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.”