Gold treading at $1,700 despite bullish expectations

In the Lead: “Banks, Japan: Take My Gold, Please…”

The waiting game in the markets continued for yet another day albeit there was one item for which participants no longer need to wear their guessing caps; the ECB’s rate decision. Mr. Draghi’s institution cut its interest rate by one quarter percent and with that move fully reversed Mr.Trichet’s previous hikes (which some have labeled as ‘mistakes’). The fear implied in the ECB cut is that the eurozone will slip into an economic contraction perhaps as early as the beginning of 2012, and, based on recent data coming from various parts of the region, such a possibility is now more of a…certainty.

Metals dealings opened with the same level of nervous indecision that they have exhibited all week. Despite market survey projections that showed most polled participants being quite bullish on gold for the week, the yellow metal has managed to do little more than to bump up against the $1,750 mark a few times and then retreat in a hurry. Today’s opening had gold rising 90 cents to the $1,744 mark and silver advancing 28 cents to $32.79 per ounce.

After another feeble attempt at overcoming the seemingly impenetrable $1,750-$1,760 resistance zone gold prices went into somewhat of a freefall following less than encouraging words from Mr. Draghi at his news conference. In effect, the markets threw a mini-tantrum when they learned that the ECB declined to signal that it might ratchet its debt purchases higher in order to put the crisis fires out in Europe. The Dow fell 70 points in early dealings this morning after Mr. Draghi declared that his institution’s hands are ‘tied’ and that the decisions that matter are really up to politicians now. The new EU fiscal compact cannot come soon enough. The question is: will it stick? Investors are voting with their feet, this morning at least.

Meanwhile, President “Sarko” warned that the failure of the euro is a ‘luxury we cannot afford’ and his minister for European affairs warned that the “euro could explode” and that Europe could “unravel.” Explode, implode, the net result is the same: When in serious doubt, flee to the greenback (it surged nearly 0.50% to 78.81 on the index). Gold lease rates fell to a record -0.57% (yes, that’s a minus) as stories that European banks are on the hunt for dollars and will do anything to track’em down circulated among professional traders. If verified, such a development can at least in part explain why gold is acting in the manner it is acting in…(read: counter-intuitive).

Bullion fell to lows near $1,705 and the euro fell under $1.34 once again as Mr. Draghi tried to temper impatient speculators with words of caution as to what certain parties are prepared to do or not to do in order to address the crisis in Europe, and how long such measures might take to come to fruition. Since so much had been built on a uni-dimensional level in the market (optimistic anticipation), the ‘exhale’ proved quite damaging to precious metals at this juncture. Silver fell two-thirds a dollar to the $31.85 per ounce mark. So much for the ‘surprise’ rally we were promised earlier in the week by chart-parsing fortune-tellers. This “congestion” on the charts has, thus far, led to a “sneeze.”

Certain speculators were/are holding out hope that the ECB summit will yield some positive news for the euro and thus for precious metals as well. Others remain wary about the likelihood of comprehensive solutions being born out of the meeting and continue to hang on to US dollars instead. In any case, the EU hoopla is keeping other notable headlines crowded out from media flows. Lost in the shuffle this morning: news that US jobless claims fell 23.000 to 381.000 filings (lowest in nine months) and news that Mr. Corzine “simply does not know” where the missing $1.2 billion in client funds might be (and you thought you’d heard it all…).

A potential contrarian metric to keep an eye upon as we head into 2012 is the fact that Japan’s gold exports have risen to 100-120 tonnes this year. Wait a minute; Japan does not produce gold other than that which it finds in urban landfills, does it? Well, no, it does not. However, Japanese individuals have been selling quite some quantities of gold bars, gold coins, and gold jewellery into market price strength for some years now. Dis-investment from Japan has remained an ‘interesting’ feature on the tables of fundamental supply and demand for several years now. Not that anyone bothered to point it out.

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