Rudi's View | May 31 2007
By Rudi Filapek-Vandyck
At the end of 2006 few would have doubted gold was poised to surge past the US$700/oz in the months ahead and replace last year’s US$722/oz as the highest peak since 1980.
However, as the fifth month of 2007 draws to an end, US$700/oz has remained as elusive as ever and the precious metal appears to have landed in a serious struggle to keep the positive momentum going.
Highly respected market experts have now opted for the sidelines or are issuing warnings to their clientele: were the metal to drop below US$646/oz don’t think twice, but simply cut and run!
All of a sudden that often mentioned US$700/oz price target seems farther off than ever.
At face value, gold’s underlying market fundamentals are still supportive with global demand increasing and producers either reporting production declines or switching into lower grade tailings to maximise their long term benefits. Most of them have been unwinding forward selling hedge contracts which is also supportive of a higher gold price.
Gold being gold, however, and not silver, copper or nickel, there’s always a plethora of other factors in play to impact on the price direction of the metal. One of the easiest to determine heavyweight factors is central bank selling of the metal, which is always acknowledged after the event.
And so it is we know now that two weeks ago, when the metal seemed geared up for another attack on the US$700/oz price level, European central banks decided to sell 17.7 tonnes of gold in one single week.
European central banks have now sold 120 tonnes of gold in a little over two months. To put this figure into perspective: only 112 tonnes were sold during the previous six months. Signatories to the second Washington Agreement, and that includes most central banks in Europe, are only allowed to sell a combined total of 500 tonnes of gold in each year between October and the end of September. This year the banks can still sell another 268 tonnes before the end of September.
It has to be noted that in the year to September last year the central banks only sold around 300 tonnes out of their inventories. They don’t have to sell up to the maximum allowance, but they cannot transfer some of it into the following year either.
While possibly crucial for the price direction of gold, it remains guesswork, at best, to try to figure out what the central banks will decide in the months ahead.
Another clearly identifiable factor has been a resurgent US dollar. Interest rate expectations, and more specifically changes to market expectations, are the single most powerful factor behind moves on international FX markets. It is therefore no surprise that as bond investors in the US have started to price out further interest rate cuts in the past few weeks, the US dollar has made a swift come back against the euro and most other free floating currencies.
As such, the strengthening US dollar has been one of the triggers for hedge funds and other speculative investors to sell off base metals such as copper and nickel. Continued weakness for most hard commodities has had an impact on the gold market as well. More than any other publicly traded commodity, gold tends to trade as an alternative to the greenback (in the opposite direction thus).
What has gotten many a market watcher worried, however, is the technical picture that has emerged from the recent price correction. No hard figures are available about the importance of technical analysis for open spot and futures markets such as gold, but it is more than likely the majority of today’s traders and investors in the gold market use some form of technical analysis as guidance.
Gold’s repeated failure to move past US$693/oz -considered a formidable technical resistance level- and stay above the price level has part of the market genuinely worried. Some experts believe that if the metal won’t achieve this in the short term it is likely to remain stuck in a tight trading range beneath US$690/oz for many months to come.
This means investors would have to wait until next year to see gold possibly move past the US$700/oz price level.
Meanwhile, of course, there is a real danger the metal will sink into more troubled territory. In the words of one respected team of technical chartists this week: “We are concerned by the absence of a bounce; however, only a close below [US$]646 would force us into the bearish camp.”
One of the longstanding long term bulls on the precious metal recently formulated it as follows: gold has been in a “mega uptrend” since the gold price reached a low point in February 2001. The metal now has only two choices left: either continue rising and move past the US$722/oz peak from May last year, or suffer a loss larger than the largest loss from the past six years, which was 2006’s 22% price correction.
As not every technical chartist uses the same methodologies, this expert believes that as long as gold remains above US$627/oz (so-called 65 week moving average) it’s long term uptrend shall remain intact. So any large pull back from gold’s current price of circa US$655/oz should not necessarily damage the metal’s upside prospects, but it might.
Equally important is that gold moves higher and takes out the US$722/oz price peak from last year as this price level will otherwise become the top for the current uptrend, indicating we’ve seen the metal’s high for the time being.
Gold bullion set an intraday peak for a front-month futures contract of US$728/oz on May 12, 2006. That was the highest level since the third week of January 1980, when gold traded at US$850/oz for less than 48 hours.
Many an expert is still calling the metal at US$750/oz by year end. However, this was also the case in 2006. Instead gold entered the new year with a price tag of US$637/oz.