Bullion Weekly

October 31, 2011 - Provided by Bullion Weekly from www.thebulliondesk.com

Last Week

• Gold edged higher at the start of last week on a mix of technical short-covering, improved optimism ahead of an EU summit on the region's debts and speculation of a third round of quantitative easing (QE3) by the Federal Reserve after New York Fed president William Dudley said that it had "not yet run out of bullets" and that "the Fed is doing and will continue to do everything within its power to promote jobs and price stability".
• Steady bids helped gold reclaim $1,650 per ounce on Monday although it was capped ahead of $1,665 until Tuesday when reports that the Ecofin meeting scheduled for Wednesday had been cancelled triggered a flight-to-safety rally.
• The initial move saw gold jump $40 in a matter of minutes to reclaim $1,700 by Tuesday's close, with follow-through buying across Wednesday and into early Thursday lifting the metal to $1,728.50. Trade turned more mixed during Thursday's European session but the rally resumed later that day. Risk sentiment picked up after the outcome of the EU summit – officials agreed to boost the European Financial Stability Fund to more than 1 trillion euros from 440 billion euros and take a 50-percent haircut on Greek debt.
• Gold hit its best in a month during Friday's Asian session, touching $1,752.80, and closed the week in a steady tone around $1,745, a gain of more than six percent. Silver posted an even stronger 12-percent gain after breaching $35 for the first time since late September.
• Strong Diwali-related demand helped keep gold premiums into India at around $3 per ounce last week, although demand proved lower than some had hoped due to recent price volatility. Bombay Bullion Association president Prithvirj Kothari was quoted as saying that gold imports could rise 30-40 percent in the fourth quarter, while silver imports could spike above 4,000 tonnes this year.
• Holdings in the SPDR gold ETF rose 16 tonnes last week, the largest weekly inflow since mid-August. Available data from the funds we track showed investors added a net 20.9 tonnes of gold while net silver holding fell almost 95 tonnes.

The Week Ahead

Markets are again likely to be volatile this week while traders and investors continue to focus on global – especially Western – economic growth worries and the EU debt saga.

In the run-up to Friday's blockbuster non-farm payrolls data, markets will also pay attention to the ADP NFP number, Challenger job cuts, ISM manufacturing PMI and other important US data. PMI data is also likely to be watched closely as will interest rate decisions, central bank announcements and press conferences, with the FOMC and ECB meeting this week. This will be first rate setting meeting with Mario Draghi as ECB president.

Analysts will also be seeking greater clarity from EU politicians on how they intend to finance this latest bailout. There is the prospect for further details to emerge from the G20 meeting, which starts on Thursday. Also, given the OECD's latest grim economic forecasts and calls for coordinated growth action, investors will also be interested in the G20's communiqué.

FOCUS – Is a base in place?

Gold has been struggling in recent weeks against a backdrop of fund and investment liquidation while worries over the ability of the eurozone to contain the region's debt have leant to tighter funding costs.

This has forced traders and institutions to generate cash with liquid assets such as commodities, particularly the precious metals.

Gold, for example, fell heavily in the last week of September, trading down almost $300 at its lowest point in the month but did find strong support around $1,600 and reclaimed $1,700 last week after eurozone officials took more aggressive measures to contain the region's debt, in turn boosting risk appetite and easing the immediate demand for cash.

The question now for gold is whether it has established a base from which to extend higher.

We see little change to argue against the bullish case for gold. Mine supplies, while expanding, are failing to keep pace with demand and physical offtake remains robust despite record local prices, creating a bullish fundamental picture. Interest rates still remain at historically low levels and are likely to do so for the next 12-18 months; inflation remains a threat to many economies, while investors have looked towards gold as an alternative to fiat currencies, debased by quantitative easing.

Bearish arguments for gold include the fact producers have virtually completed their dehedging and the return of stronger dollar sentiment and the prospect of further QE by the Federal Reserve – although the longer-term effects are likely to be bullish due to growth in capital liquidity looking for a safe home.

The accompanying chart is also supportive for further price gains, with the CFTC latest data showing fund players have cut their long exposure to its lowest in two years - down 31 percent from its recent peak at the start of August. A correction of a similar scale has seen gold rally around $150 as funds rebuild their longs.

Another potentially positive implication for gold is the effect of the Greek haircut – the 'voluntary' cut rather than default may mean holders of Greek credit default swaps may not receive payouts. This could draw a new pool of investors towards more tangible safe-haven assets as faith in paper assets dwindles.

Technical Analysis – Gold

Gold closed positively last week with an imperfect shaven top and bottom. It has dropped this week and is now looking for support from the bottom of the old long term up channel at $1,717.

The stochastics and the RSI are neutral. Gold has support from the 5 WMA and 20 WMA. These WMAs are attempting to cross higher. Gold also closed above the 50% Fibo at $1,726 last week but has fallen below this level this morning.

Given last week's substantial gains, we would not be surprised by some consolidation and range-trading early in the week. But we will remain neutral-positive on the metal's outlook for now, noting that a close above $1,752 would open up $1,764 (UTL)-$1,772 (61.8%)-$1,799 as upside targets. But failure to close above $1,717 (UTL) could leave it vulnerable to further losses, with $1,681 a viable downside target.

Technical Analysis – Silver

Silver closed positively last week, having found resistance from the old triangle formation at $40.94-$35.78. This morning it opened negatively and fell below the 38.2% Fibo at $35.13.

The stochastics and RSI are neutral. Silver has support from the 5 WMA and resistance from the 20 WMA and 40 WMA, which are attempting to cross negatively. A close below the 38.2% Fibo would be negative. Support is seen at $33.54-$33.06-$32.83.

Overall, we are neutral on silver and think there is a case for some consolidation this week. We would only look to turn positive on a close above $35.13 (38.2%)-$35.78 (UTL). Upside targets would then become $36.78 (20 WMA)-$36.85 (40 WMA)- $36.97-$37.93 (50%).

But a close below $33.54-$33.06-$32.83 could suggest a deeper retracement and turn us neutral in the short term.

Market Drivers

Dollar Index Dollar weakness resulted from growing optimism that the EU debt situation would be brought under control. Despite the initial enthusiasm, we feel there is room for the euro to weaken further. The latest rebound in the dollar follows the BoJ intervention. As former hard currencies become more fiat, further monetarisation of gold should follow.	Gold & Silver ETFs Holdings in the gold and silver ETFs are diverging, with redemptions in silver while holdings in gold are picking up again. This would suggest the deteriorating economic outlook is weighing on the industrial metals, while concerns over EU debt are boosting buying of gold.
Funds The net long fund position (NLFP) on gold climbed 2,743 contracts last week but remains low. What's more, although 6,922 extra longs bought, there were also an extra 4,179 shorts. So there is not a universal bullish swing in gold for now. The swing in silver was more bullish, with 655 new longs entering the market and 15 shorts covered. All eyes are on the gold NLFP to see if it rebounds.	Gold : Silver Ratio We said last week: "We would get more bullish for gold and silver if price rebounds coincided with a falling Au/Ag ratio because it would suggest investors were keen to get back into bullion and were taking advantage of silver's relative cheapness." This was the case last week and the trend remains to the downside, while it remains bullish for bullion.

Conclusion

Bullion prices broke higher last week. The fact they managed to hold strong even when it looked as though risk appetite was growing bodes well. Indeed, we are not that surprised because we have generally seen the weakness in recent months as part of the process in which institutional investors have had to liquidate assets to raise cash. If the EU rescue plan has made the markets safer, another 'dash-for-cash' seems less likely.

The net long fund position has dropped significantly but it seems to have fallen back to a base level that might represent the long-term bulls. ETF buyers are also generally thought of as being in for the long term and we note that redemptions in the ETFs have generally been light. So those still holding gold are probably in for the long term, we feel, and we would not be surprised if investor buying returns now that concerns over the EU debt situation have lessened and the risk of another broad-based meltdown have receded.

After all there is still much uncertainty around in the financial markets and, with former safe havens such as the Swiss franc and the yen now looking more like fiat currencies, gold and silver may well under go further monetarisation.

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