Gold’s drop seen as ‘but a flesh-wound’

Good Morning,

Circulating reports that the Fed’s putative QE2 may turn out to be somewhat dinghy-sized as opposed to an all-out behemoth to rival QE1, put a dent into market participants’ plans to lift gold well beyond the $1,300 mark – for the moment. The U.S. central bank is said to be considering certain open-ended, but smaller-scale bond purchases as opposed to some kind of “massive” bond purchases that come with a finite end.

The Wall Street Journal reports that rather than launching a Nimitz-class carrier full of said bonds and using a “shock-and-awe approach” campaign to carry out monetary policy, the Fed may test more of a Zumwalt-class bond-hurling vessel with which to wipe out deflationary threat targets still lurking offshore.

The mere mention of such a possible tactical shift in Fed anti-deflation warfare helped spur a recovery in the dollar and stabilized several other hitherto nervous markets. Ergo, the slight letting go of the iron grip of the longs on gold. Recall that last week’s perception of a Fed ready to buy, buy, buy, spelled ‘bye-bye’ to the dollar’s ascent for the time being – in fact, it pushed it to a near half-year low against the euro (and gave gold its open ramp to the $1,300 mark).

Gold prices opened with a $6.50 loss on Tuesday, quoted at $1,288.10 following an overnight drop to the $1,278.60 level. The near-$25 dip from Monday’s pinnacle amounts to…not much at this juncture, given the scope of the recent tallies in value to the upside.

In fact, most of the desk traders we contacted early this morning dismissed the event as “but a flesh-wound” within a market that is still on course to flex some serious muscle come (insert any forward month between October and June here) and show what it is made of.

Nonetheless, according to RBC’s daily market diagnosis “when you have 9 record up days in a month and no record high open interest in futures, that pretty much tells you that too much of the two-way trades are being put on by the same in-and-out traders.” Ah, the joys of spec fund whipsawing. Translation: we could still pop into the plus column before the day is over.

Today’s market spin will be that this was a healthy, welcome and needed correction and that it took place amid ‘improving global conditions.’ Once upon a time, such ‘improvements’ meant a lift for commodities (gold included) as better demand was one of the attached strings of same. For the moment, let’s forget that and perhaps witness a brief return to the inverse gold-equities and gold-dollar correlation that used to also be part of the market ‘norm.’

Our good friend Dennis Gartman confirms that the specs might hit the “pause” button for the moment and see how much support the yellow metal receives on such dips as seen overnight before piling on additional positions. What appears to bother Mr. Gartman is the sheer number of (not just financial) media enquiries about gold and their insistence on having analysts name the next lofty gold target with which to entice readers. More often than not, such analysts turn out not to be veteran market combatants such as Mr. G, but freshly-minted gold ‘experts’ who just happen to work for…bullion-selling firms or gold-producing companies.

Silver started the second session of the week with a 31-cent drop to $21.13 per ounce and did not appear to heed the ‘improving conditions’ formula. Profit-taking was cited in this particular instance, as well. Platinum backed off to the tune of $14 on the open this morning, with a quote on the bid-side at $1,613.00 while palladium only $2 to ease to the $548.00 mark. Rhodium remained static at $2,240.00 the ounce.

In the background, the greenback held relatively steady at 79.42, crude oil dipped about 60 cents, and Dow futures were pointing higher ahead of home price and consumer confidence data. At least one variety of consumer confidence (that belonging to the denizens of Germany) leapt forward this morning, offering a reading of 4.9 for October – according to the GfK research group.

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