Commodities | Nov 01 2012
Gold, after its dramatic fall from US1795, looks to be holding well. Is this the low we should be looking at to enter long positions or does the current pause in price action represent a lull before more sales to the down side? Over the last week we have been monitoring all the past reasons for holding on to the metal, like prospects for inflation, a weaker USD, central bank demand, more stimulus etc which all pointed to gold remaining firm. However, as it stands all these reasons are weakening in their influence towards the price of the metal trading higher. Talk of no more stimulus programs for the foreseeable future is having an effect on sentiment towards economic growth and inflation, which sees the USD remaining bid, and with only central bank demand providing support our resolve to buy into the dip is being tested. Normally when we have conviction on a trend we are happy to stick our necks out however this time we are more cautious as the conviction is just not there. The fact physical demand has picked up, particularly in India, is supportive of a low, however with ETFs and general investment unwinding positions the market seems unconvinced that a low is forming.
However,by looking a little deeper we can potentially see demand by default for the metal.
It is interesting to see the problems in Spain evolve. Currently we are looking at unemployment over 25%, and the longer the country holds out the more concern we have. Rajoy and Monti have a meeting of minds, rather than a strategy: as soon as they ask for a bailout they lose an element of sovereignty. Both are against this, however they may have little choice the longer they leave it. We suspect that Spain will ask for a bailout soon. If it does this will trigger the ECB into buying Spanish Bonds, which in turn should change sentiment towards the euro, and the USD will weaken thus stimulating by default demand for gold. The only problem with this is the timing as to when Spain will ask for the bailout. We feel that this will not occur until regional elections are held which are in the 25thNovember. That’s a fair bit of water that needs to go under the bridge first, however it should remain a supporting factor for the metals up until then.
Overall, the market remains in consolidation mode trading a narrow range. We still have no signs of a low in place. We do expect to see a short test to the topside as to whether or not this represents a return to US1800 we currently doubt it.
Chart point:
We have been trading in a range of US1695 – US1715. Momentum indicators are low however have not yet turned. As mentioned last week we may spend a little time around US1700 and in the short term expect a bounce as a reaction to the fall from US1800. If long, stops can be placed at US1685.
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