Gold searching for support after fall

In the Lead: “A New Old Standard? It’s…Academic”

Gold prices fell by the most in a year-and-a-half on Tuesday as the quest for safe-haven turned into a quest for securing profits and being the first one out from an apparently extremely overbought market. RSI metrics had been above the 70-mark for more than two weeks while gold vaulted 14% during the very month that is normally price-unfriendly. However, yesterday, the yellow metal at one point came within just $5 of recording a full $100 drop from the most recent high water mark it achieved just hours prior to yesterday’s rout (1,917 versus 1,822).

This morning’s market action showed that some initial attempts were in progress to stabilize the situation somewhat. Spot gold dealings opened with a gain of 1.04% in New York and the yellow metal was quoted at $1,848 per ounce on the bid-side. Overnight, the Shanghai Gold Exchange raised its own gold trading margin requirements for the second time this year, in the wake of recent wild and woolly price action in the metal. The CME already enacted a similar hike just recently.

Silver, on the other hand largely refused to rise with the Wednesday tide in gold, adding only 16 cents at the open and hovering right around the $42 pivot point. A very large unwind battered the white metal on Tuesday, also just hours after panic gripped retail buyers and they piled into $44+ silver. Today, the poor man’s gold threatens to head towards $40…In the background, the US dollar continued flat at just under the 74.00 mark on the trade-weighted index. Jackson Hole “momentary paralysis” is alive and well.

This morning’s feeble gains did not show much longevity however; silver headed into the red (by almost 85 cents) shortly after the market’s opening bell and led the apparently re-emerging selling patterns in the complex. Gold fell to fresh lows at under the $1,805.00 area, bringing the holding of the psychological support thought to reside at the $1,800.00 mark onto trading radars. Futures prices actually did dip beneath that figure at last check. News on the US economic front showed a surprise 4% jump in July durable goods orders and an also surprising gain of 0.9% in housing values. The Dow reacted with…a non-reaction of a 38-point climb. Jackson Hole…etc.

Platinum and palladium showed a similarly more muted recovery in values as the midweek session got underway; their gains were ranging from $2 in palladium (to $760.00 the ounce) up to $5 in platinum (to the $1,868.00 level). Rhodium remained unchanged at the offered quote of $1,975.00 per ounce. Carmaker Toyota is rebounding from the devastating Sendai quake in March with a virtual blitz of new models aimed at the US market. The redesigned Camry (on and off, the best-selling car in the USA) is slated to kick the automakers revitalized assault on the American car shopper’s list of priorities.

Some of the current questions being posed among bullion traders center not on whether gold will find a more solid floor of support, but at what value marker down the road they might do so. Estimates range from yesterday’s lows near $1,825, to $1,725 and down to $1,680.00 an ounce. Expectations of an average quarterly price of $1,600 as at the end of this year were made public by National Australia Bank yesterday. The institution noted that “recent economic events should help to maintain the price of gold at an elevated level until uncertainty begins to dissipate and investor demand for gold unwinds." Looking further down the road, Citi analysts envision gold prices averaging $1,650 next year and $1,500 the year after that.

None of these other projections stopped Darrell Cronk, SVP at Wells Fargo from restating the investment bank’s position whereby it can “confidently state that interest in gold investing has reached the level of a speculative bubble.” To wit, the level of demand that investment has come to account for in the gold market has recently risen to 39% from the mere 4% it amounted to, in the year 2000, according to Citigroup-sourced statistics.

The bank’s analysts recently noted that “this very aspect that provided support for gold over this time [period] may result in its downfall going forward. Even a slowdown-let alone a decline in net investment can have a materially negative impact on the gold price from current levels.” We have repeatedly noted here that the market has become a complete addict to but one category of offtake; that of investment.

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