Gold Ended Marginally Down as Economic Data Boosted Risk Appetite
| 13 Dec 2010 | 1st resistance | 2nd resistance | 3rd resistance |
| Today’s resistance US$ | 1395 | 1403 | 1415 |
| | 1st support | 2nd support | 3rd support |
| Today’s support US$ | 1375 | 1363 | 1355 |
| Today’s pivot point US$ | 1383 | | |
The Day’s Story:
Gold had another roller coaster session on Friday, trading both side of zero line as market reacted to another rate hike for Chinese banks reserve rate requirement. Gold also suffered as better than expected U.S data boosted investors’ risk appetite. Rising treasury yields also lured investors to take some cash out of bullion and invest in Government’s debt. Gold ended its day with marginal losses but weekly losses extended to over 2%, making it biggest decline for a week in two months. Chinese data over the weekend suggested inflation peaked above 5% for first time in two years but surprisingly key interest rate was put on hold which may restore some confidence among gold bulls this week. Gold has lost $36 dollars since it peaked to its all time high last week but is up by 26% this year and looks well set to record its 10th annual gain.
Stocks in U.S ended higher on Friday as stronger than expected economic data calmed jittery investors who then decided to opt for riskier assets. The Dow Jones closed up 40 points at 11406 while S&P 500 finished 7 points higher at 1240 and NASDAQ rose 21 points to finish its day at 2637. Market welcomed the release of a report by Commerce department that trade deficit narrowed by 13% to $38.6 Billion in October, making it the lowest level in 9 months. In another report, University of Michigan Consumer Confidence rose to 74.2 against analysts’ expectation of 72.5. Stocks in Europe however, had a mixed day with Britain's FTSE 100 rising 0.09%, the DAX in Germany rose 0.6% while France's CAC 40 closed marginally down by 0.02% to finish the day.
Over the weekend, China reported that inflation rose to 5.1% during last month, a level which has not been seen in last two years. China increased its Reserve rate requirement for its banks on Friday effective from 20th of December for third time in last five weeks but left its key interest rate unchanged over the weekend. Most precious metals including gold dipped lower on Friday due to concerns that China will issue another interest rate hike over the weekend as government leaders and the heads of state-owned businesses meet for a three-day conference to determine the Asian nation’s economic policy for 2011. Investors had been expecting a more aggressive interest rate increase. So on the one hand, gold prices were seeing a bit of relief at the more tame measures, but gains were tempered on concerns that a reserve ratio increase won't be enough to severely tame inflation.
A slew of important economic data is due to be released this week. After a quiet Monday at economic front market will have two important pieces of data to judge on Tuesday as retail sales and PPI figures will be released. Later that day, U.S FOMC will announce its interest rate decision. Consumer prices and Industrial Production figures will be out on Wednesday. Some important construction data along with Initial jobless claims numbers will determine Thursday’s trading before a quiet Friday. In addition, the Federal Reserve will release a policy statement on Tuesday.
U.S. dollar index rose marginally for another day, making it 5th day of gains in a row. Euro traded on both side of zero line and ended marginally lower, paring most of its intraday losses in the final hours of the session. U.S dollar’s recent gains are partly because of market’s realization that U.S economy’s outlook in 2011 will be improved due to some positive data released last week. Last week, market cheered the extension of Bush-Era tax cuts by President Obama but received a setback as House Democrats rejected the plan later in the week. Another view is by extending Bush-era tax cuts will force Government to borrow more which will hurt dollar’s prices in the long run. Gold and dollar’s inverse correlation normalized on Friday as both moved in the opposite directions. Any relief in euro crisis, similar to what were seen during last couple of weeks, will push the euro higher and the dollar lower and be good for gold, as the two move inversely to each other. If a debt crisis flares up again and default is floated as an option for some countries, the euro could plummet in value and take gold with it. Safe haven buying, however, should create a floor of support for gold prices.
Gold prices could be more volatile towards the end of the year (similar to what we have been seeing in last few sessions) as profit-takers contend with "bargain-hunters" and those wanting to add gold to their portfolio before the New Year. During December, those traders selling gold future contracts must also deliver physical gold and the longs must pony up the cash which increases liquidity and volatility in the market. However, the end of the year traditionally brings with it less liquidity and greater potential for rapid shifts in price direction, meaning that gold could endure more setbacks before resuming its uptrend.
Yesterday’s Price Action:
Gold price cut some of its previous session’s losses in early Asian trading. Gold moved marginally higher during Asian session but remained capped in a tight trading range. Gold continued to trade in a narrow range during early European session as investors decided to watch from sidelines. After peaking to its intraday high of $1392.3 an ounce, yellow metal was hit by strong round of profit taking just before U.S market open. Gold nose dived in early U.S trading hours and fell to its intraday low of $1372 an ounce. Bullion stabilized and pared most of its intraday losses during rest of the session and finished its day just below its previous close at $1385.6 an ounce.
Other Metals:
Silver futures for March delivery closed down 21 cent to $28.61 an ounce on Friday.
Platinum futures for January delivery fell $3.60 to $1,675.30 an ounce on NYMEX.
Palladium futures for March delivery rose by $8.90 to $732.70 an ounce.
N.Y. Copper for March delivery closed up 2 cents to $4.11 a pound on Friday.
Gold (News and Views):
February Comex gold closed down $7.90 at $1,384.90 an ounce on Friday. The London P.M. gold fixing was $1,375.25 on Friday compared to its previous P.M fixing $1,391.25. The world’s largest gold exchange-traded fund, New York’s SPDR Gold Trust, said its holdings fell to 1293.778 tons on December 09 down from 1295.296 a day earlier. The dollar index, which measures the U.S. currency against a basket of six major currencies, rose by 0.05 to 80.08 on Friday. Crude Oil for January delivery fell $0.62 to $87.75 on Friday on New York Mercantile Exchange. Gold hit its true peak on Jan. 21, 1980, when it rose to $825.50 an ounce. Adjusted for inflation in 1980 dollars, that translates to an all-time record of $2,184.08 an ounce, in 2010 dollars. GoldCore looks for silver to outperform gold, with the gold/silver ratio set to target 40, the level from 1998 when Warren Buffett was accumulating the metal. The ratio measures how many ounces of silver it takes to buy an ounce of gold, and a decline in the number means silver is outpacing gold. “The gold/silver ratio at 48.1 is sustainable as in gold and silver's last bull market in the 1970s, the gold to silver ratio was between 18 and 48 and averaged around 30,” GoldCore says. “In the last 40 years, a very significant amount of silver has been consumed in consumer and industrial applications. Gold's consumption is tiny in comparison and this would suggest that the very high gold/silver ratio of the 1990s and up until recently may have been a historical anomaly.” Factors Affecting Gold Price Yesterday:
“The push didn’t bring in any momentum (buyers) and the volume wasn’t there. That was a big indicator gold was not going to hold its levels. We drifted back to where we ought to be,” said Frank Lesh, futures analyst at FuturePath Trading.
Tuesday-Friday was our strongest three-day run of physical sales to India since late October, when gold was trading around $1,320," said UBS analyst Edel Tully.
"Physical buying from India and other centers this week was likely one of the reasons more investor longs didn't liquidate, as strong physical demand is often a sign that a downtrend is about to bottom."
Suki Cooper, precious metals analyst at Barclays Capital, said profit-taking pressured gold but economic uncertainty kept longer-term investment demand stable across precious metals.
"Gold has still found healthy physical demand upon price dips even after the seasonally strong period for demand, but perhaps more importantly, we haven't seen a surge in scrap supply," Cooper said.
BNP Paribas analyst Anne-Laure Tremblay said year-end book squaring was also aiding downside pressure in gold. "Investors who have performed well this year may be looking to protect their gains rather at this stage," she said.
Earlier, China's central bank said it was raising lenders' required reserves by 50 basis points, effective Dec. 20, its sixth official increase this year.
"Tighter global monetary policy is bad for gold, and this is tighter monetary policy. But only slightly, and in one part of the world, so the impact is not huge," said analyst Matthew Turner at Mitsubishi Corp.
Gold Future Outlook:
Lesh said barring any unforeseen circumstances, he expects gold will likely hold in a fairly narrow $50 trading range between $1,350 and $1,400 between now and the rest of 2010.
Lesh said it’s likely a lot of the major players have closed most if not all of their books for the year, taking handsome profits. Once the New Year starts, it’s likely they’ll return to the market. He said the events that will support gold are not going away: problems with the Eurozone, central bank buying, concerns about debt levels and fiat currencies.
Commerzbank cites ongoing debt issues in Europe and Vietnamese demand as supportive influences for gold, which has backed down from a record high hit earlier this week. “The downgrading of Ireland’s credit rating yesterday by rating agency Fitch had been largely expected by market players, so the implications for gold prices were limited,” Commerzbank says in a research note. “Gold should remain well supported at its current level as long as the debt crisis in euro-zone peripherals continues to simmer and make gold look attractive as a ‘safe haven.’”
Tom Pawlicki, precious metals analyst at MF Global, said a rate hike in China could be bearish for gold and other precious metals as it “would diminish the ability of Chinese consumers to use excess income on investments like gold as well as their ability to buy other commodities. If the price of necessities like oil falls as a result, gold could suffer secondary reverberations from the perceived lack of inflation. A hike in policy would be justified given China’s currency peg to the dollar, which enables them to import accommodative monetary policy.”
William Adams, head of research for FastMarkets.com, writes, "We are bullish medium-to long term ... there may have to be a lot more investment buying and financing deals to keep prices up." Adams sites European austerity measures and stricter fiscal policy in China as a trigger for a potential global slowdown.
Technical Analysis:
Looking at technical charts, gold has strong support at $1,375, said Ralph Preston, senior market analyst with Heritage West Financial. Preston also thinks that gold will need some sort of new catalyst to push it out of its current range, something beyond what’s in the news now.
He said it looks as if gold might be trying to build another head-and-shoulders pattern on daily technical charts, with the left shoulder the highs from November and the head the high of this week. If gold trades in a sideways pattern that could be a sign this chart pattern is forming. “We have to let the numbers direct us,” he said.
If gold either closes below $1,375 or trades under $1,350, it could take a trip down to $1,315, Preston said. On the upside, if gold can close over $1,410 it could try to test the recent high. A close over $1,426 could mean a test of $1,460. However, Preston said that a rally is less likely because of the lack of fresh news and the fact that it is the end of the year, which can also mean less trading volume.
Gold and Silver Expected Range:
Gold: US$1370- $1405
Silver: US$28.00 - $29.50
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