Is gold run/euro fall ending?

On a Monday morning when Ireland lost one figure from its previous Aa2 Moody’s rating, European CDS spreads widened, The IMF halted talks with Hungary on its deficit-cutting plans, and the country’s leaders refused to turn the austerity screws any further on its denizens, what happened? Well, what actually happened was that the euro refused to give up much of its near-$1.30 perch, the U.S. dollar traded sideways-to-lower (still near 82.50 on the index), European stocks rebounded from their opening lows, and gold sank further, nearing $1185.00’s support zone once again. So much for ‘predictability’ in the markets.

Then again, who would have predicted anything but caving skies over Europe, strong recovery in the United States (complete with gains on the inflation front), and more record bullion prices just one month ago? Everyone polled, that’s who.

Almost everyone, that is. The “Father of the Euro,” Nobel-prize winning Robert Mundell said one week ago that: “Investors betting on a euro breakup are going to lose their money,’ he said. ‘And I think also those people who were betting on the price of gold going up to $2,000 an ounce are going to lose their money, too.’”

Veteran market analyst Ned Schmidt picked up on the cautionary Mundell tone and also picked up on another little detail present in the gold price (in USD) charts; the fact that gold’s monthly average has not posted a decline for more than one month, since November of 2008, until the declines recorded in April of 2009, February of this year, and current month, that is. Mr. Schmidt remains of the opinion that gold is exhibiting a parabolic rise which will inevitably be truncated. He sees the risk estimate in the yellow metal as remaining somewhere in the $750 to $970 value zone.

Meanwhile, an equally long-standing name in the business, Dennis Gartman, conceded last week that the “bearish move for the EUR has ended” and that, if that is the case, “then we have to admit too that our long standing bullish posture on gold predicated upon foreign currency valuations too has to change.” Bloomberg quoted Mr. Gartman as opining that “gold in EUR terms may now be a broken trade” even if it may still have ‘legs’ in US dollar terms. Probably (but not for sure).

New York spot dealings opened mixed on this Monday morning. While gold and silver slipped lower, platinum traded sideways and palladium managed a small gain. Spot gold started the session with a $4.90 per ounce decline, quoted at $1188.10 as the aforementioned conditions plus a strong whiff of deflation (noted in the Fed minutes and economic stats released last week) added to selling pressure.

No safe-haven bids were noted this morning (despite what should be a catalyst for same coming out of Europe), and the spectre of collapsing prices in the US kept buyers on the defensive and sellers emboldened. All of this follows a bearish close on Friday and a settlement at the lowest level in sixty days on the 16th.

Within the first half hour of trading, bullion did penetrate the support figure of $1185 and fell to a low of under $1183.00 the ounce. Time to revise charts and conclusions regarding the same and the amount of technical damage done – no longer just a ‘flesh wound.’ Market vanes continue to point towards the $1170-$1140 range as the next likely one. To be continued…

Hopefully, physical buyers will lend support to the metal as it nears critical support at the $1185.00 mark. In Indian gold futures terms, the yellow metal is poised to decline for the 5th week in a row; precisely the type of development that might be expected to bring in some buyers ahead of two festivals in August and September. On the supply front, China announced a 6% surge in gold output on a year-on-year basis through May. More than 127 tonnes of yellow metal have been dug up in the country in the period in question.

As for difficulties on the supply front, the problems –once again- appear to be clustered in South Africa. New and more stringent mine safety regulations could pose a threat to platinum-group metals production for at least two major firms; Aquarius Platinum and Anglo Platinum. Silver fell 9 cents on the open, and was quoted at $17.77 the ounce. As mentioned, platinum showed no change (at $1507.00) along with rhodium (at $2290.00 bid) but palladium eked out a $2 gain to start at $450.00 per troy ounce. Later in the session, the entire complex turned red as sellers became the dominant force on the market scene. Platinum threatened to break under $1500.00 per ounce at last check.

In New York market terms, the market is also pointing towards the conclusion that June’s price action was more like overreaction (to the euro crisis). Hedge funds and other large specs cut back on net long positions by another 2% through July 13th and spot gold shows losses for three out of the four past weeks.

The question of ‘overbought’ (now no longer a question for June) turns into a question of ‘oversold’ –at some point (it would be nice to know just where that might be…). Lost momentum in the global recovery, the passing of tough financial industry regulation, and the aforementioned smell of deflation conspired to push the Dow down 261 point last Friday, also engendering questions as to when that metric also starts flashing its own ‘oversold’ light…

In the meantime, notwithstanding the Hungarian Rhapsody and the Irish ceilidh, the U.S. deflation blues and the Dow’s lament continue to make for sellers in the driver’s seat.

Jon Nadler, Senior Analyst, Kitco Metals Inc. North America

Websites: www.kitco.com and www.kitco.cn

Blog: http://www.kitco.com/ind/index.html#nadler

About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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