A day of recovery was apparently in the making in the precious metals markets this morning as the complex opened solidly in the "green" against a pullback in the US dollar and amid rising optimism that Europe and its currency would live to see another day. After the worst three-day rout since the scary days of 2008 and the worst four-day slide since 1983, one would expect as much from the commodities space. The questions that remain relate to how durable today's optimism (and buying) will prove to be. The appetite for risk was back on the investment menu and it was being reflected in 3% gains in copper and equal-sized advances in crude oil, for starters.
Spot bullion dealings opened Tuesday's trading session with a gain of $33 in gold spot (quoted at $1,661) and with a $1.84 rise in silver (to $32.60 per ounce). Platinum and palladium joined the rally with gains of $16 and $20 respectively. The former touched $1,572 while the latter climbed to $648 the ounce. Current support/resistance levels in the metals - brought to your courtesy of the analytical team at Standard Bank (SA) are as follows: Gold support is at $1,580 and $1,491. Resistance is $1,713 and $1,754. Silver support is at $27.51 and $24.29, resistance is at $32.51 and $34.28.Platinum support is at $1,494 and $1,408, resistance is at $1,643 and $1,706. Palladium support is at $620 and resistance at $661.
The near-$80 premium in gold versus platinum was once again seen as a potential stimulant for platinum purchases by investors who recall the historical differential between the two metals. We say "potential" because as things stand right about now, the angst over global growth may keep this gap in place for possibly some time to come, and may even widen it.
Monday's closing saw gold finishing with a more modest decline of $29 and silver ending its wild day's ride just above the $30 mark. Technically speaking, the touching of the $1,532 price level, one nearly $400 from the September high, met the definition of a bear market (20% decline required) and very few previously imagined that the yellow metal might beat the S&P 500 to such an "achievement." Long-time (and quite accurate) market observer James Moore (he of TheBullionDesk.com in London) noted that "The rise in risk sentiment has also reduced the rush to generate cash, taking the pressure off the precious metals. However, gold remains vulnerable to further bouts of liquidation."
The intra-day and the overnight bounces from the lows have however been vigorous enough to quickly dismiss most of the conversations containing the "B" word (bear or bubble, take your pick) for the time being. It is now all about recapturing the $1,700 level so that, you know, we may progress with the reaching of the $2K target after this temporary "distraction." This distraction has however shaken the confidence of many a soul who had sought refuge in bullion based on the urgings of the alarmist camp. Over the past week the fear-based trade has managed to induce fear into the hearts of the hitherto over-confident bulls.
Thomson Reuters technical analyst Wang Tao's "Inside Commodity Technicals Q4 2011" sounded a fairly alarming note by stating that "A long-term uptrend for spot gold may have been violated by the depth of the recent falls, bringing an end to gold's 12-year bull run." Using Fibonacci projections and wave-based analysis the TR technician noted that "the bull run that started at the August 1999 low of $251.70 across a period of 146 months, or roughly 12 years, has eventually come to an end."
He went on to remark that "It generally takes some time for a top to form, so the most likely scenario will be gold continuing the current retracement to $1,447, the 38.2 percent Fibonacci retracement on the rise from $680.80 to $1,920.30. It could rebound to $1,700-$1,800 before starting a long-term downtrend that will reverse most of the rally from $251.70."
As for spot silver prices, Wang Tao opines that it has moved into a long-term bearish cycle. "The [white] metal is riding on a fierce downward wave "c", which is expected to travel to $16.34, the 161.8 percent Fibonacci projection level based on the length of the wave "a" fall from $49.51 to $32.33 and the wave "B" peak at $44.14.
As far as gold's reaching back to the previous price pinnacles is concerned, Australia's Resource Capital Research opines that such a feat might just be a matter of not a few weeks or months, but perhaps a few years. The Sydney-based firm correctly notes that "The safe-haven buying of gold is fear-generated, though this is irrelevant when investors are forced into liquidity-related selling. The recent bull market in gold has been fuelled by the fear associated primarily with massive deficit-driven stimulus spending in the U.S., and perhaps the biggest fear factor, festering euro-zone sovereign debt concerns and the perceived risk to the stability of global financial markets."
While fear is a powerful motivator of market behavior, it is occasionally ill-founded and so is the conviction that, under any/all circumstances, the formula "a+b" must equal "c" (or, in this case, "i" as in; inflation). In its most recent market commentary, the CPM Group analytical team takes us back to the dark days of 1982 and finds that "during the second half of 1982, convinced that [huge] monetary accommodation, the precursor of today's quantitative easing and the origin of the concept of 'throwing money from a helicopter' in response to financial crises that risk throwing the country into a deep or deeper recession, investors bought gold hand over fist. They drove gold prices from $298 in June 1982 to $510 in January 1983. The view was that the monetary policies had to be inflationary."
Guessing incorrectly and overloading in gold on account of misplaced expectations, had its consequences, as it turned out. We bring these items to your attention at this juncture because at least two Fed policy makers have chimed in with their reservations as to the idea (or practice) of utilizing inflation as a "growth tool." CPM remarks that as far as 1982 goes, "History has shown us that this was one of the worst times ever to buy gold. The monetary accommodation brought the world out of recession and back from the brink of collapse. The world's financial system did not collapse. Gold spent most of the next 15 years trading between $320 and $400, with occasional spikes above and below that range."
CPM concluded with the following passage - and this was written on September 22 (!): "None of this is to belittle the current state of economic disarray, or that gold prices will not keep rising. It is to inject a note of caution and humility into the current euphoric view prevalent among gold producers, traders, investors, marketers, and others, that gold prices are inexorably bound to rise over the next many years because of the enormous economic and financial problems facing the world. The world has faced big problems before, and it has survived them."
Until tomorrow, let's survive another market session...
Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.