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.