Gold Falls 2.5% But Up 21% YTD – Technical’s Short Term Bearish; Long Term Bullish

Published in Market Updates  Precious Metals Update  on 18 November 2011

By Mark O’Byrne


Gold is trading at USD 1,727.10, EUR 1,278.60, GBP 1,090.30, CHF 1,579.20, JPY 132,590 and CNY 10,970 per ounce. 

Gold’s London AM fix this morning was USD 1,730.00, GBP 1,093.00, and EUR 1,279.87 per ounce.

Yesterday's AM fix was USD 1,756.00, GBP 1,115.70, and EUR 1,304.12 per ounce.


Gold in USD – 1 Year Daily and DMAs

Gold has bounced 0.5% today, after falling 2.5% yesterday. Gold is down 2.6% week to date and is headed for its first weekly loss in four weeks which would turn the short term technicals bearish.

Spot gold has rebounded above the 50-day moving average that it fell below yesterday. The 50-day MA is moving close to crossing below the 100-day MA, which can be seen as a bearish technical signal. However, the last time gold’s 50 dma fell below the 100 dma in February 2011 it was  prelude to rising prices in the coming months (see chart above).

However, while the short term technicals may turn bearish, the long term technicals remain positive as does the all important fundamental picture as seen in the global gold supply and demand figures yesterday.

The data was extremely positive but there was an element of ‘buy on the rumour’ and ‘sell on the news’ as the positive demand backdrop may have been factored into prices.

Official intervention as ever cannot be ruled out and there is now a frequent pattern of somewhat odd sharp sell offs prior to options expiry – options expire next Tuesday.

Yesterday’s sell off was attributed to risk aversion due to concerns of contagion after Fitch warned that US banks face a “serious risk” from Europe’s debt crisis. This led to sharp sell offs in equity and many commodity markets which likely resulted in traders, hedge funds and other speculators closing gold positions and moving to cash. 

Massive uncertainty, counter party and systemic risk is leading to some speculators and fund managers opting out of the paper or leveraged gold market and moving to cash. Some are also moving into the safety of physical bullion in the form of allocated accounts. 

The Wall Street Journal mentioned how the continuing liquidation of holdings by former MF Global clients, as accounts become unfrozen by the trustee, helped pressure precious metal prices lower.

The trustee of the troubled brokerage, which filed for bankruptcy protection last month, has been transferring client holdings to other clearing firms with only partial margins, or collateral deposits, as around $600 million of client money was reported missing. Clients who are unable to post additional margins with the new client firms are being forced to sell their holdings, according to the Wall Street Journal.

The MF Global fraud looks set to lead to thousands of clients losing their investments and has claimed some brokerages as victims. 

Counter party and systemic risk is on a scale never seen before in modern financial history (or indeed in all of history due to the globalised and massively integrated nature of financial markets today) and this will lead to more investors avoiding brokerages who offer leveraged paper gold vehicles via the official exchanges and opting to buy physical bullion over the counter.

It may also lead to further questioning of some of the gold ETFs due to their many custodians and sub custodians and the high level of indemnification in their prospectuses.

The Shanghai Gold Exchange lifted silver margin requirements to a very high 18% of a contract’s value, up from 15% previously. 

Some believe this may have exacerbated the sharp selloff in silver yesterday. It’s not clear when the new margin requirements come into effect, but a report by Reuters said it would likely be from Monday.

Arbitrary and incomprehensible margin increases will likely lead to traders in the spot and futures markets opting for physical bullion as they realize that the leverage offered by paper gold products is a double edged sword.

‘Return of capital’ rather than ‘return on capital’ will become a dominant theme in the coming weeks and months as contagion leads to the domino effect of innumerable bankruptcies globally. 

Gold and particularly silver are ‘on sale’ at these levels (silver fell 6% yesterday) and buyers of bullion with a long term outlook will again be wise to buy this dip. Gold is just above the 100 day moving average at $1,708/oz and the 100 day moving average has proven to be a good entry point for buyers in recent months and years.

While gold fell 2.6% yesterday, it is important to focus on the long term and gold remains up 1% MTD, 4% QTD & 21% YTD. 

Silver’s sharp fall yesterday mean that its monthly and quarterly performance are negative but year to date silver is up 4%. This is quite a performance after last year’s 80% gain and suggests that silver is consolidating prior to further price gains in the coming months.

Thus, the precious metals are again outperforming equity indices in 2011 showing their importance as a diversification for investor portfolios.

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SILVER 
Silver is trading at $32.34/oz, €23.80/oz and £20.38/oz 

PLATINUM GROUP METALS 
Platinum is trading at $1,592.70/oz, palladium at $609.50/oz and rhodium at $1,575/oz. 

NEWS
(Reuters)
Gold steady; dollar, euro zone weigh

(Wall Street Journal)  
Banks in Scramble to Buy Gold

(Wall Street Journal)
Gold 'Lures' Central Banks

COMMENTARY
(Mineweb)
Mineweb Interview Stoeferle - Investors moving to physical gold as macroeconomic concerns fester

(King World News)  
Paul Brodsky - Gold Trading at 80% Discount to Intrinsic Value

(GoldSeek)
Gold & Whirlwind Crisis

(King World News)
Gerald Celente - MF Global...What about Gold ETF GLD & HSBC?

(ZeroHedge)
Watch Nigel Farage Dance On The Euro's Grave

(ZeroHedge)
 "The Entire System Has Been Utterly Destroyed By The MF Global Collapse" - Presenting The First MF Global Casualty

(Bloomberg)
Video: Grubb Says European Debt Crisis Boosting Gold Demand

 

 


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