Gold staged an abrupt move down early this morning

After tracking sideways for the greater part of Asian trading hours, gold staged an abrupt move down early this morning. Dollar strength was the primary catalyst as sentiment turned against the Eurozone in the wake of election uncertainty in France and ECB President Draghi at the weekend’s G20 finance ministers summit resisted pressure from the IMF to do more to stem the debt crisis in the region.

However, stops were triggered around the $1,638 mark, sending the price even lower. It appears as if
the market has now stabilised around the $1,632, level with good support coming from Asian buyers.
The Shanghai Gold Exchange announced an increase in margin requirements and trading bands for its gold and silver contracts.

The margin for gold contracts will be raised to 13% from 12%, while the trading band is increased to 10% from 9% as of 26 April settlement. For silver, the margin becomes 16% (from 15%), and trading limits are 13% (from 12%). This has not had much effect on markets because the move was largely anticipated in advance as of the end of April/early May holidays in China.

Spanish bond auction

After a dramatic sell-off in gold yesterday, the gold price recovered rather quickly and settled in a fairly tight $1,645 to $1,655 range for most of the overnight session. Overnight, activity in the complex was largely confined to the white metals, as buying interest was perked up by the more genial sentiment.

This morning, we’ve seen the whole complex succumb to waning investor enthusiasm, most likely due to Eurozone uncertainty sparked by the approach of tomorrow’s Spanish bond auction. A strengthening dollar is adding to the downward bias of price of gold.

Gold support is at $1,635 and $1,623. Resistance is $1,658 and $1,670.

Worse-than-expected Chinese GDP numbers are weighing on sentiment

Gold was buoyed by the perceived dovish talk from Fed and ECM members yesterday, pushing beyond the $1,670 level. The rest of the complex, in particular silver, was taken along for the ride. Improved sentiment (especially concerning Europe) and a weakening dollar also helped broaden the appeal of precious metals. However, the initial rally soon ran out of steam, with gold remaining in the $1,670-$1,680 range overnight.

This morning, the worse-than-expected Chinese GDP numbers are weighing on sentiment, although the effect on gold and silver has been rather muted. This lack of direction is understandable, since a weaker Chinese economy could see jewellery demand fall, but it may also prompt a greater monetary policy response from the PBoC which would be to the benefit of precious metals. We feel the latter outcome is not likely (although easing will continue at a moderate pace), and even if the PBoC were to step up monetary accommodation, it would take 12-18 months before the effect would be felt in the economy.

Gold managed to rally yesterday as sentiment continued to sour

Shrugging off the downward momentum from a stronger dollar, gold managed to rally yesterday as sentiment continued to sour, prompting some safe-haven associated buying. With equity markets coming under pressure, even in the US—Alcoa’s better-than-expected results only came in after the closing bell—it was apparent that risk aversion was definitely back. The other precious metals, especially PGM, didn’t seem to benefit as much—no doubt still weighed down by the disappointing Chinese trade data, which signalled continued lacklustre global industrial demand.

However, we would also caution against being overly optimistic on gold as the rally could have been overdone, given that it occurred amid weak volumes and thin liquidity. During Asian market hours, profit taking was evident as gold came under selling pressure from the start. Heavy liquidations were also evident in platinum. Physical demand for gold has suffered after yesterday’s rally as participants appear to be waiting
for a sharper move lower before entering the market.

The dollar is tracking sideways this morning, which is keeping gold largely range-bound. European equity markets appear to be staging a timid recovery. Should this upward momentum hold and be extended into the US markets (as equity futures currently indicate could happen), we could see gold lose some support. The Fed’s Beige Book is being released later today, which could spark some price activity in precious metals as the market tries to glean from it the possibility of further quantitative easing.
Gold support is at $1,636 and $1,618. Resistance is $1,669 and $1,682.

Physical demand for gold, which has been relatively good

Gold price received a shot in the arm late last week from a disappointing US non-farm payroll number, as market participants continued to react to changing expectations of further quantitative easing. Of course, a weaker US economy raises the possibility that the Fed will need to act. The upward momentum stalled over the weekend, although, with some decent interest from the Far East, precious metals remained relatively steady yesterday.

Disappointing Chinese trade data sparked some interest in the complex earlier this morning, as poor imports numbers signalled perhaps a deeper slowing down of the Chinese economy than originally anticipated. This saw some safe-haven buying emerge in Asia, and no doubt also propped up expectations that this could see the PBoC increase the pace of monetary easing. However, with European markets back today, it is once again the euro/dollar that is largely dictating movements in Gold price—with a strengthening dollar weighing on prices and reversing the early morning gains.

Concerns over the Eurozone sovereign debt crisis are back, with Spain the current focus. To this end, we could see some euro/dollar reaction (and consequently, a reaction from precious metals) from tomorrow morning’s Spanish industrial production figures. Physical demand for gold, which has been relatively good despite the protest action in India is likely to pick up, after it was announced that Indian jewellery stores would be reopening ahead of the Akshaytritya Festival which begins 24 April.

Gold support is at $1,635 and $1,629. Resistance is $1,649 and $1,656.

In Asian markets, interest in gold price remained severely lacking

The downward pressure on gold price continued into the early part of the New York trading session, with already negative sentiment (especially regarding the prospects of central bank easing) compounded by ECB President Draghi’s remarks after the bank’s interest rate announcement. The emphasis he placed on inflation concerns is most likely what has spooked the markets as it reduces the possibility that the central bank will engage in any further monetary easing. However, he did attempt to balance these remarks by saying that he did not think that he was being overly hawkish and that “any talk of exit strategy is premature”.

In Asian markets, interest in gold price remained severely lacking, with the lower price levels even failing to attract significant physical buying. Nevertheless, there was enough interest again (as there was the previous day) to keep prices relatively stable. This morning, we’ve seen cautious buying give the complex a moderate lift.

Gold support is at $1,607 and $1,591. Resistance is $1,644 and $1,664.

We still favour gold and see $1,630 and $1,600 as good levels to establish a long position for a move higher

Along with most other markets, gold and silver, came under heavy selling pressure yesterday after the FOMC minutes appeared less dovish than market participants had hoped for. It was largely the non-committal mentioning of further quantitative easing rather than a clear signal that there would be no further stimulus that markets have focused on. Once gain, the Fed mentioned that “if the economy lost momentum or if inflation seemed likely to remain below its mandate consistent rate” then it would engage in further monetary accommodation.

As outlined in our Quarterly Preview (released yesterday) our view on gold remains unchanged. We still favour gold and see $1,630 and $1,600 as good levels to establish a long position for a move higher. We forecast an average gold price of $1,790 for 2012. This bullish view has always been independent of whether or not a third round of Fed quantitative easing would occur.

We feel the global reserve accumulation will continue to grow (spearheaded by emerging markets and particularly China) and consequently provide the main impetus for gold-friendly growth in global liquidity during 2012. Overnight, the rout was arrested somewhat by decent physical buying, especially from South East Asia. However, this only served to keep prices steady, with the downward trend resuming in this morning’s trade. Should the euro/dollar manage to remain steady, we don’t foresee another leg down today.