Bullion Weekly

June 27, 2011 - Provided by Bullion Weekly from www.thebulliondesk.com

Last Week

• Bullion prices started the week positively, helped by a weaker dollar and safe-haven demand while traders awaited the outcome of Greek Prime Minister George Papandreou's no-confidence vote, with the country's political leaders continuing their efforts to secure additional financial aid and avoid a default.
• Gold worked its way towards the top of its recent range of $1,510-1,550 per ounce on Monday and Tuesday and continued to edge higher on Wednesday despite Greek default concerns easing slightly when Papandreou's cabinet won the confidence vote, albeit with a slim majority.
• The yellow metal threatened to stage an upside breakout during Wednesday's US session after pushing up through previous resistance to touch $1,558.50, its best since setting its lifetime high on May 2. But despite downwards revisions to the Federal Reserve's quarterly growth and employment estimates and the Fed indicating it would maintain its current monetary policy, the lack of upside follow-through triggered long liquidation.
• Further pressure from oil led gold back to $1,510 on Thursday after the International Energy Agency said it would release 60 million barrels of its stocks into the market. Technical selling kept gold under pressure over the rest of the week, leading to a brief test below $1,500 shortly before closing around $1,501 on Friday, down 2.5 percent.
• As with gold, silver started more firmly before tracking lower, eventually breaking out of its recent range to the downside during electronic trading late on Friday, touching its lowest since mid-May.
• Gold set new lifetime highs in sterling and rupee terms on Wednesday shortly before correcting lower.
• Russia's central bank added a further 6.2 tonnes of gold to its holdings during May, it said; the bank has added approximately 46.6 tonnes of metal so far this year.

The Week Ahead

Markets will be anxious to hear the outcome of the vote taking place in the Greek parliament on Wednesday. Failure to pass the Troika's austerity measures will make a Greek default by start of July highly probable; this would have massive implications for the global financial markets.

Market sentiment will also be heavily driven by a host of economic data releases. US data due to be published this week includes Friday's ISM manufacturing PMI, housing data, consumer sentiment and inflation expectations.

We expect further weakness in data to have a greater negative effect on asset prices. Outside of the US, PMI data from both China and Europe is scheduled as well as EU flash CPI data, which could give some insight into the ECB's next move after July.

The lowering of expectations on US and global economic growth, combined with the potential for a default in Greek debt has rattled markets. Any additional increase in bearish sentiment could actually negate the negative effects of a stronger dollar on bullion, allowing them to rise in tandem.

Focus – How gold's performance compares with mining equities

This week's focus will look at how gold compare with gold mining equities given recent market moves.

Until the creation of gold ETF/ETC products, investor access to the gold market was restricted to trading futures contracts on exchange platforms or buying physical material in either coin/bar form or through an unallocated account.

While trading futures may suit some investors and others enjoy the security of holding physical material, they each have drawbacks – the need to update margin requirements and roll positions forward to avoid taking delivery or to provide suitable secure storage, for example.

To avoid this, other investors have opted for gold mining equities; but while both gold and two of the major mining indices – Philadelphia Gold and Silver Index and the Amex Gold BUGS Index – have enjoyed solid returns over the past 11 years (as the accompanying chart shows), there are distinct difference.

The gold price is much more fundamentally driven than equities, for example, with only a finite amount produced each year and supplies very inelastic to price fluctuations due to the delay in establishing new supplies. Mining stocks by contrast are paper assets; while they may represent ownership in real gold mines, companies can issue new shares at will and new companies can form and float at any time.

Indeed, it is the lack of supply elasticity in gold that marks the difference for investors between gold and gold mining stocks; this is perhaps best illustrated by the movements of both the XAU and HUI indices over 2007/8 when the credit crunch and the collapse of Lehman Brothers sent stock markets tumbling. Both indices fell more than 25 percent on the year; gold, by contrast, was one of only a handful of assets that gained ground, reflecting the underlying reason investors opt for gold over paper, which is as a safe haven.

Technical Analysis – Gold

Gold closed negatively last week, forming a heavy bearish engulfing pattern. In doing so, it closed below our long-term up channel of $1,532-$1,612 and the 5 WMA at $1,521, which was our cue to turn negative in the short term. The stochastics and RSI are now neutralnegative, while the Parabolic SAR has turned negative.

Gold has support from the 20 WMA at $1,480 and at $1,471-$1,462. It has resistance from the 5 WMA and from the bottom of the up channel of $1,532-$1,612.

We are now negative on gold in the short term and think prices could look to drop slowly and test $1,471-$1,462. But this price weakness is short term in nature; we therefore think the dips will be well bought. In the long term, we remain bullish based on gold's trading in the long-term up channel of $1,425-$1,664.

Technical Analysis – Silver

Silver closed negatively last week, forming a strong bearish engulfing pattern. It also closed below the triangle formation of $36.88-$37.87 and the bottom of the long term up trendline at $35.09.

With the stochastics in the weak range and the RSI trending lower, prices could continue to fall in the short term. Evidence of this weakness is silver breaking below the 50% Fibonacci retracement level at $33.78 this morning.

Overall, we are bearish on silver in the short and medium terms but remain bullish in the longer term. Prices could continue to come off in the near term; the cue for this would be a close below the 50% Fibo, which could trigger a run down towards $32.33-$31.25-$29.99 (61.8% Fibo).

Market Drivers

Dollar Index The dollar index is repeatedly challenging the down trend line that has dominated the chart over the past 12 months. Resistance is evident around 76. A move up above 76.37 and then the former support line at 76.83 would suggest growing bullish sentiment for the dollar, which is likely to weigh on commodities.	Gold & Silver ETFs Investment demand for gold and silver ETFs edged higher last week but, interestingly, the overarching trends are opposite. Gold holdings in ETFs are edging higher while silver holdings have been in decline. The rise in the gold/silver ratio also highlights this to some extent. All in all, investment interest still seems to be lacking.
Funds Fund investors raised their exposure to gold, with the net long position rising 11,532 contracts as of June 21. Interestingly, that was the day before last week's price peak at $1,558.50 – given that prices have since fallen, it will be interesting to see the extent of the long liquidation. The silver net long fund position climbed 2,736 contracts.	Gold : Silver Ratio The gold/silver ratio is trying to extend gains, which may well suggest that the consolidation within the triangle pattern was just a half-way pause. Another run-up in the ratio would suggest weaker bullion prices, with silver leading the retreat. The ratio first needs to clear the May peak at around 75.80 to suggest the upward trend has further to run.

Conclusion

We thought last week that there was risk on the downside for bullion prices in the short-to-medium term due to broad-based risk reduction. This was the case to some extent, with equities and commodities pushing lower, while the dollar has been bid.

Greek debt and the potential for contagion remain a worry – a financial crisis in Europe could yet develop – but we will have to see whether the Greek government passes the austerity package on June 29 before we get clearer insight.

If it votes in favour – meaning the country qualifies for a second round of bailout money from the IMF and EU – more time will have been bought. But if the package fails or if a rollover deal with European banks is deemed a default by the credit agencies, the EU debt situation could trigger further broad market risk reduction. This could initially carry bullion prices down with it.

The ending of the second phase of quantitative easing in the US (QE2) could also be a negative for markets in general.

So there is risk on the downside in the short term, we feel, but we remain bullish for gold over the medium-tolonger term and expect dips to attract good volume buying. In addition, once bullion prices find a base and start to rebound, we would expect investment buying to join the rally too.

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