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.