Wednesday, July 7, 2010

After Lassitude, Gold Slumps Below $1,190

The inflation rate in Grece hit 5.2%, but that number was largely due to tax increases. The data didn't provide any boost to gold, which dropped in early morning trading after failing to stay above $1,195. It did get above that level for two hours starting at 8:30 PM ET, but sunk back to around $1,194. The decline in early-morning trading was choppy and frequently interrupted, but it proceeded to the point where the metal got below $1,185; the bottom of $1,184.30 was reached as of 5:30 AM. Recovering to above $1,190 within two hours, the metal slumped back to the high 1180s. As of 8:01 AM ET, the spot price was $1,185.80 for a loss of $8.00 on the day. The Kitco Gold Index split the loss into -$5.10 for predominant selling and -$2.90 for a strengthening greenback.

The U.S. Dollar Index spent most of the overnight session drifting upwards. Reaching almost 84.4 around 5 AM, it slumped back a little later. As of 8:06, it was 84.25.

A Wall Street Journal report ascribes the early-morning fall to two items: mainland China's State Administration of Foreign Exchange deciding not to sway from their policy regarding gold, because the metal's thirty-year return hasn't been all that good, and a report that the Bank of International Settlements undertook some gold swaps.
Simon Penn, market analyst at UBS, added: "The reality is that all SAFE [China's State Administration of Foreign Exchange] said was that it wasn't changing its existing investment strategy towards gold—no news really. But given the pressure gold is under at the moment and the very long positioning in the market, its comments were sufficient to depress the market below $1,190/oz."

Reports that the Bank Of International Settlements undertook large-scale gold swaps in the first quarter also "confused" the market, said UBS analyst Edel Tully, compounding the downward pressure on gold....

Gold could possibly retest the mid-May lows around $1,165 an ounce, after failing to hold at $1,200 an ounce , said Bullion Desk analyst James Moore.

However, he added that with little change in the global economic and European sovereign-debt outlooks, there "is little at present to suggest this is anything other than a short-term correction."
Another analyst was quoted as saying the market was keeping an eye out for economic data; if they're bad, then gold should rise in consequence.

The State Administration's decision, plus some recovery in the greenback, were the reasons given by a Reuters report. There's still a fair bit of physical demand at current prices.
"China has $2 trillion in currency reserves, so it is simply not possible for them to invest a major part of this in gold -- the gold isn't there," said Commerzbank analyst Daniel Briesemann.

"I am convinced they will increase their gold holdings if prices fall further. I don't expect gold to fall below $1,000, but if that happened... China would step in and buy gold."

He said concerns over the economic outlook after a raft of soft U.S. economic data was likely to keep gold well-bid, however. "Over the mid to long term, gold should be very well supported," he said.
Also mentioned is the holdings of the SPDR Gold Shares Trust (GLD) dipping 2.43 tonnes to 1,316.48 tonnes.

The morning Bloomberg report, as webbed by Business Week, says the U.S. dollar's pull-up helped push gold down. It included an influence on the rising greenback: a major Russian bank defaulted on $250 million of its bonds.
Gold “is looking increasingly bearish and we could see even more technical selling and profit-taking,” said Andrey Kryuchenkov, an analyst at VTB Capital in London. Still, “the downside will remain very limited as long as economic uncertainty prevails.”...

“The dollar is exerting an influence on gold at the moment,” said Park Jong Beom, Seoul-based senior trader with Tong Yang Futures Co. “Gold has been losing some momentum since breaking higher to a record last month as more investors are enticed to book profits.”
Despite the decision from the State Administration of Foreign Exchange, gold buying in mainland China was up on the first half of this year. The article also mentions that fact that, despite the drop in GLD's holdings, overall holdings of ten gold ETFs were up slightly yesterday.

The beginning of regular trading saw a rebound to above $1,190, briefly pushing gold into the gain column. In the absence of any new economic data, the metal's run that started with the opening of the pit session took it up to $1,194 before reversing. As of 8:50, the spot price was $1,192.30 for a decline of $1.80 on the day. The Kitco Gold Index assigned +$0.60's worth of change to predominant buying and -$2.40's worth to greenback strength. The U.S. Dollar Index, after a partial recovery that took it up to 84.33, slumped below 84.2 before picking up a little. As of 8:53, it was at 84.21.

Although that news from mainland China was a disappointment, it didn't have a lasting effect on the gold price. Regular trading, seemingly motivated by the greenback's stall, all-but erased the loss. The metal may sink back as the session moves from early to late, but it got off to a good start.

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