Bullion Weekly

January 17, 2011 - Provided by Bullion Weekly from www.thebulliondesk.com

 

Last Week

• Bullion prices started to consolidate last week at lower levels but, once support had been found around $1,353 per ounce for gold and $28.34 for silver, buying soon emerged and the rebound then attracted even more buying. Indeed, the speed of the bounce suggested bargain hunters came back into the market with determination, which was enough to lift gold prices to $1,392.50 and silver to 29.81.
• But successful debt auctions in Portugal, Spain and Italy boosted the euro. Although that led to dollar weakness, which is normally a bullish factor for gold and silver, it did not have a positive effect on bullion prices this time.
• Fewer concerns about EU debt translated into reduced need for safe-haven investments, which prompted liquidation selling across the metals. The week ended with the dollar under pressure — the dollar index was around 79, the euro either side of 1.3400, gold at $1,360.50 and silver at $28.325.
• An increase in geopolitical tension after the overthrow of the Tunisian president has not yet boosted gold prices but the situation must be closely monitored. If the tension spreads to other Middle Eastern states, especially oil-producing countries, gold may rise as a hedge against an escalation in geopolitical risk.
• The mood turned less bullish last week when investors started to take profits. Across the ETFs we follow, gold holdings dropped 17 tonnes and holding of silver fell an estimated 390 tonnes. In addition, funds cut their net long gold position by 24,946 contracts, a drop of some 12 percent over the week. It will now be interesting to see at what price the longs start to buy again.

The Week Ahead

The Ecofin meeting of EU economic ministers on Tuesday is likely to affect bullion trading at the start of the week and its outcome is likely to influence prices over the week as a whole. But a swathe of economic data is also due this week, we note, which could well influence sentiment.

Comments by EU economic ministers have raised speculation that the EU could expand the existing bailout package and even cement it as a permanent bailout mechanism by March. This renewed optimism over the EU's latest attempt to curtail the crisis has removed some of gold's flight-to-quality appeal in the short term.

This week's heavy economic data load is likely to trigger considerably volatility in the currencies but, as we saw last week, the usual inverse relationship between gold and the dollar has been strained; the dominant factor in bullion has been liquidation selling.

Overall, we see bullion under pressure again this week while the market adjusts to the possibility that the risks from the sovereign debt crisis might have lessened. EU sovereign debt CDS spread movement could therefore be a good indicator for gold in the short term, we suspect.

Focus – Reduced Need For Safe Havens

The EU sovereign debt crisis has had two distinct phases — the first was the Greek bailout (February-June) and the second was the Irish bailout (mid-October-December 2010).

Looking at prices in dollars (the red line on chart, right) and the euro (the black line), gold in both currencies had a high correlation rate during and after each of the bailouts. Between these periods, the correlation lessened: gold in dollars continued to rally on QE2 speculation while gold in euros consolidated.

Gold dollars/oz and gold euro/oz both peaked recently on January 4 and have since traded lower in tandem — similar to the aftermath of the first bailout.

Gold euro/oz has led the decline with a high-to-low drop of 5.5 percent, while gold in dollars has fallen 4.5 percent, which indicates that investors have felt less of a need for safe havens. Chinese and Japanese support for the debt-plagued EU nations and comments from Germany hinting that the EU bailout fund could be expanded seem to have buoyed broad market confidence. This culminated in relatively successful auctions of Portuguese, Spanish and Italian debt last week.

Gold could be set to continue lower in the near term, especially with confidence in the US recovery also soothing concerns about the aftermath of QE. Indeed, the fact that bullion has sold off while the dollar has weakened suggests profit taking and reduced interest in gold overall.

But we think this correction could be relatively short lived for several reasons: first, an increased bailout fund increases liquidity but does not solve market worries over sovereign debt; second, the physical market could well become a buyer again and set a floor for the market; and third, we expect inflationary concerns to emerge as a bullish factor for gold before long.

Technical Analysis – Gold

Gold closed negatively on Friday and has continued lower this morning. The stochastics are bearish — the K% line is in the weak range.

Prices closed below the 7 DMA, 21 DMA and 50 DMA, leaving support from the 100 DMA at $1,349. Gold also found support from the lower Bollinger bands on Friday, we note.

The metal closed below and failed to retake the neckline of the head-and-shoulders formation at $1,390, which suggests a downside target of $1,305.

Gold has other long-term trendline support at $1,360 and trendline resistance at $1,370-$1,390. Support for the metal is now seen at $1,360-$1,355-$1,352-$1,348-$1,340-$1,325-$1,319. Resistance is seen at $1,365-$1,378-$1,393.

Overall, we remain bearish in the short term but bullish in the medium-to-long term. We also think that this downside correction could well be constructive.

Technical Analysis – Silver

Silver closed negatively on Friday and continued to retrace this morning. Silver closed below the 50 DMA last week, which was bearish, but found support from the bottom of the Bollinger bands. This morning the momentum indicators remain weak.

Silver found support from the 23.6% Fibo level at $23.04 this morning. It has fallen below the bottom of the old triangle formation and now has trendline resistance at $28.27-$28.79-$30.09-$30.49. Other support is seen at $27.85-$27.76-$27.56-$26.91.

Overall, we are still bearish on silver and think there could well be further losses on a break below $28.00. In the wider picture, we have turned neutral.

Market Drivers

Conclusion

Gold and silver prices have started to correct on profit-taking, which has been sparked by a pick-up in optimism over a recovery in the US and greater confidence that the EU governments, helped by promises of support from China and Japan, will be able to handle the sovereign debt crisis.

These developments, plus the successful debt auctions last week, have provided some respite but how long this lasts remains to be seen. Some investors are adjusting their exposure to safe havens, however, which is likely to keep bullion prices under pressure for a while.

We expect recent debt actions have just bought governments more time; we doubt the problems have gone away and, when they return, the need for safe havens will also return.

And if growth does start to recover, inflation is likely to become an issue given all the liquidity in the markets, which is likely to boost demand for gold and silver again.

We would also keep a close eye on the geopolitical events in the Middle East Middle — if unrest spreads, it could start to worry the oil market. Unrest in the Middle East was, after all, one of the main triggers of the 1980s spike in bullion prices.

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