Euro-gold hit a new all-time high today

Euro-gold hit a new all-time high today. We expect it to move higher. Many parallels have been drawn between the current EMU debt problems and the problems seen with Greece Apr'10 to
Jul'10. As a result we look at the how commodities reacted between April and July to euro weakness (against the USD) On average, commodity prices have fallen much more on euro weakness than they have rallied higher on euro strength between April and July this year. The only exception was gold - gold increased on euro weakness, confirming gold's status as hedge
against credit risk — we believe gold is set to do so again.

In the gold physical market we believe buying interest will remain on dips in the physical market, while it is likely to slow somewhat when gold approached $1,375, but on balance we believe the interest will be buying, not selling. The IMF indicated they sold 19.5 tonnes of gold in October. This is part of the 403.3 tonnes the IMF in 2009 indicated they would sell and as a result we view this announcement as market neutral.

Gold support is at $1,356 and $1,346. Resistance is at $1,379 and $1,395.

Gold in euro-terms will outperform gold in dollar-terms

Apart from debt problems in Europe, risk appetite is also little ahead of the weekend. At the same time market is more illiquid than usual with many US participants largely inactive since yesterday. Price movements are therefore more pronounced.

Sovereign risk remains at the forefront as bond yields in Portugal and Spain continues to rise. The 10y yield on Spanish debt rose to record levels around 5.17% yesterday. The euro is still struggling. We continue to see net physical buying of gold, especially on dips. We maintain gold in euro-terms will outperform gold in dollar-terms.

Gold support is at $1,354 and $1,349. Resistance is at $1,370 and $1,380.

Investor demand is fading as tensions in the Korean Peninsula ease and with US markets on holiday

A stronger dollar and better-than-expected US jobs and consumer confidence data, saw precious metals lose ground yesterday. Initial jobless claims came in at 407k, well below expectations (435k) and last week’s revised figure of 441k. Continuing claims too showed an encouraging drop to 4,182k from 4,324k. The University of Michigan consumer confidence barometer rose to 71.6, in line with consumer income and spending data that showed a steady improvement. A fall in both US durable and capital goods orders might have added to downward pressure on Gold.

Since then an easing off in the dollar has helped precious metals, especially silver and palladium, recover. Bargain buying, mostly in the physical market, is also providing some support across the precious metals complex. However, investor demand is fading as tensions in the Korean Peninsula ease and with US markets on holiday. This seems to indicate a day of muted trading and limited price moves, barring any significant developments in the Eurozone debt situation or between North and South Korea.

Gold support is at $1,366 and $1,361. Resistance is at $1,379 and $1,387.

Gold price below $1,350 last week has spurred renewed physical buying interest

Gold continues to find cause for support. The Fed minutes of the their FOMC meeting earlier this month indicated the FOMC considered (but decided against it) targeting longer dated yields irrespective of the amount of bond buying necessary. The minutes further indicated the FOMC in general agreed that more liquidity is necessary for the US economy. They moved their growth forecast lower and unemployment forecast higher. Higher unemployment and lower growth implies very accommodative monetary policy in 2011.

Concerns remain over European sovereign debt, with 5y CDS rising for Spain, Portugal and Ireland yesterday - despite the Irish bail-out plan. These concerns are set to weigh on the euro. Credit concerns are also set to benefit gold. Based on the physical market, gold remains a buy on dips. We believe sovereign credit risk in Europe, combined with the physical market should see gold in euro-terms outperform gold in dollar-terms for the time being. We've seen strong physical selling and scrap gold coming to market during the first two weeks of November as the gold price pushed above $1,400.

However, the latest decline in the gold price below $1,350 last week has spurred renewed physical buying interest. Our Standard Bank Gold Physical Flow Index (GPFI) has jumped into positive territory after lingering in negative territory earlier this month (see Commodities Daily dated 23 Nov’10). The return of buying interest in the market is an indication that the physical gold market is slowly adjusting to the higher gold price which now sees a “higher low” in the gold price as a buying opportunity. Long-term this is a bullish sign. We continue to expect gold physical demand to prevail on dips into January. Since Monday gold in euro-terms has surged Eur30 higher. As pointed out on Monday, we believe sovereign credit risk in Europe, combined with the physical market should see gold in euro-terms outperform gold in dollar-terms for the time being.

Gold support is at $1361 and $1,345. Resistance is at $1,388 and $1,397.

Gold physical demand supports gold on dips

We believe gold remains a buy on dips. Not only do financial market conditions support gold investment demand, but the physical gold market also remains supportive. We have seen strong physical selling and scrap gold coming to market during the first two weeks of November as the gold price pushed above $1,400. However, the latest decline in the gold price to below $1,350 last week has spurred renewed physical buying interest.

As a result our Standard Bank Gold Physical Flow Index (GPFI) has jumped into positive territory after lingering in negative territory earlier this month (an index value greater than zero indicates net buying in the physical gold market, while a value less than zero indicate net selling).
Once again it appears the return of buying interest in the market is an indication that the physical gold market is slowly adjusting to the higher gold price and now sees a “higher low” in the gold price as a buying opportunity. Long-term this is a bullish sign.

We continue to expect gold physical demand to prevail on dips. However, the demand on dips might not be as strong as it has been in October during the run up to Diwali in India. But on balance Indian demand should remain positive until at least mid-December on the back of wedding season. We also still have the festive seasons in the Western Hemisphere as well as Chinese New Year. In 2011 Chinese New Year is on 3 February. With regard to physical flows going forward: Our analyses find that Q2 is the second strongest quarter for jewellery demand behind Q4, after controlling for the gold price. But physical demand may fall away in February and March next year, before picking up in April.

We note that physical demand is dominated by investment demand and we need to be cognizant of drivers of investment demand. We believe the gold market is pricing the $600bn of QEII
already. Our estimates are based on gold's close relationship since 2004 with global liquidity of which the Fed's balance sheet makes up an important component. This implies we cannot base an argument for greater investment demand and a higher gold price purely on a Fed QEII liquidity argument. We need to look for something else that will drive prices lower or higher.

However, we do believe sovereign credit risk in Europe would provide investment demand for gold. Combined with the physical market which looks to provide support on dips for gold we believe gold in euro-terms should outperform gold in dollar-terms for the time being.

Gold continues to trade around the $1,350 level

Gold continues to trade around the $1,350 level. In the physical market buying on dips prevail. We expect this trend to continue into January. However, we also believe the gold market is pricing the Fed QEII action already. We use gold’s causal relationship with liquidity to determine what the market is pricing already — we estimate that a gold price around $1,375 fully price a QEII program of $600bn. As a result we need either greater sovereign credit problems out of Europe, combined with bond buying by the ECB, or further dollar weakness driven by events other than QEII, to push gold much higher.

Given that further sovereign credit problems in Europe at this stage appear the most likely scenario, we believe gold in euro-terms may outperform gold in dollar-terms.

Gold support is at $1,340 and $1,330. Gold resistance is at $1,365 and $1,375.

Gold continue to be bolstered by investor demand

Gold continue to be bolstered by investor demand, which in turn is supported by the weaker dollar. As it becomes more likely that Ireland will accept an EU bailout, fears over contagion spreading across the Eurozone’s debt markets are diminishing, improving confidence in the euro. As highlighted yesterday, buying in the physical market (especially in India) is
also playing a supportive role.

However, the brief dip in prices overnight, prompted by rumours of a Chinese rate hike, highlights the sensitivity of precious metals to news related to global liquidity. With the Fed’s QEII now largely priced in, focus has now shifted to the actions of the Chinese central bank. Of the policy tools available to the PBOC, credit rationing seems the most probable to be enacted. While this might create some friction in commodities markets, we still believe Chinese demand for commodities will remain largely intact. Thus, we remain bullish, especially on precious metals with significant exposure to Chinese markets, such as silver and palladium.

Gold support is at $1,340 and $1,326. Resistance is at $1,365 and $1,374.

China currently holds around 1,064 mt of gold, compared to 8,133 mt for the US

Gold, along with most of the commodities complex, were hit hard in yesterday’s afternoon session, though all of the metals fared much better than the base complex. Concerns over Ireland's economic woes saw the dollar strengthen against the euro, triggering a bout of selling as the euro fell below the $1.35 mark. Profit-taking gave way to liquidation, with the triggering of stops exacerbating the sell-off.

As noted in the Base section, fears over Chinese monetary tightening have also been reignited, keeping precious metal prices subdued this morning. Of interest however, are reports that China is looking to gradually increase its reserves of gold and oil.China currently holds around 1,064 mt of gold, compared to 8,133 mt for the US. While the scope for China to increase its gold reserves are limited in the short term, it will nevertheless be interesting to see whether Chinese reserve holdings to gradually pick up over the coming months and years.

Gold has drifted sideways to lower during the morning, closely tracking fluctuations in the dollar. This pattern is likely to continue, heading into he afternoon, with the market waiting for clarity on Europe’s debt problems. Light physical buying is helping provide some support to prices however.

Gold support is at $1,323 and $1,309. Resistance is at $1,359 and $1,380.

A strengthening dollar and some profit-taking continued to weigh on Gold

A strengthening dollar and some profit-taking continued to weigh on Gold during Monday’s trade. In addition, the announcement that the CME would be raising initial and maintenance margin requirements on precious metals, pushed gold and silver down even further. Gold margins will be raised by 5.9% and silver by 11.5%, effective from the close of business today.

Gold prices appear to have stabilised after the recent bout of liquidation, with prices back around the levels seen in late October. Although prices have stabilised, gold has lost momentum and is in reactive mode. Consequently, exogenous factors and the dollar remain key in terms of dictating price direction over the balance of the week, with the dollar effect and the safe haven status of the metal likely to continue battling it out.

Gold prices are currently trading sideways heading into Tuesday afternoon. Eurozone debt concerns continue to circle overhead however, with the main fear that Ireland may be forced to accept a bailout, supplemented by fresh concerns over Portugal.

Gold support is at $1,354 and $1,344. Resistance is at $1,376 and $1,387.

Gold prices fell the most in four months

Gold prices fell the most in four months, last Friday, as investors, concerned that surging inflation would perhaps prompt Chinato raise interest rates over the weekend, headed for the exit. While concerns still persist that China may look to tighten monetary policy, there was no action by the Chinese monetary authorities over the weekend. As such, those fears have subsided, helping gold to remain steady in early trade.

Nevertheless, Asian demand remains weak, with even some sporadic selling emerging. Rumours that the Chinese government will take action to stem inflationary pressures and limit speculation will likely keep investors on edge and mostly on the sidelines for now. The draw of gold as a safe-haven also appears to have diminished, in spite of the on-going troubles faced by Ireland and the Southern European nation. Consequently, we expect prices to remain range-bound, albeit with one-eye on fluctuations in the dollar.

Gold continued the see-saw pattern of the past week

Precious metals continued the see-saw pattern of the past week, falling significantly during early trade today, on the back of weaker Asian equities and a stronger dollar. With Eurozone debt fears again the focus of the market, gold and silver are in the middle of a tug of war between currency movements, in reaction to the sovereign debt issues in Europe, and from safe-haven
demand.

The euro has since stabilized and strengthened against the dollar heading into the afternoon, with gold also finding its feet following its initial sell-off. Although ahead of the G20 meeting the market appears to be taking risk off the table, we remain constructive on precious metals, especially gold and silver as increased uncertainty over Europe’s economy and safe-haven demand for precious metals helps to counteract the recent rebound in the dollar.

In addition, we expect physical buying to return as jewellery demand picks up as we enter the Indian wedding season.

Gold support is at $1,374 and $1,356. Resistance is at $1,404 and $1,422.

The precious metals moved in tandem with the dollar

The precious metals moved in tandem with the dollar on Wednesday, however this morning has seen the likes of gold and silver rally, in spite of a stronger dollar, or rather euro weakness. Concerns over sovereign debt issues in Europe, and Ireland in particular, appear to be shielding gold with safe-haven buying activity propping it up and seeing it temporarily detach from its
previously strong link to the dollar.

With the Indian market returning to work tomorrow, after the week’s celebrations, we may see some renewed buying interest in the physical market. As we highlighted earlier this week, the Indian wedding season lies ahead, and with the general feeling among Indian buyers being that prices will continue to climb, we could still see significant physical demand, even at these elevated levels.

Gold support is at $1,391 and $1,374. Resistance is at $1,418 and $1,427.

Despite periods of dollar strength

Despite periods of dollar strength, especially against the euro, gold and silver have once again touched record highs. Silver led the way, closing on above $27.70/oz on Monday before powering through $28.00/oz during Tuesday morning. Gold also sailed through $1,400/oz on Monday without any difficulty, with the metal going on to trade above $1,420/oz ahead of US trade.

The euro weakness this morning has largely attributable to renewed concerns over the Eurozone’s sovereign debt situation, with Ireland again in the market’s crosshairs. These worries have broadened the safe-haven appeal of precious metals, most notably gold and silver, with those metals detaching from the dollar, albeit perhaps only temporarily.

Even in the physical market, selling is absent, despite the temptation of high prices, with participants expecting further upside still to come.

Gold price just broken USD 1,400 level.

The gold market rallied $60.10/oz on Thursday and Friday in a reaction to the Fed’s QE2 package unveiled on Wednesday afternoon. The initial reaction on Wednesday was quite small and made the event seem inconsequential to prices. However, an op-ed article in the Washington Post the next day provided the impression that the Fed would continue to ease monetary policy until the value of asset markets begin to rise and boost consumers’ confidence.

That gave a green light to most assets to make strong gains, and for gold prices to break out to record highs. Gold advanced $45.50. Gains in energy prices provided inflation suggestions to gold, suggesting that it would be needed as a hedge. Later on Thursday, Pres Obama said that he is open to extending the tax cuts to all income groups, and the Fed said it would consider allowing stronger banks to raise their dividend payouts.

The events created the impression that the economy was recovering. Up to date, gold price just broken USD 1,400 level.

Gold Close This Week at US1,394.1

For gold, the physical market remains supportive. Buyers, in Asia and India in particular, continue to buy dips. Diwali in India ends this week, which may see physical demand decline next week. But indications are that demand in India should still remain elevated well into December due to the upcoming wedding season. Also, India seems to expect the gold price to head higher — not lower — and buyers are willing to buy dips in gold.

Gold support is at $1,362 and $1,330. Resistance is at $1,408 and $1,424.

Buying on dips the preferred strategy

Our view on precious metals is unchanged ahead of the FOMC announcement tomorrow. We believe that gold is pricing in QE of $500bn already. We estimate that no QE action from the Fed may see gold closer to $1,280, while $1trn in QE may see a gold price well above $1,400.

The physical market remains supportive of the gold price, with buying on dips the preferred strategy. We still expect gold physical demand to prevail on dips. However, demand on dips might not be as strong as it has been the past month. While Indian demand may fall away towards mid-November, we still have the festive season in the Western Hemisphere as well as Chinese New Year. In 2011, the Chinese New Year will be on 3 February.

Gold support is at $1,346 and $1,340. Gold resistance is at $1,363 and $1,374.

Gold physical market is now providing support rather than resistance

Investor estimate remains that the gold market (and by extension many other commodities) are pricing $500bn of QEII already. They will interpret the impact on commodity prices of any QE announcement relative to this $500bn. As highlighted on Friday last week, our Standard Bank Gold Physical Flow index (GPFI) shows the gold physical market is now providing support rather than resistance.
Overall we believe that

1. the physical market should provide support for gold on pull-backs until the end of January.
2. However, post-Diwali (5 November), this support may be situated at a lower price level — possibly below $1,300 (depending on FOMC actions on Wednesday
3. We believe that resistance in the physical market may grow stronger post- China New Year and run well into 2011.

Gold support is at $1,344 and $1,330. Resistance is at $1,367 and $1,375.