A pullback in gold and silver seems due

As we move closer to the ECB’s second LTRO (long-term repo operation) on 29 February, the latest CFTC data shows increased investor interest in gold and silver. This is unsurprising, given the promise of increased liquidity and a potentially weaker dollar which accompanies this measure. However, we would caution against markets becoming overly enthusiastic, and would not be surprised to see a pullback towards the end of this
week or early next week.

After the previous week’s interruption, net speculative length for COMEX gold resumed its climb, with 57.3 tonnes added this past week. The change in the net position was the result of speculative longs added (60.7 tonnes). The mild increase in short positioning (3.3 tonnes) detracted somewhat from the overall improvement. As already mentioned, the increase in net speculative length is not surprising, as futures market participants position ahead of the ECB’s second LTRO. ETFs appear to be of a similar mind to futures market participants, with 8.5 tonnes added to their gold holdings this past week. However, the increase is certainly nothing remarkable, so perhaps they share our scepticism that the rally will be sustained.

We maintain that gold will reach new highs in 2012, probably towards Q3. However, we’re still avoiding an overweight position in gold. Looking at COMEX silver, net speculative length continued to improve, marking an eighth week of steady gains, with a 236.5 tonne increase. This brings the total net speculative length added this year to 3,009.7 tonnes. Unlike in the previous week, this time the improvement was largely as a result of remarkable rise in long positions — of 345.0 tonnes. However, short positions were added for the first time in six weeks (108.5 tonnes).

Futures market positioning remains the strongest it has been since the dramatic fall during late September of
last year. However, the 108.5 tonne turnaround in short positioning makes us wary. ETFs also do not appear too confident in silver’s prospects, with only 28.4 tonnes added to their holdings this past week (after 106.2 tonnes were shed in the previous week). It is worth noting that net speculative length for silver as a percentage of open interest, at 19.1%, is well above the 2011 average of 15.7%. This is a clear indication of a market
that is becoming overstretched and consequently vulnerable to correction. We believe that silver’s downside
remains exposed, possibly towards $29/oz.

Gold was pushed higher during New York trading hours

Gold was pushed higher during New York trading hours yesterday, reaching a 3-month high on electronic trading momentum. The move higher was accompanied by light physical selling, which was extended by participants in Asia (both China and TOCOM). This, together with some profit taking (augmented by a stronger yen), put some downward pressure on the metal overnight.

This morning, we initially saw an extension of the overnight weakness. However, a spike of dollar weakness saw gold push upwards to the $1,780 mark, before subsiding back to the around $1,775. Silver reacted more markedly to this morning’s dollar weakness, and has managed to hold onto most of these gains. However, this point of support (i.e. dollar weakness) is not expected to hold, as the market digests the EU’s interim economic forecasts. The report warns that the Eurozone will most likely enter a “mild recession”, which could put a dampener on sentiment, only recently (and perhaps prematurely), buoyed by the approval of Greece’s bailout.

Once gain the effect of this afternoon’s US data flow, the dollar will most likely dictate price movements in Gold. Today, we have jobless claims, house price and Kansas City Fed manufacturing activity data. An improvement in the manufacturing is expected, while jobless claims are expected to rise and house price growth is expected to ease.

Gold support is at $1,757 and $1,737. Resistance is $1,791 and $1,803.

Greece to receive the required €130bn in bailout loans

With the US on holiday and the rest of the market holding its breath ahead of the much-anticipated meeting of Eurozone finance ministers last night, yesterday saw gold price trade largely sideways. However, after the conclusion of the meeting, at which agreement was reached for Greece to receive the required €130bn in bailout loans, markets immediately reacted positively. Most of the pick-up in gold price was owed to a weaker dollar.

However, enthusiasm has faded this morning, as the euro loses ground. Most gold price are trading at the levels before the conclusion of last night’s meeting. Perhaps confidence has been dented by a leaked confidential report, currently doing the rounds, that warns that Greece could require even more debt relief. In addition, uncertainty over the public backlash and the upcoming Greek elections (in April) has also perhaps dampened confidence in the deal.

For the rest of today, we might see some support for prices as the US plays catch up to the overnight Eurozone news. However, should the current questioning of the situation in Greece gain traction (which Eurozone equities, currently in the red, seem to indicate) we could see precious metals remain on the backfoot due to the stronger dollar.

Gold support is at $1,730 and $1,723. Resistance is $1,742 and $1,745.

Gold and silver could see a near-term pullback

Ending five weeks of increases, net speculative length for COMEX gold fell 38.2 tonnes this past week. The change in the net position was largely the result of speculative longs being unwound. The increase in short positioning continued for a second week. The decline in net speculative length affirms our suspicion that the aggressive moves at the end of January were largely as a result of overexcitement after the Fed’s dovish announcement.

Consequently, we remain cautious of gold’s near-term prospects, and would not be surprised to see further weakness emerge this week. ETF buying also continues to decelerate. A meagre 0.8 tonnes were added to gold holdings. We maintain that gold will reach new highs in 2012, probably towards Q3. However, we’re still avoiding an overweight position in gold. Given that we see fair value for gold at $1,640, we would look to establish tactical longs between $1,590 and $1,620.

COMEX silver net speculative length continued to improve, marking a seventh week of successive gains, with a 262.0 tonne increase. This brings the total net speculative length added this year to 2,773.3 tonnes. Unlike in the previous week, this time the improvement was largely as a result of a marked decline in short positions — 206.2 tonnes. A healthy 55.8 tonnes were added to longs. Futures market positioning remains the strongest it has been since the dramatic fall during late September last year (and at 4,546.0 tonnes, net
speculative length is largely in line with last year’s average). If we see a continued strengthening of investment demand, this could help prices shrug off some of the negativity of a weak outlook for industrial demand.
After a stellar two weeks of buying, ETFs turned net sellers, with 106.2 tonnes shed from holdings this past week. Perhaps investors remain uncertain about silver’s prospects.

Gold Support Getting Less

Yesterday, Gold joined most other asset markets on a roller coaster ride as the morning’s pessimism gave way to excitement over the US economy and perceived progress in solving the Greek situation. US jobless claims numbers eased off, with initial and continuing claims falling to 348k and 3,426k respectively (from 361k and 3,526k respectively). The initial claims number was the lowest since 2008. In addition, housing starts also grew expectedly (1.5% m/m, consensus was for a 3.4% m/m decline) and the Philadelphia Fed Index showed strengthening industrial activity in the region, adding to optimism that the US economy was gaining traction.

Eurozone officials yesterday expressed their optimism that finance ministers would give approval to Greece’s second bailout package at this Monday’s meeting. There was also news from Athens, with officials there also optimistic that the government was close to achieving the additional €325m in spending cuts. Reports that the European governments might reduce interest rates on Greece’s bailout loans also bolstered market confidence. Lastly, the ECB has pledged further involvement in the debt restructuring programme.
The above contributed to a weaker dollar, which along with a healthy dose of short-covering and bargain hunting gave gold prices a shot in the arm yesterday afternoon. However, the upward momentum faded in overnight trading with the complex trading mostly sideways.

We expect this trend to continue into the weekend, as participants remain wary of taking on new positions ahead of Monday’s Eurozone meeting. Perhaps, given yesterday's reaction to positive US data flow, we could see some price action after this afternoon’s leading indicator numbers—though this would depend on the dollar’s reaction.

Gold support is at $1,714 and $1,697. Resistance is $1,739 and $1,747.

Gold came under selling pressure as fears of a possible Greek exit from the European Monetary Union

After enjoying some upside in the early morning, Gold (along with most other markets) came under selling pressure as fears of a possible Greek default and/or exit from the European Monetary Union were reinforced by the cancelling of yesterday evening’s Eurozone leader meeting. It was hoped that yesterday’s meeting would see the Eurozone leaders approve Greece’s proposed austerity budget plans and pave the way for that country to receive the required bailout funds.

For Gold price, as well as commodities in general, if a default and/or withdrawal should occur, there are several important considerations. First, a drop-off in the euro/dollar — a sudden drop to $1.20 appears likely — would of course be negative for commodity prices. Second, financial contagion which could prompt a drying up of money market liquidity, not only in Europe but across the globe. This, in our view would lead to a dramatic fall in commodities (although perhaps not as dramatic as the response to the 2008 credit crunch), even for those traditional safe-havens such as gold. Lastly, the real economic impact on Europe, and via its trade linkages around the globe, would also be felt in the demand for those metals with industrial applications.

Overnight, during Asian trading hours there was some bargain buying of gold and silver on dips below $1,722 and $33.32 respectively. However, the dour mood has continued this morning, with precious metals continuing to lose ground, weighed down by an ever strengthening dollar. Again, as in Asia, we are seeing some bargain hunting, although this time across the complex, which might place a floor on further downside.

Gold support is at $1,713 and $1,706. Resistance is $1,733 and $1,745.

Gold and silver managed to push ahead

Gold and silver managed to push ahead yesterday afternoon, despite renewed dollar strength. Overnight and this morning, increased optimism over the Eurozone extended the upward move for gold and silver, with PGM also enjoying the benefits of a weaker dollar. Most of this optimism was inspired by the commitment from Chinese authorities to help resolve the region’s debt crisis. Strong physical buying (our Standard Bank Gold Physical Flow Index continues to rise), particularly out of India, has also helped push gold higher.

However, the buoyant mood has since soured as investors grow increasingly concerned over a possible Greek default and/or exit from the European Monetary Union. The catalyst for these concerns has been the cancelling of today’s Eurozone leader meeting, at which it was hoped that Greece would finally gain approval to secure the required bailout package. In light of these renewed concerns, the dollar is strengthening which is placing a dampener on Gold prices, a pattern which will most likely be extended into New York trading hours.

Gold support is at $1,716 and $1,706. Resistance is $1,733 and $1,739.

Physical Gold demand continues to place a floor on prices

A resurgent dollar weighed on Gold price overnight, as Moody’s announced a slew of rating actions across Europe. Among the notable actions, was the downgrade of Italy, Portugal (both one notch) and Spain (two notches). Not even the UK was left unscathed, receiving a negative outlook (from stable). The agency cited “growing financial and macroeconomic risks emanating from the Eurozone crisis”.

Physical Gold demand continues to place a floor on prices, as we witnessed a resurgence in interest after the overnight dip in prices. Around $1,715 seems to be the level of support currently offered by the physical market. Later this morning, we’ve seen dollar strength relenting, which has eased downward pressure on precious metals. We expect the complex to continue tracking euro/dollar movements today. To this end, we could see a reaction from US retail sales and business inventories data out this afternoon. Better- than-expected data might prompt some appetite for risk, which could see the dollar lose some ground.

Gold support is at $1,712 and $1,705. Resistance is $1,730 and $1,741.

Cautious of gold’s near-term prospects

Gold are benefiting from a weaker dollar, as the euro advanced after the Greek parliament approved the requisite austerity measures over the weekend. However, market optimism might be premature as two conditions still have to be met before the Eurozone leaders’ meeting this Wednesday. Firstly, a further €325m in cuts have to be found, and secondly, a pledge from Greek political leaders that they will maintain the reforms after the country’s general elections (this April).

Turning to CFTC data, net speculative length for COMEX gold grew again, although not with as much gusto as in the previous week. Similar to the previous week, the change in the net position was largely the result of speculative longs being added (37.4 tonnes). However, we saw a resumption in short positioning (the first time in four weeks), with 13.3 tonnes added. The tentative nature of the past week’s moves affirms our suspicion that the aggressive moves of the week before last were largely as a result of overexcitement after the Fed’s dovish announcement. Consequently, we are cautious of gold’s near-term prospects, and would not be surprised to see further weakness emerge this week. ETF buying also slowed markedly.

For COMEX silver, net speculative length continued its dramatic improvement of the past six weeks, with 823.4 tonnes added— the largest gain since August 2011. Participants showed increasing interest with an incredible 730.0 tonnes added to long  positions — the largest gain of the year so far. Futures market positioning is currently the strongest it has been since the dramatic fall in late September last year. If we see a continued strengthening of investment demand, this could help prices shrug off some of the negativity associated with a weak outlook for industrial demand. ETF buying also continues to firm up, with
121.0 tonnes added to holdings this past week.

Gold support is at $1,711 and $1,693. Resistance is $1,741 and $1,753.

Interest in gold from Far East client

Yesterday saw a rally across assets, as reports came through that the Greek government had reached agreement on the required austerity measures. However, these gains were soon reversed as Eurozone finance minsters postponed approval of the bailout package until next week Wednesday, citing that the Greek government’s budget proposal was incomplete. Three conditions remain before approval will be considered—a further €325m in cuts, Greek parliamentary approval (should be this Sunday) and a pledge from Greek political leaders that they will maintain the reforms after the country’s general elections (this
April). While indications are that the Greek parliament will approve these measures, there is enough uncertainty to keep markets on edge as we enter the weekend.

The announcement by the CME that initial margin requirements on gold futures will be dropped has failed to inspire much interest in the metal. Initial margins will fall to $10,125 per contract from $11,475, while the maintenance margin moves from $8,500 to $7,500. This is effective from close of business next Monday.
We are seeing some interest in gold from Far East clients, especially on the physical side after this morning’s fall to $1,720. This should keep gold supported, although, should it fall further we consider the range $1,700 to $1,720 as a good opportunity for establishing short positions.

Gold support is at $1,714 and $1,707. Resistance is $1,741 and $1,760.

Mild speculative buying in gold

 

Gold and silver came under some selling pressure as the dollar strengthened at the onset of New York trading hours. Soon afterward, the dollar weakened again, but gold and silver did not manage to recover much of their losses. Perhaps heightened optimism, sparked by apparent progress on the Greek political wrangling, reduced the safe-haven appeal of these metals. Coalition leaders in Greece have reached agreement on most of the required austerity measures that would enable the country to access the second €130bn in bailout funds, although pension cuts remain a point of contention.

Overnight, we saw mild speculative buying in gold, along with continued interest on dips from physical buyers. Today, the complex remains largely shackled to dollar movements, particularly in relation to the euro — dollar strength has been weigh on price for most of the morning. Today’s ECB announcement is not expected to hold any surprises — interest rates are expected to be kept on hold (although our G10 analyst feels a cut is not entirely implausible). However, markets will most likely to be looking for hints regarding plans for a possible extension of the ECB’s long-term refinancing operation (LTRO), which of course would be bullish for precious metals. As it stands, the there is one more 3-year LTRO scheduled for 29 February.

Gold support is at $1,722 and $1,710. Resistance is $1,750 and $1,765.

Greece, the dollar weakened against the euro yesterday, which sent Gold prices rallying

Despite another postponed deadline in Greece, the dollar weakened against the euro yesterday, which sent Gold prices rallying. The Greek Prime Minister’s meeting with key coalition party leaders was postponed till today — the meeting is being held so that the Prime Minster can obtain the political support for the austerity measures that would ensure cooperation from international creditors. Perhaps the optimism was owing to reports that the ECB was willing to contribute to a restructuring of Greek debt. However, this is subject to a successful conclusion to the current debt restructuring negotiations.

Another contributing factor to yesterday’s dollar weakness and the subsequent push higher for Gold prices, was perhaps Fed Chairman Bernanke’s testimony to Senate Budget Committee. Although he stated nothing new (he had already testified a week earlier to the House Budget Committee), he dampened optimism over Friday’s payroll numbers by reiterating that the Fed felt that the US jobs market was still far from healthy.
Yesterday’s rally was followed by relative inactivity in Asia, which saw prices remain level overnight. This morning, not much has changed, with prices across the complex holding steady.

Physical buying of gold, especially out of China, has been quite strong despite the relatively elevated prices. However, we have seen a slight pull-back in physical demand after yesterday’s rally. Gold support is at $1,705 and $1,695. Resistance is $1,732 and $1,749.

Gold and silver trading relatively range-bound

After initially Gold price drop, yesterday saw gold and silver trading relatively range-bound. PGM managed to get some lift at the start of New York trading hours, although momentum did not carry over into Asian markets. This morning we’ve seen little interest in the complex, despite a relatively steady dollar and indications of rising risk aversion (Asian equity markets ended down and European stock indices are currently trading in the red).

After Greek leaders postponed yesterday’s meeting, markets have grown anxious that agreement and the resolve to adopt the required austerity measures is lacking. The EU has suggested a deal should be reached by 15 February to ensure that the necessary arrangements are made before Greece makes a critical bond payment on 20 March. Eventually this concerns should see renewed interest in gold. However, any upside could be dampened if the dollar should push higher owing to the same concerns.

Gold support is at $1,705 and $1,695. Resistance is $1,732 and $1,749.

Gold popping still above $1,700

Gold price came off sharply on in the wake of the surprising nonfarm payrolls figures, as a stronger dollar and increased risk appetite saw investors shun the complex. After the past week’s rally, some profit-taking most likely also contributed to the downward pressure. The trend has continued into this morning, with concerns over the Eurozone aiding further dollar strength and weighing gold down.

This has been the most aggressive display of confidence in gold we’ve seen in some time. However, given that these moves were largely as a result of the Fed’s dovish announcement, and that before these moves the futures market remained cautious of gold’s prospects, we still would not be surprised to see a pull-back.
ETFs added a relatively strong 14.1 tonnes of gold. ETF holdings now stand at 2,466.0 tonnes — closing in on the 12-month high of 2,469.7 tonnes recorded in early December.

We maintain gold will reach new highs in 2012, probably towards Q3. However, with gold popping still above $1,700, we are witnessing growing resistance from the physical market. We see good value on approach of $1,600.

Physical gold buying is largely on the sidelines

Gold are enjoying some support from safe-haven demand as issues in Eurozone once again weigh on investors’ minds. The Greek Prime Minster appears to be struggling to garner political support for the required austerity measures that would secure extra funding from international lenders. In addition, no clear agreement has been forthcoming on either private or official sector involvement in a Greek debt restructuring.

Despite the Eurozone concerns, the euro has been relatively stable against the dollar, which has allowed the gold to benefit from safe-haven interest without too much hindrance from a strengthening dollar. Physical gold buying is largely on the sidelines, with only minimal interest forthcoming. Base on Standard Bank Physical Gold Flow Index is holding steady, only marginally inside positive territory—a positive value indicates net buying in the market. As mentioned in the base metals section, all eyes are on today’s US non-farm payrolls data. We feel that the likelihood of a disappointing number is slightly greater. This would benefit precious metals, especially gold and silver, as it would strengthen the Fed’s case for an extended period of monetary accommodation.

Gold support is at $1,746 and $1,733. Resistance is $1,768 and $1,775.

Gold prices have moved significantly higher this morning as the dollar has softened

Gold came under pressure from a stronger dollar after a disappointing US consumer confidence reading dented investor optimism. Overnight, not much support was forthcoming from Asian participants. However, despite high prices, we have seen a resurgence in Indian physical demand, partly explained by an appreciating rupee. Base on Standard Bank Gold Physical Flow Index, after two days in negative territory is once again positive (indicative of net buying in the market).

Although relatively stable during Asian trade,Gold prices have moved significantly higher this morning as the dollar has softened. Momentum, though is lacking, without any strong conviction to buy—the preferred strategy remains to buy on dips. In line with last week’s data which showed a slowdown in Eurozone money supply and credit expansion, the recently released ECB report on bank credit standards has revealed a significant tightening of standards in Q4:11, with even more tighter controls expected in Q1:12. This does not bode well for money market liquidity in the region, and we feel warrants more attention than markets are currently paying.

We feel that a drying up of money market liquidity in the Eurozone remains a key risk to commodity prices (even precious metals) over the coming months. Gold support is at $1,732 and $1,718. Resistance is $1,755 and $1,762.

Continued to see lacklustre physical gold interest

In overnight trade in Asia, we continued to see lacklustre physical gold interest, and even some scrap gold and silver coming to market from Japanese recyclers — nevertheless, prices held steady. This opened the way for renewed buying interest this morning off the back of a weaker dollar and renewed optimism as concerns over the Eurozone debt crisis have eased. PGM received an added boost from Japanese vehicle production figures for December, which grew 13.4% y/y.

As we enter month-end, a lot of headlines are underscoring the strong year-to-date performance of precious metals (and commodities in general). Gold is set to have the best January since 2008, while silver is poised for a record January return of the past three decades. Platinum and palladium are up 15.8% YTD and 5.7% YTD, respectively. Some are even declaring resurgent industrial demand as the reason for these gains in silver and PGM. We are sceptical, and the think the reason as more to do with the expectation of growing liquidity, with last week’s dovish announcement by the Fed the primary catalyst.

We still feel that the risk to commodities during Q1:12, are more to the downside. It is too early to expect real demand to support higher commodity prices. The lack of a strong pick-up in the physical markets, even after recent commodity price declines, indicates that growth will remain slow in Q1:12. Another major risk in our view is a stronger dollar, especially against the euro, as the Eurozone continues to struggle to solve its fiscal problems.

Gold support is at $1,725 and $1,709. Resistance is $1,749 and $1,756.