Gold prices fall as Greek optimism proves fleeting

In the Lead: “Curbing Your Enthusiasm ”

Against a backdrop that included burning buildings and flying stun grenades in the streets of Athens, the Greek Parliament voted to pass a tough new round of austerity measures that might just make for a new definition of ‘Spartan.’ The image and video that accompany this story speak of anything but optimism on the part of the Greek citizenry.

There is a school of economic thought that now envisions the country stepping closer to a full-blown depression while another one projects that Greece will possibly morph into what one labels as a “third world country.” A German economist has bluntly warned that “what politicians refer to as a ‘rescue’ will not actually save Greece. The Greeks won’t ever return to health under the euro. The country just isn’t competitive. Wages and prices are far too high, and the bailout plan will only freeze this situation in place. So it’s in Greece’s interest to leave the euro and reintroduce the drachma.”

Thus, although the markets greeted the news of the passage of the austerity measures with the enthusiasm that one might have expected, the ’celebrations’ were rather half-hearted as reflected in the gains in various assets. Worrying about Greece is clearly not off the table, despite the sigh of relief engendered by its government’s vote and the soon-to-materialize disbursement of rescue funds from the EU.

The fleeting optimism kind of situation was also mirrored in gold’s tepid advance to $1,734 overnight and by its shrinking gains within the first half hour of trading in New York this morning. The latest indications on the bid-side showed the yellow metal trading at $1,717 the ounce, actually down $5 from Friday’s close. According to EW-think the penetration of the $1,709.94 level in gold could usher in a resumption of its previous downtrend and only a rally above $1,763.71 would signal that the counter-trend climb has not yet concluded.

The Standard Bank (SA) daily commodities report notes that, according to CFTC data, speculators boosted their long positions in gold albeit at a lesser clip than they did in the preceding reporting period. Notably, the amount of short positions resumed its gain for the first time in four weeks. The development prompted the report’s authors to opine that due to “the tentative nature of the past week’s moves affirms our suspicion that the aggressive moves of the week before last were largely as a result of overexcitement after the Fed’s dovish announcement. Consequently, we are cautious of gold’s near-term prospects, and would not be surprised to see further weakness emerge this week. ETF buying also slowed markedly.”

ForexPros.com contributor Michael Gayed has been studying the gold-dollar relationship and is cautioning that we could be in for a change in that relationship given recent trend developments in the two assets. The peak in the gold-dollar (GLD to UUP) ratio took place in late August last year. Now, the potential for a reversion to the mean in the ratio between the closely watched pair points to a possible period of gold underperforming the greenback. Just something to consider the next time a US dollar obituary lands in your e-mail inbox.

The other metals in the complex posted modest gains as well but the advances were lacking the energy one might have anticipated in the wake of news that had been so long in the making. Silver traded as high as $34.15 but was last shown as bid at $33.54 per ounce, down a nickel from Friday. Key support in silver is thought to reside at the $32.82 level. Platinum and palladium climbed a tad higher as well initially, but then lost steam, with the former declining $1 to $1,651 and the latter losing $3 to $696 per ounce.

The noble metals continue to receive support from on-going South African labor strife, which is resulting in estimated platinum production losses on the order of 3,000 ounces on a daily basis at Impala Platinum — the world’s second largest producer. Interest levels among speculators in PGMs have been on the rise as evidenced by the latest CFTC market positioning metrics. In platinum there was an increase of more than 18,000 ounces on the long side and in palladium there was a rise of more than 11,000 ounces noted.

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