Gold rallied 1% this morning as the European economic crisis continues. Worryingly, the Italian 10-year bonds are now at 6.6% which is just a shade short of the 7% level that prompted Greece to seek financial assistance from the ECB and IMF. Tragically, the European crisis is soluble mathematically and can be resolved financially — the problem is that it remains bankrupt in the political will and decision-making department. The likelihood remains that Europe will, like our US cousins, need further QE to buy the bonds of ailing, or is that failing nations. There remains a sense that the policy-makers in Europe are constantly “behind the curve” in terms of decision-making and this is having a deeply corrosive effect on confidence in the markets.
Gold has acted with aplomb. Faced with clear signs the economic system is in a state of grave concern (witness the VIX or fear index above 30) and it has rallied accordingly. Gold is still about 10% below its all-time high of $1,920 seen early this September when COMEX futures traders took profit, but last Fridays figures released by the CFTC suggest that they may now be rebuilding long positions... the weak longs have been shaken from the market. Encouragingly, that sell-off by futures traders saw only 25 tonnes of selling from the gold ETF holders (which represents less than 1% of holdings), which for many will confirm the view that these investors are in for the long haul and their confidence is not shaken by the latest squiggle or bump in price.
We expect gold to test overhead resistance at $1,772, which, if breached convincingly, could see buy stops triggered to take gold into the low $1,800's where it belongs. This being the seasonally strong quarter for gold buying, the tide is very much in favor of the gold bulls at this time.
Ross Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.