News and gold strategy

Gold Finished Sharply Lower – May Fall Further in Coming Days

21 Jan 2011	1st resistance	2nd resistance	3rd resistance
Today’s resistance US$	1363	1381	1391
	1st support	2nd support	3rd support
Today’s support US$	1336	1325	1308
Today’s pivot point US$	1353

The Day’s Story:

Gold finished sharply lower yesterday and fell below critical support level of $1350-52. Gold declined to its two month low as dollar recovered some of its lost ground at the back of better than expected U.S economic data.  Some sell stops were also triggered - automated orders investors use to lock in their profits which is expected on a day like this as price breached two important support levels. Commodities markets also came under pressure due to Chinese inflation and GDP data yesterday. Although numbers came better than market expectations but heightened speculation that China's authorities will take further steps to tighten its monetary policy fueled yesterday's sell off.

Commodities received another major blow by Brazil’s move to hike its interest rate by 50 basis points in an effort to tame inflation. Gold has long been considered as a hedge against inflation. In real sense it is a hedge against negative real interest rates, the inflation rate minus the interest rate. A negative interest rate situation emerges when the local currency is worth less and gold, which provides no dividend or interest, retains its value and is worth more. Meanwhile holdings in SPDR gold trust, largest gold backed exchange traded fund fell to their lowest levels since May 2010.

Bargain hunters who generally come to rescue bullion at price dips stayed at sidelines pondering at what price precious metal would be a best buy. Gold, which rose 30 percent last year, has fallen 5 percent this month as investors took profits and put more cash into assets such as equities and industrial commodities. Gold is headed for the first monthly loss since July after a 10-year advance.

Stock markets in U.S trimmed their earlier losses and ended marginally as technology stocks remained weak and market worried over the growth prospects of Chinese economy. Dow Jones closed down 3 points at 11822.8; S&P 500 ticked down 1 point to finish at at 1280 while NASDAQ declined 21 points to finish its day at 2704.  Before starting bell, a report showed initial jobless claims dropped 37,000 to a total of 404,000 in the latest week, much better than analysts’ expectations. The Federal Reserve Bank of Philadelphia’s index of manufacturing activity for month of January in the region dipped a bit less than expected. A separate report revealed Sales of existing homes jumped 12.3% in December to a seasonally adjusted annualized rate of 5.28 million, beating estimates of 4.88 million. Yesterday’s calendar was concluded with another positive piece of economic news as the Conference Board reported a 1% increase in its index of leading economic indicators for December, ahead of the consensus calling for a rise of 0.6%. Stocks in Europe also ended lower with Britain’s FTSE 100 closing down 1.8%, DAX in Germany finished with the losses of 0.8% and France's CAC 40 fell 0.3%.

Market has been keeping a close eye at Chinese President’s 4 days visit to U.S in which among other important issues, Yuan devaluation talks will take center stage. In recent developments, both countries have reached billions of dollars worth of deals to boost economic co-operation. Nothing particular has been said in relation to Yuan valuation although a group of Senators in U.S has been urging President Obama to increase pressure on China to appreciate its currency. Yuan appreciation could have serious consequences for gold lovers in China as stronger Yuan will hurt Chinese exports and will leave less money in their pockets to shop for gold.

U.S. dollar index, which measures the dollar against six major currencies, rebounded from its recent losses after hitting fresh two months low a day earlier. A slew of better than expected economic data from U.S helped the dollar and took away some of investors’ motivation to own gold. Euro ended modestly higher against greenback as European common currency continued to be favored by investors after successful bond auctions of debt stricken countries in recent days. Investors have also been buying euros in anticipation that European officials will reach a concrete solution to navigate the debt crisis, which has plagued the Euro and economic recovery in the region for most part of last year. Dollar’s near term technical outlook remains bearish and further decline in U.S currency could limit the losses in precious metal.

Gold's average hourly inverse correlation with the dollar remained near its strongest level in about a week. Dollar denominated assets tend to move higher at dollar weakness as it makes them cheaper for holders of other currencies. But gold and dollar can break away from that norm at times of heightened economic uncertainty, which had been the case for most part of last year.

What Next?

No economic data from U.S is on the cards in today's session so expect quiet Asian session. Gold's next support lies at $1330 level now that it has broken below the bottom of recent price range but a corrective pullback can also be seen in the absence of any catalyst. As always, keep an eye on dollar's move for further clues.

Gold purchase in China and other Asian nations celebrating Chinese New Year rises to its peak during this period and that could provide much needed push to bullion prices in coming days. Latest dip in prices have attracted many buyers from China ahead of their New Year celebrations and similar trend is expected to continue until first week of February when Year of Rabbit kicks off.

Options expiration will occur next week that could cause high volatility as traders either let their contracts expire or roll them over.

Yesterday’s Price Action:

Gold price started its Asian session with minor losses in a quiet trading. Gold spent most of its time in red zone after hitting its intraday high of $1371 an ounce very early in the session. Gold fell deep into red when markets in Europe started their trading day and hovered around its critical support levels during early European trade. Bullion losses were accelerated as data from U.S started filtering in. Gold remained under extreme selling pressure in early hours of U.S trade and fell to its two months low of $1343.1 an ounce. Gold spent much of the U.S session in seesaw mode and finished its day with heavy losses at $1347.4 an ounce.

Other Metals:

Silver futures for March delivery closed down 133 cents to $27.47 an ounce on Thursday.

Platinum futures for April delivery fell $19.50 to $1,818.60 an ounce on NYMEX.

Palladium futures for March delivery fell 3.90 to $815.85 an ounce.

N.Y. Copper for March delivery closed down 10 cents $4.27 a pound on Thursday.

Gold (News and Views):

      February Comex gold closed down 23.70 at $1,346.50 an ounce on Thursday.

      The London P.M. gold fixing was $1,345.50 on Thursday compared to its previous P.M fixing $1,372.00.

      The world’s largest gold exchange-traded fund, New York’s SPDR Gold Trust, said its holdings fell to

1251.433 tons on January 20th.

      The dollar index, which measures the U.S. currency against a basket of six major currencies, rose by 0.18 to 78.81 on Thursday.

      Crude Oil for February delivery fell $1.27 to $89.59 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.

      Turnover in the U.S. futures market was stronger than usual. COMEX gold totaled 260,000 lots, up two-thirds from the 30-day average, and volume in COMEX silver was about 50 percent higher, preliminary Reuters data showed.

      The gold-to-silver ratio, the number of ounces of silver needed to buy an ounce of gold rose to a near two-month high at just below 49, showing that silver is underperforming gold in a falling market.

Factors Affecting Gold Price Yesterday (Analysts View):

In the short term, some of the flood into the gold from the European crisis has subsided somewhat. We are poised for a decent-size correction here in all risk markets, and gold is getting caught up in that," said James Dailey, portfolio manager of the Team Asset Strategy Fund.

Investors seemed to also be dumping their gold trades, possibly for other riskier assets. "The ETFs have lost nearly 50 tons [in the past month]," says Jon Nadler, senior analyst at Kitco.com. "We have seen the HSBC absolute return fund scale back its gold holdings by 50% in the last month." The day after a big selloff has typically been met with bargain hunting for the physical metal.

Any big selloff in gold also triggers sell-stops in which traders sell to lock in gains. "Support was $1,360 and $1,350," says George Gero, vice president at RBC Capital Markets,

Gold broke below support around the $1,360 mark, which may also have trigger some technical selling, said Carlos Sanchez, a director at CPM Group in New York. Still, the metal’s “long-term trend remains intact,” he added.

“Gold’s rally is just about over,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “Everybody’s getting out. The dollar’s up nicely, and commodity prices have all been too high.”

“Look for acceleration on the downside,” Kaplan said. “Historically, when gold prices go down from the highs, they fall precipitously.”

Gold Future Outlook:

"[but it] now looks like [a] wider trading band at $1,325 support, still the $1,420 area looks hard to break out of on the upside." Gero thinks that Friday could hurt as well as gold prices see some margin selling and the "last of the rollover into April contracts."

"I think investors are looking for confirmation that real interest rates are going to remain low," says Nick Brooks, head of research and investment strategy for ETF Securities.

Brooks thinks that rates will remain low despite any hikes, but that gold investors will be tortured by the day-to-day worries and speculation. "With governments needing to tighten on the fiscal side ... it's pretty clear that central banks are going to have to target low real interest rates even if the growth numbers look a little bit better than in the past."

Gold could be back trading around $1,400 an ounce as early as next week as problems such as Europe’s sovereign-debt crisis, fiscal policies in the U.S., and inflationary pressures in developing countries “have not gone away,” Carlos Sanchez said.

Australia and New Zealand Banking Group Ltd. cut its 2011 price estimates for gold and platinum. It expects gold to average $1,453 this year, down 3.3 percent from an earlier forecast, and platinum to average $1,886 an ounce, 3.2 percent lower, analysts Mark Pervan and Natalie Robertson wrote in a report today.

On technical charts, a new downward trend could be forming for the U.S. February gold contract after prices broke below their 100-day average to hit a two-month low on Thursday.

"For the past few weeks, we are seeing a series of lower highs and lower lows forming on the charts. Technically, this suggests a new downward trend is forming," said Adam Sarhan, chief executive of New York-based Sarhan Capital.

Technical Analysis (by Jim Wyckoff):

Technically, February Comex gold futures bulls faded further Thursday, on a near-term basis. A bearish head-and-shoulders top reversal pattern is playing out on the daily bar chart. The gold market bulls do still have the overall longer-term technical advantage, but need to show fresh power soon to regain some near-term technical momentum and avoid more serious chart damage being inflicted. More near-term chart damage would be inflicted if prices closed at a bearish weekly low close on Friday.

Gold bulls' next near-term upside technical objective is to produce a close above solid technical resistance at this week's high of $1,378.90 in February futures.

Bears' next near-term downside price objective is closing prices below solid technical support at the $1,330.00 area.

First resistance is seen at $1,352.70 and then at $1,360.00.

Support is seen at Thursday's low of $1,342.40 and then at $1,335.00.

Wyckoff's Market Rating: 6.0.

Daily Gold and Silver Expected Range:

Gold: US$1330- $1368

Silver: US$26.60 - $28.40