This morning, activity has remained light with only a small amount of gold physical buying evident on dips below $1,785. Contributing to the general lack of direction is the relative absence of physical buying from the Middle East owing to holidays in observance of Eid. Our Standard Bank Gold Physical Flow Index is still in positive territory (indicating net buying) but continues to move lower. We expect physical demand to return in full force, in line with the usual seasonal pattern in early January next year.

Today, focus will be on Italian politics as parliament prepares for a budget vote. There is some concern that the Italian Prime Minister Berlusconi will be able to secure the required majority. Such a failure could result in Berlusconi facing a confidence vote, which could delay the necessary fiscal reforms and create even more uncertainty in terms of the Eurozone debt crisis.

Gold support is at $1,765 and $1,737. Resistance is $1,811 and $1,828

Gold has enjoyed some support from continued troubles in the Eurozone

Gold has enjoyed some support from continued troubles in the Eurozone. Although it appears as if Greece is making some progress on the political front, details remain sketchy and markets are shifting their attention to Italy. The Italian Prime Minister has been urged to step down as Italy’s borrowing costs soared to new Euro-era records as investors feared spill-over effects
from the Eurozone’s ongoing debt crisis. While gold might be enjoying some safe-haven buying, we warn that should the Eurozone debt crisis result in a drying-up of the region’s money markets, all commodities will suffer, including gold.

Physical buying in gold remains light with the Middle East on holiday in observance of Eid.
Net speculative length for COMEX gold increased moderately again this past week, with 31.2 tonnes added. However, unlike in the previous week, the change in the net position was largely due to speculative shorts being unwound (20.2 tonnes), with a more modest increase in speculative longs (11.1 tonnes) adding to the overall improvement. With two weeks of improvement in the net position, coupled with a drawing down of short positions, the speculative market finally seems more confident about gold’s prospects.

ETF buying continues to gain momentum, with 16.8 tonnes added this past week (compared to the 12.2 tonnes and 4.7 tonnes added in the previous two weeks). These increases are encouraging, and underscores the growing confidence in the gold market. COMEX silver net speculative length continued to climb, with 239.2 tonnes added over the past week. However, there is still a long way to go to recover from the 3,060.0 tonnes lost previously, so net speculative length still looks relatively weak. Encouragingly, for the most part, the increase in the net position was attributable to 177.3 tonnes shed from speculative short positions.
This brings speculative shorts to a total of 1,074.6 tonnes — now more comfortably in line with last year’s average. The 61.9 tonnes added to speculative longs also contributed to the overall improvement. Market positioning remains weak, yet there are signs that investors have become less bearish on silver.

Gold support is at $1,756 and $1,744. Resistance is $1,774 and $1,779.

Eurozone’s is still a long one and fraught with difficulties and obstacles

Gold made some solid gains early of last week over uncertainty about the Eurozone after Chancellor Merkel outlined the proposed Greek referendum on this country’s continued membership of the Eurozone. However, price activity has since stalled, even after Greece’s Prime Minster Papendreou cancelled the referendum. Attention is now on today’s vote of confidence in the Greek Parliament, which Papendreou contends will be enough of a mandate to push ahead with the proposed austerity plans.

With the major opposition party declaring their support for the confidence motion, it seems a successful vote of confidence will be passed. Nevertheless, the path to a satisfactory resolution of the Eurozone’s is still a long one and fraught with difficulties and obstacles. The longer the Eurozone’s woes continue and the greater the uncertainty (as provoked by, for example, this referendum), the greater the volatility and possible short-term downside for all commodities, including gold. The main impetus for this would be a drying up of liquidity in Eurozone money markets if this region’s banks come under severe pressure because of the Eurozone sovereign debt market.

Today’s US nonfarm payrolls might be able to shift focus away from the Eurozone for a while. The market expects an increase of 95k during October, slightly lower than September's surprise increase of 103k. Our G10 analyst foresees the data being only slightly firmer than expectations and therefore prompting not much of a market reaction. Similarly, the conclusion of the
G20 summit today is unlikely to spark any major market moves.

Gold support is at $1,731 and $1,704. Resistance is $1,777 and $1,795. Silver

Gold price rallied $19.27 to $1,760.2 per ounce

The gold price rallied ahead of yesterday’s Federal Open Market Committee (FOMC) meeting and maintained the majority of its gains following the FOMC announcement. There, the U.S. central bank reaffirmed its plans to leave the Fed funds rate near zero through mid-2013 and to proceed with Operation Twist. The Fed noted that “recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,” to help support its accommodative policies.

While the majority of the FOMC statement was quite similar to the prior one in September, one key difference was a dissenting vote from Chicago Fed President Charles Evans. Evans supported further monetary policy easing – which marked the Fed’s first “dovish dissent” in five years, according to BTIG chief global strategist Dan Greenhaus.

In addition to Evans’ dissent, another key difference was the absence of dissenting votes from Presidents Plosser, Fisher, and Kocherlakota. At the previous two FOMC meetings, these three central bankers each voted against Fed committing to its interest rate policy through mid-2013 and to implementing Operation Twist.

The gold price rallied $19.27 to $1,760.2 per ounce Friday morning after the European Central Bank (ECB) unexpectedly cut its benchmark interest rate by 25 basis points to 1.25%. The price of gold traded modestly lower near $1,725 in overnight trading, but turned sharply higher as ECB President Mario Draghi – who took over for Jean-Claude Trichet earlier this week – wasted little time in providing a clear signal on the severity of the European sovereign debt crisis.

Not to launch a third round of quantitative easing (QE3)

Gold price showed a modest reaction to the Fed statement, as they maintained the large majority of their gains near $1,738 per ounce. The Federal Reserve decided not to launch a third round of quantitative easing (QE3) or expand its set of accommodative monetary policies at its Federal Open Market Committee (FOMC) meeting on Wednesday.

Today’s FOMC announcement was released at 12:30pm ET – rather than its usual 2:15pm ET – because Chairman Ben Bernanke will be holding his second-ever post-FOMC press conference later this afternoon.

The large majority of the FOMC statement was identical to the previous statement in September – with the Fed choosing to continue with Operation Twist.

One noteable difference at today’s meeting was the existence of only one dissenting vote – that from Charles Evans, who “supported additional policy accommodation at this time.”

At the prior two meetings, three Fed presidents – Fisher, Plosser, and Kocherlakota – voted against committing to a near-zero Fed funds rate through mid-2013 and against Operation Twist.

Bernanke held his first and only press conference in April of this year – which turned out to largely be a non-event. As GoldAlert wrote at the time, “It was quite disappointing to hear the softball questions lobbed at Bernanke by many members of the mainstream media. The American people would have been much better served if the journalists in attendance had asked the type of challenging, more serious questions that get to the heart of the unfortunate consequences of the Fed’s policies.”

Physical gold buying has slowed down post-Diwali

Despite markets adopting a risk-off stance, as evidenced by losses across global equity markets, gold have failed to garner much interest from a safe-haven perspective. The announcement by Greece’s Prime Minister that he will put the government’s planned austerity measures to a referendum has renewed concerns over the Eurozone debt situation, which has not only fuelled risk aversion but also contributed to a stronger dollar. It is this dollar strength that is curbing safe-haven demand for gold.

In addition, physical gold buying has slowed down post-Diwali. Our Gold Physical Flow Index dipped below zero yesterday, the first time since early August, a signal that physical selling has begun to outpace buying. Consequently, we can’t expect the support from physical buying we have seen over the past month.

Nevertheless we expect interest to pick up again in mid-December, and continue to see value in gold, especially on approach of $1,600. Gold support is at $1,694 and $1,679. Resistance is $1,736 and $1,761.

Remain constructive on gold over the long term

Gold — COMEX

1. • Open interest continues to see-saw, rising by 21.5 tonnes after the previous week’s 13.9 tonne fall. Gold open interest on COMEX now stands at 1,422.1 tonnes, still only marginally up from this year’s low of 1,400.6 tonnes. Prices also gained last week, at 6.2% w/w. This is the strongest w/w rise this year.
2. • Along with prices, net speculative length increased, although only moderately, with only 26.9 tonnes added over the past week. The change in the net position was due to speculative longs being added (33.4 tonnes), with the marginal increase in speculative shorts (6.5 tonnes) detracting from the overall improvement.
3. • Given that this week’s improvement merely erases the deterioration of the previous week, the speculative market still appears to be cautious about gold’s short-term prospects.
4. • ETF holdings continued to climb, although still only modestly, at 11.3 tonnes. While this increase is encouraging, market participants still appear uncertain about gold’s direction over the next few weeks.
5. • As a percentage of open interest, net speculative length is currently around 20.8%. This is a well below last year’s average of 31.8% — a signal of a market far from overstretched.
6. • We remain constructive on gold over the long term.

Optimism over the Eurozone plan reducing gold’s safe-haven appeal

After a bumpy start yesterday, owing to optimism over the Eurozone plan reducing gold’s safe-haven appeal, the metal managed to make some significant headway later on. Growing dollar weakness, together with some scepticism regarding the proposed Eurozone plan, most likely increased the appeal of gold as an alternative asset.

Today, despite a relatively weak dollar, we’ve seen some weakness emerge in gold. After yesterday’s rally the most likely culprit is profit-taking. In Asian markets overnight we saw buying largely absent, giving sellers the upper hand. This trend looks set to continue into today. However, amid growing scepticism over the Eurozone debt plan and the concomitant uncertainty of the region’s economic prospects, we feel that downside will be limited. Consequently, we would advocate buying dips on gold and silver.

PGM are tracking the broader precious metals complex, having largely shrugged off the disappointing Japanese vehicle production figures. Vehicle production in Japan fell 4.5% y/y in September after the previous month’s 1.8% y/y expansion. In terms of data today, the afternoon’s US personal spending/income and consumer confidence figures are the most noteworthy.

As usual, market participants will be looking for indications on the health of the US economy and the possibility of recession. Gold support is at $1,712 and $1,688. Resistance is $1,757 and $1,776.

Eurozone’s plan to rein in ongoing crisis in the region has reduced gold’s safe-haven appeal

After making solid gains yesterday, gold has lost some ground this morning as optimism over the Eurozone’s plan to rein in ongoing crisis in the region has reduced gold’s safe-haven appeal. Silver has tracked gold down, while platinum and palladium have reacted more in line with industrial metals, managing to make some modest gains.

Continuing with the reaction to the news from yesterday’s EU summit, amid a lack of details and scepticism over the actual implantation of the proposed plan, we are wary about the current euphoria. The optimism could soon fade, which could see participants once again adopt a risk-off stance. However, given gold’s close co-movement with equities recently (the last few days excluded), it is uncertain whether the metal will benefit from a market returning to risk aversion.

For now though, there seems little that will derail appetite for risk, which should continue to see gold and silver trade on the backfoot today. A weaker dollar should at least limit any downside. In addition, physical demand should keep gold from slipping too far, although, as already mentioned, with India currently celebrating Diwali, this support is not what it usually is.

Gold support is at $1,694 and $1,678. Resistance is $1,727 and $1,743.

Gold is back above $1,700/oz

Gold is back above $1,700/oz. While some support for gold is coming from the weaker dollar, we view FX moves as only a short-term factor influencing gold. This is evident gold has traded at levels anywhere from $600/oz to as high is $1,800/oz for the euro/dollar at $1.38 (red line).
Clearly, there must be something else driving the metal in the long-term. This, we believe, is predominantly global liquidity and, to a lesser extent, real interest rates.

We note that global liquidity should continue to grow as long as (1) governments increase their nominal debt burden and/ or (2) central banks, such as the US Fed, implement quantitative
easing measures. In 2010, global liquidity grew 16%, in 2009 by 9.2% and 2008 by 28%. We believe that global liquidity would likely grow by 20% in 2011 and 18% in 2012. We do not argue other factors such as fx moves, credit risk and equities influence gold in the short term. But we view these factors as only short-term influences. We therefore judge the long-term value for gold relative to where global liquidity and real interest rates dictate gold should be.

Accordingly, our view is that the gold price will push higher in 2012 amid the growing risk of a recession in the EU and the US and given that the US Fed appears to committed to an
accommodative monetary stance. This should ensure that interest rates remain low well into 2013. We continue to believe gold will push higher into 2012.

Remain constructive on gold over the long term

CFTC (Commodity Futures Trading Commission) data, released on Friday
21 October 2011, reveals the following

1. After only modest improvements in the net position over the previous two weeks, the past week’s deterioration confirms that the speculative market is indeed cautious about gold’s short-term prospects. However, positioning remains uncommitted either way, so participants don’t seem particularly worried about the gold price falling off a cliff.
2. Along with prices, net speculative length decreased, although only moderately, with only 25.8 tonnes lost over the past week. The net speculative position for gold now stands at 514.4 tonnes — within touching distance of this year’s low (510.4 tonnes) recorded four weeks ago when prices fell 8.6% w/w. The change in the net position was mostly the result
   of speculative longs being unwound (24.3 tonnes), with the increase in speculative shorts (1.6 tonnes) contributing marginally.
3. After only modest improvements in the net position over the previous two weeks, the past week’s deterioration confirms that the speculative market is cautious about gold’s short-term prospects. However, positioning remains uncommitted either way, so participants don’t seem particularly worried about the gold price falling off a cliff.
4. ETF holdings continue to climb, albeit modestly (4.7 tonnes), another indication that markets remain uncertain about gold’s direction over the next few weeks.
5. We remain constructive on gold over the long term.

Combat the sovereign debt crisis, investors bid up the price of gold

The gold price was pressured last week by widespread weakness in commodities as uncertainty over the European sovereign debt crisis cast a pall over financial markets. Euro zone finance ministers began a six-day meeting on Friday in the hopes of developing a more robust plan to combat the escalating crisis. Leveraging up the European Financial Stability Fund (EFSF) to as high as €2 trillion has been a topic of considerable debate, but no concrete plan has yet to be agreed upon.

Grant concluded by saying that “Europe has now run out of road. There is no compromise that is politically acceptable. Whatever choices are left are ones that are either politically or economically painful and perhaps impossible. Whatever gets done is going to be nowhere near what some in the marketplace have hoped for or bet on. Europe has reached the wall.”

The implications of Grant’s predictions for the gold price are quite unclear, particularly in the short term. In the absence of a leveraged EFSF, Greece is almost certain to default, and several other PIIGS may not be far behind. Such a scenario would likely lead to substantial and widespread liquidation in financial markets – where investors are forced to sell any and all asset classes to raise cash – which could present a significant headwind for the gold price.

However, further turmoil in Europe could also have grave consequences for the euro currency and thus add to the wave of declining confidence in fiat currencies across the globe. Furthermore, the risk of deflation in many developed and emerging economies would likely increase in this scenario, thereby provoking central banks to implement a slew of additional accommodative monetary policies in efforts to resuscitate their respective economies. In such an environment, the gold price would likely be a prime beneficiary.

The gold price climbed higher Monday, rising back above the $1,650 per ounce level. Despite the fact that European leaders decided at this past weekend’s summit in Belgium not to use the European Central Bank’s balance sheet more aggressively to combat the sovereign debt crisis, investors bid up the price of gold anyways. Gold prices have been mired in a correction as debate rages over whether the current deflation scare is in the process of sending the global economy into a new recession.

Calls for More Fed Easing, QE3 On The Rise

Several members of the Federal Reserve have begun in recent days to make calls for the central bank to provide additional accommodative monetary policies.

Fed President Eric Rosengren and Fed Governor Daniel Tarullo each made comments this week that the Fed should consider resuming its purchase of mortgage-backed securities, which would effectively mark the launch of a third round of quantitative easing (QE3). The Fed last purchased mortgage-backed securities as part of QE1.

The intention of such measures would be to further stimulate the housing market, which has shown few signs of improvement despite the rebound in numerous other sectors of the U.S. economy since 2009.

Judging by recent history, another round of quantitative easing would almost certainly be positive for gold prices and other precious metals.

The gold price spiked toward $1,650 per ounce Friday, rallying on the back of weakness in the U.S. dollar and on speculation that European leaders were prepared to print over a trillion dollars to prevent a systemic crisis. Ministers from all 27 members of the European Union will meet tomorrow to discuss how to bolster market confidence in the integrity of its banking system. Stock and commodity prices moved higher across the board with the $31.90 rise in COMEX gold futures accompanied by a 5.1% rise in copper and a 1.7% gain in crude oil.

U.S. will return to a gold standard within the next five years

While Ron Paul is generally considered to be the foremost proponent of the gold standard, he has gained quite a bit of company in recent months. The idea of the United States returning to a gold standard is gaining considerable traction among many Republican 2012 presidential candidates.

Herman Cain was quoted recently as saying that “Our dollar is suffering. It’s similar to when we wake up in the morning, an hour is 60 minutes. We don’t have to go look in the paper to see what it’s worth. We’ve got to get back to a dollar is a dollar is a dollar. . . Yes, we do need a gold standard to do that.” Newt Gingrich, former Speaker of the House, has called for “hard money with a very limited Federal Reserve.”

Steve Forbes – who ran for President as a Republican in 1996 and 2000 – earlier this year predicted that the U.S. will return to a gold standard within the next five years.

Kent Sorenson, a state senator in Iowa, asserted that “Right now we have a Federal Reserve printing money that’s not backed by anything — it’s just paper. Hess noted that Sorenson – who is supporting Michelle Bachmann in her presidential bid – has proposed a measure legalizing gold and silver coins as currency in Iowa.

The gold price retreated $19.48 to $1,621.18 per ounce Thursday as weakness in gold continued this morning. The spot price of gold fell to as low as $1,606.90 in overnight trading, but pared its losses as the U.S. dollar turned lower against a basket of foreign currencies. Silver prices fell as well, by $0.56, or 1.8%, to $30.69 per ounce. The gold price showed a muted reaction to the weekly U.S. jobless claims report, which at 403,000 met the median estimate among economists.

Gold price oscillated near $1,650

The gold price and broader financial markets will likely trade based upon news flow related the report from The Guardian that France and Germany “reached agreement to boost the eurozone’s rescue fund to €2tn (£1.75tn) as part of a ‘comprehensive plan’ to resolve the sovereign debt crisis.” The plan is comprised of two parts – the first of which involves giving the EFSF “additional levers enabling it to offer first loss guarantees for bondholders, be they public or private.”

According to the report, “Senior diplomats say this will deliver a fivefold increase in the fund’s firepower – giving it more than €2tn compared with the current €440bn lending capability. The EFSF will in effect become an insurer, thereby overcoming European Central Bank resistance to the idea of turning into a bank.”

Under the second part, euro zone banks would be recapitalized “to meet the 9% capital ratio that the European Banking Authority is demanding after its re-examination of the exposure levels of 60 to 70 ‘systemic’ banks.” Although The Guardian acknowledged that “technical details” of the plan have not been finalized, the framework is in place to deploy additional ammunition to tackle the crisis.

While the markets extended their gains following the EFSF news, the report was soon after refuted by Dow Jones Newswires, which claimed that euro zone officials are still debating the size of the bailout fund.

Looking ahead, the gold price is likely to continue to take its cues from the developments across the Atlantic. A significant increase in the EFSF, as reported today, would inherently involve additional money printing and likely be bullish for the price of gold. Investors with positions tied to the gold price will thus be keeping a close eye on this weekend’s meeting of euro zone finance ministers, as well as the crucial European Union Summit on November 3, to see the specific components of Europe’s plans.

The gold price oscillated near $1,650 Thursday morning. Rumors out of Europe that its leaders were prepared to expand the size of the European Financial Stability Fund (EFSF) have led to increased volatility in gold prices as well as in the broader stock and commodities markets. The UK-based Guardian reported that France and Germany are ready to approve a 2 trillion euro rescue fund for Europe and its ailing banking system.

Physical demand for gold remains strong

Gold have succumbed to the general negativity in markets, prompted by fading optimism regarding the Eurozone, and deepened by disappointing Q3:11 Chinese GDP growth. Starting in New York yesterday, liquidations across assets have continued into the European open this morning, with sell-offs in precious metals particularly acute in Asian markets during overnight trade.

Of concern, is that gold are failing to garner much interest from safe-haven demand, which reminds us of several weeks ago, when cross-asset liquidations saw gold and silver lose considerable ground. Once again it appears that regardless of the general risk-off sentiment, precious metals look set to suffer the same fate as equities and other risky assets. In addition,
as highlighted yesterday, we can expect a period of heightened volatility in the build-up to this weekend’s EU summit.

Physical demand for gold remains strong, and as we’ve seen in the past few weeks, we foresee significant interest emerging below $1,650. Therefore, we remain confident that a sustained fall below this level is unlikely, although a temporary dip towards $1,600 could be on the cards if the speculative market continues to shun gold.

Gold support is at $1,651 and $1,643. Resistance is $1,682 and $1,704. Silver support is at $30.79 and $30.55, resistance is at $31.97 and $32.90.

Gold’s “slow grind up”

The U.S. Dollar Index (DXY) advanced 0.6% to 77.031 this afternoon, while the euro currency dropped 0.7% to 1.3775 against the greenback.

Phil Streible, a senior market strategist at MFGlobal, presented a bearish case for the Gold in a recent note to clients. Gold’s “slow grind up” over the past two weeks “makes me think gold prices could correct,” he wrote. ”If it takes out $1,650 then $1,605 is the target.”

The gold price, at $1,684 per ounce, hovered near unchanged Tuesday morning. After trading as high as $1,695 overnight, the price of gold retreated after German Chancellor Angela Merkel’s chief spokesman, Steffen Seibert, warned that a quick ending to the sovereign debt crisis in Europe was not forthcoming. S&P 500 stock futures turned down on the news while cyclically-sensitive commodities, such as oil and copper, pared their gains.