GOLD ANALYSIS

Gold stalls as Chinese holiday drops momentum

Last week’s huge surge in gold purchases seems to have quietened down, but this may in part be due to China’s May Day holiday shutdown. Economic announcements this week could prompt a resurgence.
Author: Lawrence Williams
Posted: Tuesday , 30 Apr 2013

LONDON (Mineweb) -

For the most part, gold had a relatively good week last week making a good recovery from the massive drop of a week earlier.  Seemingly this was largely driven by an almost unprecedented level of demand for physical metal, particularly from Asian and Middle Eastern markets, but also being seen elsewhere too.  As long as that momentum continued then the gold price was on a bit of a roll.

However this week the recovery seems to have stalled somewhat.  Variously this has been put at profit taking from those who were clever enough to buy at the recent bottom, continued selling by nervous holders and a Chinese holiday which has reduced buying there.  The holiday lasts until Thursday at which point the buying spree could see a resurgence – particularly if prices remain muted in the interim.

But even if the gold price recovery has stalled due to the slowdown in  the huge Chinese buying, gold has, at least for the most part, held on to its gains as economic news expected this week, both from the U.S. and EC, is predicted to be seen as positive for the yellow metal.

As Jeff Nichols puts it in his latest commentary on nicholsongold.com “Global financial markets will be taking their cues from U.S. Federal Reserve and European central bank policy meetings to be held by the Fed on Tuesday and Wednesday and by the European Central Bank (the ECB) on Thursday.  The consensus among economists who pay attention to these things suggests there won’t be any significant change in Fed policy . . . but, in contrast, there is a strong belief that the ECB will cut European interest rates from their already record low levels.”

While these factors are seen as broadly positive for gold, as Nichols warns: “A cut in European interest rates could be a mixed blessing for gold. Here’s why: Lower European rates could adversely affect the euro in world currency markets . . . making the dollar appear stronger. And, dollar strength has often — but not always — been a short-term negative for gold. It could be that the markets have already priced in a weaker euro/stronger dollar, in which case there may be little gold-price reaction.

Longer term, stimulative ECB monetary policies will be a big plus for gold, not only its euro-denominated price but, reflecting higher aggregate global gold demand, as big plus for the U.S. dollar-denominated price as well.”

But what of demand?  By all accounts the buying of physical gold over the past week or so, since the big price collapse has been extraordinary – and has been seen worldwide (see Shortages of physical gold now a global phenomenon).  According to a Bloomberg note today, demand in the Middle East has been enormous.  “Surging demand for gold from Dubai to Istanbul has pushed physical premiums in the region to levels not seen in years as the biggest price slump in three decades lures consumers” reports the news service.  “Premiums paid by wholesalers and bulk buyers in Dubai to secure a 1 kilogram bar of bullion are being quoted between $6 an ounce and $9 an ounce over the London cash price, said Frederic Panizzutti, global head of marketing and sales at the Swiss-based bullion refiner MKS. That compares with about 50 cents before the rout” the article goes on – see Gold Rush From Dubai to Turkey Saps Supply as Premiums Jump.

But the strength of the rebound has taken many of the banks by surprise.  They have been rushing to downgrade their forecasts for the year – but remember these forecasts are usually for average price over the year and the poor performance of gold over the first four months of the year almost certainly means the downgrades were necessary – much will yet depend, though,  on the performance of the gold price over the remainder of the year as to how accurate these estimates are.  However with the banks nearly all looking for prices this year up to around $2000 in January, and now perhaps looking for several hundred dollars lower they may be feeding contrarian investment policies.  Banks tend to be reactive in their analyses, seldom managing to predict the future price trends with any degree of accuracy.  Indeed UBS comments that “Forcefulness of the recent correction was, in many ways “baffling”!”

But China comes out of its May Day holiday shutdown on Thursday and it will be interesting to see what happens then.  If purchasing resumes at last week’s levels we could end up seeing another price surge which takes gold back above more resistance levels, possibly triggering computer generated purchases which match the computer generated sales on the way down.

However one factor which had been thought might be driving gold purchases does not seem to have been an influence.  Following the Cyprus bail-in proposals whereby large depositors in the country’s two major banks might lose 60% of their deposits as a contribution to the rescue plan, it was expected that deposits in banks in some of the seen-as-vulnerable Eurozone economies would be withdrawn and put into other assets, of which gold is one, just doesn’t seem to have happened – at least not yet

But, back to Jeff Nichols, regarding gold price momentum and this week’s anticipated economic news which could provide another factor in its return, he notes  – “A significant upside gold-price reaction to this week’s news from the Fed and the ECB just might be enough to fuel an upside price advance and restore upside momentum.  Momentum and technically driven trading in futures and over-the-counter derivative markets were responsible for the swiftness and magnitude of selling as gold prices came tumbling down. Although gold certainly remains vulnerable to renewed technically inspired selling — especially if prices stall below recent highs — the potential for high-powered moves on the upside should not be overlooked.  If gold prices can break through key resistance points and post further significant gains in the days ahead, the machines will turn increasingly bullish — and they have the buying power to drive prices much higher in a blink of the eye.”

For a sustained rise in the gold price momentum needs to be re-established.  This week will see whether indeed this will happen in the short term.