Gold prices fall as European optimism wears off

In the Lead: “The Hangover - Part V”

Apparently, the ‘realization’ about the fifth EU summit’s outcome that we referred to in our Friday closing line has begun to settle in among global investors over the weekend. Almost all traces of optimism that the Marseille meeting engendered were wiped clean of the markets’ slate overnight and the lifespan of the after-effects of it is turning out to be on par with that of a common fruit fly. Investors set out to sell equities and commodities with somewhat of a vengeance overnight and brought gold down to a three-week low in the process, firmly breaching the $1,700 as well as the $1,680 support levels in the process.

The undisputed beneficiary of this resurging sentiment of dread was once again the US dollar- it climbed more than three-quarters of a percent on the trade-weighted index to reach 79.30 early on Monday. The greenback -you know, the same greenback that was supposed to be in a mausoleum by now- has advanced nearly 9% since August rolled around while outflows from the euro came in at twice last year’s levels during last week’s market action. Of course, the ECB rate cut did nothing to improve sentiment for the common currency among would-be investors.

Spot gold dealings opened the New York session this morning with a $35 per ounce loss at $1,676.50 on the bid, and with dimming prospects of the $2,000 Holy Grail being achieved in 2011. A sizeable number of illustrious names have been on the list that called for not only $2K gold to be in the stockings under the holiday trees this season, but also for $2.5K, $3K, and $5K and $10K gold. In reality, gold is trading at November’s low of $1,670 and October’s $1,620 low is not all that far away, either. The yellow metal’s 200 DMA is currently tracing a line at the $1,615-$1,620 levels. Thus far, the ‘surprise rally’ that had been guaranteed for the holidays has indeed turned out to be a ‘surprise’ –just not a rally. Some congestion triangles/wedges do resolve to the downside, occasionally, it turns out.

One school of thought (the one involving ‘waves’) sees a breach of the $1,600 mark as a potential trigger for a spring towards $1,300 or so per ounce. Another school of (shallow) thought as seen on Seeking Alpha today, opines that fund managers who were totally disinterested in gold prior to 2008 have apparently caught gold fever and are “following the lead of [other and more] prominent fund managers.” Don’t know if that means George Soros, for example – it probably does not. Becoming ‘full-fledged’ gold bulls at a time when the ‘prominent’ ones have already begun cashing in their profitable chips raises certain questions best not addressed here. Caveat investor.

However, we do know from history that ‘prominent fund managers’ can occasionally make monumental blunders by joining certain bull parties way near the apex of the parabola. Following them blindly can be hazardous to wealth. At the moment, the unconstructive combination of lackluster physical demand, negative gold lease rates, high margin requirements, and no growth in open interest is making for a tough closing out in the gold market for the present year, according to veteran observers at Royal Bank of Canada. We did note the environment in which banks are effectively willing to pay one to borrow their gold, please. Takers have apparently been sparse.

All we can expect now is that the predictive crystal ball will be kicked down the road and that 2012 will now be the year forecasted to bring about such lofty achievements. That is, unless that pesky Mayan calendar does turn out to have some validity, in which case nothing matters. For the time being, notwithstanding that it is the traditional time of year to make forecasts for the coming year participants will be eyeing lower support levels and how well they might hold up while keeping close attention on news from Europe at the same time. Book-squaring, window-dressing and assorted other such year-end fun will only intensify ahead of the holidays and will be followed by thinner-than-thin participation in the final four trading sessions of 2011.

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