Remain constructive on gold over the long term

CFTC (Commodity Futures Trading Commission) data, released on Friday
21 October 2011, reveals the following

1. After only modest improvements in the net position over the previous two weeks, the past week’s deterioration confirms that the speculative market is indeed cautious about gold’s short-term prospects. However, positioning remains uncommitted either way, so participants don’t seem particularly worried about the gold price falling off a cliff.
2. Along with prices, net speculative length decreased, although only moderately, with only 25.8 tonnes lost over the past week. The net speculative position for gold now stands at 514.4 tonnes — within touching distance of this year’s low (510.4 tonnes) recorded four weeks ago when prices fell 8.6% w/w. The change in the net position was mostly the result
   of speculative longs being unwound (24.3 tonnes), with the increase in speculative shorts (1.6 tonnes) contributing marginally.
3. After only modest improvements in the net position over the previous two weeks, the past week’s deterioration confirms that the speculative market is cautious about gold’s short-term prospects. However, positioning remains uncommitted either way, so participants don’t seem particularly worried about the gold price falling off a cliff.
4. ETF holdings continue to climb, albeit modestly (4.7 tonnes), another indication that markets remain uncertain about gold’s direction over the next few weeks.
5. We remain constructive on gold over the long term.

Combat the sovereign debt crisis, investors bid up the price of gold

The gold price was pressured last week by widespread weakness in commodities as uncertainty over the European sovereign debt crisis cast a pall over financial markets. Euro zone finance ministers began a six-day meeting on Friday in the hopes of developing a more robust plan to combat the escalating crisis. Leveraging up the European Financial Stability Fund (EFSF) to as high as €2 trillion has been a topic of considerable debate, but no concrete plan has yet to be agreed upon.

Grant concluded by saying that “Europe has now run out of road. There is no compromise that is politically acceptable. Whatever choices are left are ones that are either politically or economically painful and perhaps impossible. Whatever gets done is going to be nowhere near what some in the marketplace have hoped for or bet on. Europe has reached the wall.”

The implications of Grant’s predictions for the gold price are quite unclear, particularly in the short term. In the absence of a leveraged EFSF, Greece is almost certain to default, and several other PIIGS may not be far behind. Such a scenario would likely lead to substantial and widespread liquidation in financial markets – where investors are forced to sell any and all asset classes to raise cash – which could present a significant headwind for the gold price.

However, further turmoil in Europe could also have grave consequences for the euro currency and thus add to the wave of declining confidence in fiat currencies across the globe. Furthermore, the risk of deflation in many developed and emerging economies would likely increase in this scenario, thereby provoking central banks to implement a slew of additional accommodative monetary policies in efforts to resuscitate their respective economies. In such an environment, the gold price would likely be a prime beneficiary.

The gold price climbed higher Monday, rising back above the $1,650 per ounce level. Despite the fact that European leaders decided at this past weekend’s summit in Belgium not to use the European Central Bank’s balance sheet more aggressively to combat the sovereign debt crisis, investors bid up the price of gold anyways. Gold prices have been mired in a correction as debate rages over whether the current deflation scare is in the process of sending the global economy into a new recession.

Calls for More Fed Easing, QE3 On The Rise

Several members of the Federal Reserve have begun in recent days to make calls for the central bank to provide additional accommodative monetary policies.

Fed President Eric Rosengren and Fed Governor Daniel Tarullo each made comments this week that the Fed should consider resuming its purchase of mortgage-backed securities, which would effectively mark the launch of a third round of quantitative easing (QE3). The Fed last purchased mortgage-backed securities as part of QE1.

The intention of such measures would be to further stimulate the housing market, which has shown few signs of improvement despite the rebound in numerous other sectors of the U.S. economy since 2009.

Judging by recent history, another round of quantitative easing would almost certainly be positive for gold prices and other precious metals.

The gold price spiked toward $1,650 per ounce Friday, rallying on the back of weakness in the U.S. dollar and on speculation that European leaders were prepared to print over a trillion dollars to prevent a systemic crisis. Ministers from all 27 members of the European Union will meet tomorrow to discuss how to bolster market confidence in the integrity of its banking system. Stock and commodity prices moved higher across the board with the $31.90 rise in COMEX gold futures accompanied by a 5.1% rise in copper and a 1.7% gain in crude oil.

U.S. will return to a gold standard within the next five years

While Ron Paul is generally considered to be the foremost proponent of the gold standard, he has gained quite a bit of company in recent months. The idea of the United States returning to a gold standard is gaining considerable traction among many Republican 2012 presidential candidates.

Herman Cain was quoted recently as saying that “Our dollar is suffering. It’s similar to when we wake up in the morning, an hour is 60 minutes. We don’t have to go look in the paper to see what it’s worth. We’ve got to get back to a dollar is a dollar is a dollar. . . Yes, we do need a gold standard to do that.” Newt Gingrich, former Speaker of the House, has called for “hard money with a very limited Federal Reserve.”

Steve Forbes – who ran for President as a Republican in 1996 and 2000 – earlier this year predicted that the U.S. will return to a gold standard within the next five years.

Kent Sorenson, a state senator in Iowa, asserted that “Right now we have a Federal Reserve printing money that’s not backed by anything — it’s just paper. Hess noted that Sorenson – who is supporting Michelle Bachmann in her presidential bid – has proposed a measure legalizing gold and silver coins as currency in Iowa.

The gold price retreated $19.48 to $1,621.18 per ounce Thursday as weakness in gold continued this morning. The spot price of gold fell to as low as $1,606.90 in overnight trading, but pared its losses as the U.S. dollar turned lower against a basket of foreign currencies. Silver prices fell as well, by $0.56, or 1.8%, to $30.69 per ounce. The gold price showed a muted reaction to the weekly U.S. jobless claims report, which at 403,000 met the median estimate among economists.

Gold price oscillated near $1,650

The gold price and broader financial markets will likely trade based upon news flow related the report from The Guardian that France and Germany “reached agreement to boost the eurozone’s rescue fund to €2tn (£1.75tn) as part of a ‘comprehensive plan’ to resolve the sovereign debt crisis.” The plan is comprised of two parts – the first of which involves giving the EFSF “additional levers enabling it to offer first loss guarantees for bondholders, be they public or private.”

According to the report, “Senior diplomats say this will deliver a fivefold increase in the fund’s firepower – giving it more than €2tn compared with the current €440bn lending capability. The EFSF will in effect become an insurer, thereby overcoming European Central Bank resistance to the idea of turning into a bank.”

Under the second part, euro zone banks would be recapitalized “to meet the 9% capital ratio that the European Banking Authority is demanding after its re-examination of the exposure levels of 60 to 70 ‘systemic’ banks.” Although The Guardian acknowledged that “technical details” of the plan have not been finalized, the framework is in place to deploy additional ammunition to tackle the crisis.

While the markets extended their gains following the EFSF news, the report was soon after refuted by Dow Jones Newswires, which claimed that euro zone officials are still debating the size of the bailout fund.

Looking ahead, the gold price is likely to continue to take its cues from the developments across the Atlantic. A significant increase in the EFSF, as reported today, would inherently involve additional money printing and likely be bullish for the price of gold. Investors with positions tied to the gold price will thus be keeping a close eye on this weekend’s meeting of euro zone finance ministers, as well as the crucial European Union Summit on November 3, to see the specific components of Europe’s plans.

The gold price oscillated near $1,650 Thursday morning. Rumors out of Europe that its leaders were prepared to expand the size of the European Financial Stability Fund (EFSF) have led to increased volatility in gold prices as well as in the broader stock and commodities markets. The UK-based Guardian reported that France and Germany are ready to approve a 2 trillion euro rescue fund for Europe and its ailing banking system.

Physical demand for gold remains strong

Gold have succumbed to the general negativity in markets, prompted by fading optimism regarding the Eurozone, and deepened by disappointing Q3:11 Chinese GDP growth. Starting in New York yesterday, liquidations across assets have continued into the European open this morning, with sell-offs in precious metals particularly acute in Asian markets during overnight trade.

Of concern, is that gold are failing to garner much interest from safe-haven demand, which reminds us of several weeks ago, when cross-asset liquidations saw gold and silver lose considerable ground. Once again it appears that regardless of the general risk-off sentiment, precious metals look set to suffer the same fate as equities and other risky assets. In addition,
as highlighted yesterday, we can expect a period of heightened volatility in the build-up to this weekend’s EU summit.

Physical demand for gold remains strong, and as we’ve seen in the past few weeks, we foresee significant interest emerging below $1,650. Therefore, we remain confident that a sustained fall below this level is unlikely, although a temporary dip towards $1,600 could be on the cards if the speculative market continues to shun gold.

Gold support is at $1,651 and $1,643. Resistance is $1,682 and $1,704. Silver support is at $30.79 and $30.55, resistance is at $31.97 and $32.90.

Gold’s “slow grind up”

The U.S. Dollar Index (DXY) advanced 0.6% to 77.031 this afternoon, while the euro currency dropped 0.7% to 1.3775 against the greenback.

Phil Streible, a senior market strategist at MFGlobal, presented a bearish case for the Gold in a recent note to clients. Gold’s “slow grind up” over the past two weeks “makes me think gold prices could correct,” he wrote. ”If it takes out $1,650 then $1,605 is the target.”

The gold price, at $1,684 per ounce, hovered near unchanged Tuesday morning. After trading as high as $1,695 overnight, the price of gold retreated after German Chancellor Angela Merkel’s chief spokesman, Steffen Seibert, warned that a quick ending to the sovereign debt crisis in Europe was not forthcoming. S&P 500 stock futures turned down on the news while cyclically-sensitive commodities, such as oil and copper, pared their gains.