Gold enjoyed good support yesterday as fears over the Eurozone debt situation kept investors in risk-off mode

Gold enjoyed good support yesterday as fears over the Eurozone debt situation kept investors in risk-off mode. Overnight though, trading was rather lacklustre with prices remaining relatively range bound.

This morning, activity has remained light with only a small amount of gold physical buying evident on dips below $1,785. Contributing to the general lack of direction is the relative absence of physical buying from the Middle East owing to holidays in observance of Eid. Our Standard Bank Gold Physical Flow Index is still in positive territory (indicating net buying) but continues to move lower. We expect physical demand to return in full force, in line with the usual seasonal pattern in early January next year.

Today, focus will be on Italian politics as parliament prepares for a budget vote. There is some concern that the Italian Prime Minister Berlusconi will be able to secure the required majority. Such a failure could result in Berlusconi facing a confidence vote, which could delay the necessary fiscal reforms and create even more uncertainty in terms of the Eurozone debt crisis.

Gold support is at $1,765 and $1,737. Resistance is $1,811 and $1,828

Gold has enjoyed some support from continued troubles in the Eurozone

Gold has enjoyed some support from continued troubles in the Eurozone. Although it appears as if Greece is making some progress on the political front, details remain sketchy and markets are shifting their attention to Italy. The Italian Prime Minister has been urged to step down as Italy’s borrowing costs soared to new Euro-era records as investors feared spill-over effects
from the Eurozone’s ongoing debt crisis. While gold might be enjoying some safe-haven buying, we warn that should the Eurozone debt crisis result in a drying-up of the region’s money markets, all commodities will suffer, including gold.

Physical buying in gold remains light with the Middle East on holiday in observance of Eid.
Net speculative length for COMEX gold increased moderately again this past week, with 31.2 tonnes added. However, unlike in the previous week, the change in the net position was largely due to speculative shorts being unwound (20.2 tonnes), with a more modest increase in speculative longs (11.1 tonnes) adding to the overall improvement. With two weeks of improvement in the net position, coupled with a drawing down of short positions, the speculative market finally seems more confident about gold’s prospects.

ETF buying continues to gain momentum, with 16.8 tonnes added this past week (compared to the 12.2 tonnes and 4.7 tonnes added in the previous two weeks). These increases are encouraging, and underscores the growing confidence in the gold market. COMEX silver net speculative length continued to climb, with 239.2 tonnes added over the past week. However, there is still a long way to go to recover from the 3,060.0 tonnes lost previously, so net speculative length still looks relatively weak. Encouragingly, for the most part, the increase in the net position was attributable to 177.3 tonnes shed from speculative short positions.
This brings speculative shorts to a total of 1,074.6 tonnes — now more comfortably in line with last year’s average. The 61.9 tonnes added to speculative longs also contributed to the overall improvement. Market positioning remains weak, yet there are signs that investors have become less bearish on silver.

Gold support is at $1,756 and $1,744. Resistance is $1,774 and $1,779.

Eurozone’s is still a long one and fraught with difficulties and obstacles

Gold made some solid gains early of last week over uncertainty about the Eurozone after Chancellor Merkel outlined the proposed Greek referendum on this country’s continued membership of the Eurozone. However, price activity has since stalled, even after Greece’s Prime Minster Papendreou cancelled the referendum. Attention is now on today’s vote of confidence in the Greek Parliament, which Papendreou contends will be enough of a mandate to push ahead with the proposed austerity plans.

With the major opposition party declaring their support for the confidence motion, it seems a successful vote of confidence will be passed. Nevertheless, the path to a satisfactory resolution of the Eurozone’s is still a long one and fraught with difficulties and obstacles. The longer the Eurozone’s woes continue and the greater the uncertainty (as provoked by, for example, this referendum), the greater the volatility and possible short-term downside for all commodities, including gold. The main impetus for this would be a drying up of liquidity in Eurozone money markets if this region’s banks come under severe pressure because of the Eurozone sovereign debt market.

Today’s US nonfarm payrolls might be able to shift focus away from the Eurozone for a while. The market expects an increase of 95k during October, slightly lower than September's surprise increase of 103k. Our G10 analyst foresees the data being only slightly firmer than expectations and therefore prompting not much of a market reaction. Similarly, the conclusion of the
G20 summit today is unlikely to spark any major market moves.

Gold support is at $1,731 and $1,704. Resistance is $1,777 and $1,795. Silver

Gold price rallied $19.27 to $1,760.2 per ounce

The gold price rallied ahead of yesterday’s Federal Open Market Committee (FOMC) meeting and maintained the majority of its gains following the FOMC announcement. There, the U.S. central bank reaffirmed its plans to leave the Fed funds rate near zero through mid-2013 and to proceed with Operation Twist. The Fed noted that “recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,” to help support its accommodative policies.

While the majority of the FOMC statement was quite similar to the prior one in September, one key difference was a dissenting vote from Chicago Fed President Charles Evans. Evans supported further monetary policy easing – which marked the Fed’s first “dovish dissent” in five years, according to BTIG chief global strategist Dan Greenhaus.

In addition to Evans’ dissent, another key difference was the absence of dissenting votes from Presidents Plosser, Fisher, and Kocherlakota. At the previous two FOMC meetings, these three central bankers each voted against Fed committing to its interest rate policy through mid-2013 and to implementing Operation Twist.

The gold price rallied $19.27 to $1,760.2 per ounce Friday morning after the European Central Bank (ECB) unexpectedly cut its benchmark interest rate by 25 basis points to 1.25%. The price of gold traded modestly lower near $1,725 in overnight trading, but turned sharply higher as ECB President Mario Draghi – who took over for Jean-Claude Trichet earlier this week – wasted little time in providing a clear signal on the severity of the European sovereign debt crisis.

Not to launch a third round of quantitative easing (QE3)

Gold price showed a modest reaction to the Fed statement, as they maintained the large majority of their gains near $1,738 per ounce. The Federal Reserve decided not to launch a third round of quantitative easing (QE3) or expand its set of accommodative monetary policies at its Federal Open Market Committee (FOMC) meeting on Wednesday.

Today’s FOMC announcement was released at 12:30pm ET – rather than its usual 2:15pm ET – because Chairman Ben Bernanke will be holding his second-ever post-FOMC press conference later this afternoon.

The large majority of the FOMC statement was identical to the previous statement in September – with the Fed choosing to continue with Operation Twist.

One noteable difference at today’s meeting was the existence of only one dissenting vote – that from Charles Evans, who “supported additional policy accommodation at this time.”

At the prior two meetings, three Fed presidents – Fisher, Plosser, and Kocherlakota – voted against committing to a near-zero Fed funds rate through mid-2013 and against Operation Twist.

Bernanke held his first and only press conference in April of this year – which turned out to largely be a non-event. As GoldAlert wrote at the time, “It was quite disappointing to hear the softball questions lobbed at Bernanke by many members of the mainstream media. The American people would have been much better served if the journalists in attendance had asked the type of challenging, more serious questions that get to the heart of the unfortunate consequences of the Fed’s policies.”

Physical gold buying has slowed down post-Diwali

Despite markets adopting a risk-off stance, as evidenced by losses across global equity markets, gold have failed to garner much interest from a safe-haven perspective. The announcement by Greece’s Prime Minister that he will put the government’s planned austerity measures to a referendum has renewed concerns over the Eurozone debt situation, which has not only fuelled risk aversion but also contributed to a stronger dollar. It is this dollar strength that is curbing safe-haven demand for gold.

In addition, physical gold buying has slowed down post-Diwali. Our Gold Physical Flow Index dipped below zero yesterday, the first time since early August, a signal that physical selling has begun to outpace buying. Consequently, we can’t expect the support from physical buying we have seen over the past month.

Nevertheless we expect interest to pick up again in mid-December, and continue to see value in gold, especially on approach of $1,600. Gold support is at $1,694 and $1,679. Resistance is $1,736 and $1,761.

Remain constructive on gold over the long term

Gold — COMEX

1. • Open interest continues to see-saw, rising by 21.5 tonnes after the previous week’s 13.9 tonne fall. Gold open interest on COMEX now stands at 1,422.1 tonnes, still only marginally up from this year’s low of 1,400.6 tonnes. Prices also gained last week, at 6.2% w/w. This is the strongest w/w rise this year.
2. • Along with prices, net speculative length increased, although only moderately, with only 26.9 tonnes added over the past week. The change in the net position was due to speculative longs being added (33.4 tonnes), with the marginal increase in speculative shorts (6.5 tonnes) detracting from the overall improvement.
3. • Given that this week’s improvement merely erases the deterioration of the previous week, the speculative market still appears to be cautious about gold’s short-term prospects.
4. • ETF holdings continued to climb, although still only modestly, at 11.3 tonnes. While this increase is encouraging, market participants still appear uncertain about gold’s direction over the next few weeks.
5. • As a percentage of open interest, net speculative length is currently around 20.8%. This is a well below last year’s average of 31.8% — a signal of a market far from overstretched.
6. • We remain constructive on gold over the long term.