Oil finds support near $86 after sell off

It is the Principle and the Precedent

The massive sell off in gold is mainly because Cyprus has agreed to sell its gold reserves, but there is also fear that behind that it could be because of a massive slowdown in global economic growth, terror in Boston as well as fears that global central banks may become sellers instead of buyers of the precious metal. In other words it is not the fact that Cyprus has to sell gold because the amount of gold is miniscule to the global supply and demand but because of the precedent that it sets. If Cyprus is being forced to sell it gold reserves, what about Portugal, Greece, Italy, Spain, Ireland or another EU country that needs a bailout?

Is it possible that this plan to bail-out Cyprus by them selling reserves is the beginning of a reversal of the Central Banks mantra of printing paper and exchanging it for gold? Or could it be a sign that the EU gold reserves that as a group hold the most reserves in the world could use this as the backing for a gold backed euro-bond to help stabilize the zone’s massive debt problems.

Of course for gold is this case of selling the rumor and buying the fact. More than likely the next step for Europe is a euro bond as opposed to signaling to the market that they are going to start unloading their massive reserves. The market, while it needed to correct, is probably closer to a bottom than a top and while the confidence in gold may cause some extreme volatility in the short term when we level out we should see a major comeback.

The drop in gold could also alter the longer term supply outlook. The AFP reported "Gold miners have watched their screens in shock since Friday, as the price of the key gold futures contract has plummeted a staggering US$204 an ounce, or 13%. That is the biggest percentage drop since 1980, and even if it is temporary, it sends a strong message to companies that they need to lower costs, eliminate unnecessary capital spending and put a halt to all marginal projects. "People are going to have to look at their all-in costs very seriously and whether they can survive or not,” said Gerald Panneton, the chief executive of Detour Gold Corp. "Companies will cut back, companies will not put projects in production. And a lot of companies will not survive this.”

And low prices may spark demand. Dow Jones is reporting that "Indian gold imports are likely to rise to around 900 metric tons this year thanks to falling prices coinciding with the peak marriage season, industry executives said Wednesday.   Prices fell last week at the quickest pace in 30 years, reviving consumer appetite damped since January-end when the gold import tax was raised to 6% from 4%.

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About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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