Gold traders mull Spanish bailout amid deflation concerns

In The Lead: “Taking a Slowing Boat to China”

Friday’s last minute “I won’t go home flat just in case” type  pop in gold prices netted the yellow metal a $6.40 gain on the day but it fell short of erasing the 1.9% decline that gold suffered on the week. Polled market observers had gone into last week’s action convinced that bullion was going to build on the large gains achieved on the previous Friday. Alas, Fed Chairman Bernanke took the bullish wind out of their  speculative sails with his poker face flavored (as regards further QE) presentation on Capitol Hill.

The new trading week got off to a relatively strong start overnight as gold prices opened firmer overseas and they briefly retook the $1,600 level shortly after the market opened at 6:00 PM New York time. The bulk of the gains were driven by the perception that the rescue plan for Spain’s banks would be euro-beneficial. As it turned out, at least during the evening hours, the euro climbed to above the $1.26 mark and the US dollar dipped briefly amid similar expectations of some temporary success in addressing the region’s crisis.

The Commitment of Traders Report (COT) for the week ending Tuesday, May 29, 2012, tallied a notable increase in long gold positions, and a concurrent reduction of short positions. However, it should also be expected that a sizeable number of those new long positions have already been stopped out or unwound in the aftermath of Mr. Bernanke`s testimony to the US Congressional Committee on Thursday and in the wake of the resulting aggressive sell-off in gold.

The silver market’s speculative positioning shows that only a modicum of unwinding has taken place among shorts and as such the development still points to a metal whose players have not abandoned their mostly bearish view of it. A somewhat similar lack of conviction is also apparent in platinum; however the ETFs have come back as net buyers into palladium and are showing a distinct preference for it within the PGM space.

While still remaining of the opinion that the “set up is in place of a break under the $1,527 support shelf, finally” Friday night’s EW update advises that “while not expected, a rally above last week’s $1,641 high” could alter the near-term forecast and suggest a more “protracted upswing” was underway. Whether or not an upswing in the share price of Barrick Gold (following the ouster of its last CEO) is in the cards, remains unclear at this point. It is, however, interesting to note that the very vehicle that the miners clamored to launch back in 2004 – the gold ETFs – may be the culprits behind the “performance dysfunction” of some of these stocks.

As MSN Money points out, “The pressure on the [Barrick] share price was also intensified by a growing investor taste for gold-backed exchange traded funds (ETFs). Demand for these financially engineered products has tripled in the past five years. They offer pure leverage to gold prices but without the risk of mining accidents, environmental judgments, cost overruns and asset write-downs.” Here is aclassic case of “be careful what you wish for” and of a Frankestein-ian – “It’s Alive!!!!” all rolled into one.

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