Posted Moderate Gains as Bargain Hunters Kept Precious Metal in Green Zone
| 09 Dec 2010 | 1st resistance | 2nd resistance | 3rd resistance |
| Today’s resistance US$ | 1394 | 1401 | 1408 |
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| 1st support | 2nd support | 3rd support |
| Today’s support US$ | 1380 | 1373 | 1365 |
| Today’s pivot point US$ | 1387 |
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The Day’s Story:
Gold rose moderately on Thursday as bargain hunters benefited from recent dip in prices in a roller coaster session. Volume was thin and gold remained in a very narrow trading range throughout the session. Support for gold came as Fitch downgraded Ireland credit rating spiking the Euro zone’s debt fears. Gold demand was also boosted as Bush-Era tax cuts were halted due to Democrats disagreeing with President Obama’s deal with Republicans over the issue. Meanwhile situation in Korean peninsula took another turn as China showed its full support for North Korea after meeting its officials while U.S and South Korea were expecting a harsh word from China to calm North Korea’s aggression. Gold gains however, were capped due to ongoing speculation of Chinese key interest rate hike on the weekend. Gold has lost $34 dollars since it peaked to its all time high two days ago but is up by 26% this year and looks well set to record its 10th annual gain.
Stocks in U.S ended mixed on Thursday as stronger dollar put pressure on commodities stocks while financials and tech stocks emerged as winners on the day. The Dow Jones closed down 2 points at 11370 while S&P 500 finished 5 points higher at 1233 and NASDAQ rose 7 points to finish its day at 2617. Investors showed satisfaction over slightly better than expected initial jobless numbers which fell to 421000. Market was expecting numbers to fall at 423000 levels. Separately, the Commerce Department said wholesale inventories rose 1.9% in October against the market consensus of 0.7% gain. Stocks came off their earlier higher levels as tax deal came to standstill because House Democrats are not in favor of President Obama’s plan in the current form. Meanwhile European debt saga still remains at the backdrop as rating agency Fitch downgraded Ireland credit rating to BBB+, sparking fears over Euro zone’s debt crisis which doesn’t seem to go away. Stocks in Europe however, had a mixed day with Britain's FTSE 100 rising 0.23%, the DAX in Germany dipped 0.17% while France's CAC 40 rose by 0.68% to finish the day.
Meanwhile, markets continue to speculate on China’s key interest rate hike which contributed to gold’s demise in last two sessions. China has already hiked its rate in October and raised Reserve Requirement ratio for its
banks twice in November in order to curb rising inflation. Some analysts are expecting China to raise its
interest rate as early as this weekend where others are expecting it early next year. If China decided to surprise
the market before the end of this year that will be a bearish sign for precious metal and will trigger some profit taking and panic selling.
This week’s economic calendar has been fairly light, with the trade balance and consumer confidence out on Friday. Consumer confidence could be given more credence, in a way to compare some of the early views toward holiday spending. European debt problems which were offset by some important economic releases last week may come to forefront once again. Bullion which has been hit by heavy profit taking in last two sessions after peaking to its all time high of $1431 an ounce will remain well supported due to ongoing European debt saga, situation between North and South Korea and fresh talks about possible FED’s QE3 measures. Although China’s move to stabilize inflationary pressure is bearish for gold as it reduces its appeal as a hedge against inflation but analysts believe any such move will not hurt gold prices to a great extent in medium term and there will always be buyers at the other end of a dip in prices.
U.S. dollar index rose marginally for another day, making it 4th day of gains in a row. Euro traded on both side of zero line and ended marginally lower, paring most of its intraday losses towards the end of the sessions. U.S dollar’s recent gains are partly because of market’s realization that U.S economy’s outlook in 2011 will be improved provided the fiscal legislation bill is passed by the Parliament. 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 once again took a hit as both moved in the same direction due to stronger bullion demand. Any relief in euro crisis, similar to what were seen during later part of last week, 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.
Recent Price Recap:
Gold price was boosted by Federal Reserve’s $600 Billion QE2 package in early November and crossed above
$1400 on November 8th as a reaction to that move. Price peaked to $1424 but entered a correction phase as some profit taking and book squaring sent prices to early 1300 levels. After a shallow correction, gold found support at the back of European debt contagion fears. Further support came as tensions between North and
South Korea escalated after North attacked a South Korean Island killing four marines. Gold cut most of its
losses last week but remain subdued due to concerns that China may raise its interest rate to curb rising
inflation. Stronger US dollar also put a lid on gold’s gains but Friday’s jobs numbers proved to be catalyst
Bullion had been looking for as investors seek refuge in the safety of precious metal and dumped U.S dollar. Further strength was found at the back of Fed Chairman’s comments which sent prices to their all time high level for two days in a row. Gold recent gains met with heavy profit taking and book closing by funds, diving below $1400 levels. A near term chart damage suggests market has topped in near term and some corrective pullback will test near term support levels. Expect gold price to be range bound as we are heading closer to end of the year.
Yesterday’s Price Action:
Gold price cut some of its previous session’s losses in early Asian trading. Gold moved marginally hgher during Asian session but remained capped in a tight trading range. Gold’s modest gains turned into losses as European markets started their trading day. Gold fell to its intraday low of $1380 an ounce by mid European session and after being stuck in sideway mode for most part of European trading, bullion made another move towards north just before the start of U.S session. Gold peaked to its intraday high of $1394.4 an ounce during early U.S trading hours but gave away most of its gains in the later part of the session. Gold managed to close in green territory with modest gains of 0.4% at $1386.8 an ounce.
Other Metals:
Silver futures for March delivery closed up 56 cent to $28.82 an ounce on Thursday.
Platinum futures for January delivery fell $2.50 to $1,678.90 an ounce on NYMEX.
Palladium futures for March delivery rose by $12.65 to $741.60 an ounce.
N.Y. Copper for March delivery closed down 1 cent to $4.09 a pound on Thursday.
Gold (News and Views):
February Comex gold closed up $9.60 at $1,392.80 an ounce on Thursday. The London P.M. gold fixing was $1,391.25 on Thursday compared to its previous P.M fixing $1,385.50. 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 0.04 to 80.03 on Thursday. Crude Oil for January delivery rose by $0.09 to $88.37 on Thursday 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:
Gold got some support from continued concerns about Ireland’s fiscal health, said Adam Klopfenstein, a senior market strategist at Lind Waldock in Chicago.
“Gold should remain in demand as a ‘safe haven,’ not least because of the persistent uncertainty about the debt crisis in euro zone peripheral countries,” analysts at Commerzbank said in a note to clients Thursday.
“This is no longer a buy-and-hold trade,” he said. “For the rest of the year, the bears and the bulls are going to duke it out.”
"If people don't have confidence in the value of the currency, it doesn't matter if Treasury yields go up. Because, if the currency is going to lose value, the yield has to go up significantly to compensate for any ... declining value of the dollar," said Miguel Perez-Santalla, vice president of sales of Heraeus Precious Metals Management in New York.
"People are not bailing out on gold to get into Treasuries. Gold right now is still the place for safe haven," he added.
“The bottom line is that investors are losing faith in paper money,” said Lannie Cohen, the president of Capitol Commodity Services Inc. in Indianapolis. “Gold will continue to act as the currency of choice.”
“People are happy to buy here,” said Bernard Sin, the head of currency and metal trading at MKS Finance SA, a bullion refiner in Geneva. “There’s still a lot of concern in the euro zone and the U.S.”
Gold Future Outlook:
The recent break in gold prices offers a chance to build positions, says SEB. “The gold market currently offers a substantial potential upside with a limited downside risk. When trust in both the dollar and the euro is low, there are few places to go,” the bank says. They have both a bullish strategic and tactical view on gold, noting the “frenetic money printing” in the U.S. and the European situation could turn worse, while Chinese inflation encourages hedging demand. A Chinese interest rate hike could pressure gold prices, but it is viewed as a temporary setback.
This price seesaw though should continue for the rest of the year. "Short term I think we get more of the same," says Jon Nadler, senior analyst at Kitco.com, "which is volatility [and] wild swings ... if key support levels are broken at $1,370 and lower, we could have a more meaningful correction."
Nadler suggests traders or investors who were overweight gold could lighten up on gold positions at record high prices, but he still advocates that 10% of one's portfolio be in gold for the next 20 to 30 years.
George Gero, senior vice president at RBC Capital Markets, was expecting gold futures could see more
margin selling Thursday and lower prices Friday as traders are "evening out in a down week."
“Gold should remain in demand as a ‘safe haven,’ not least because of the persistent uncertainty about the debt crisis in euro zone peripheral countries,” analysts at Commerzbank said in a note to clients Thursday.
Analysts with BMO Capital Markets say they have upgraded their outlook for gold and silver and that the metals remain among BMO's “preferred commodities.” BMO Research increased its 2011 average estimate of gold and silver prices to $1,450 and $28 an ounce, respectively. “Gold and silver price assumptions beyond 2011E have been increased on average 8.2% and 18.7% respectively…” BMO says.
Matthias Detremmerie, founder of Goldessential, says gold has “nicely bounced off a three-week-old uptrend line. However, a failure to regain past $1,400 still opens for charts to deteriorate further, targeting $1,352 as next target.” Fresh strength in the U.S. dollar could also limit recovery, he says.
Technical Analysis (By Jim Wyckoff):
Technically, February Comex gold futures this week have seen a significantly near-term bearish "key reversal" down produced on the daily bar chart, which is one early clue that a near-term market top is in place. However, solid price gains on Friday would provide the bulls with some fresh upside near-term technical momentum to suggest this week's selling pressure was just a downside price correction in an overall uptrend on the daily chart.
Gold market bulls still have the overall near-term and longer-term technical advantage. A four-month-old uptrend is still in place on the daily bar chart.
Bulls' next near-term upside technical objective is to produce a close above strong technical resistance at the all-time high of $1,432.50.
Bears' next near-term downside price objective is closing prices below solid technical support at $1,350.00. First resistance is seen at Thursday's high of $1,395.60 and then at $1,400.00.
Support is seen at Thursday's low of $1,381.10 and then at $1,375.00.
Wyckoff's Market Rating: 7.0.
Daily Gold and Silver Expected Range:
Gold: US$1370- $1405
Silver: US$28.00 - $29.50
