Physical Market "Continues to Buy Gold" as Consumers "Adjust to $1600", But Technical Analysts Point to "Next Leg Down"

PRICES to Buy Gold fell further from yesterday's attempt to break $1600 per ounce in London on Tuesday morning, bouncing higher from $1575 as European stock markets rose for the second day running after falling all month.

The price to Buy Gold with British Pounds reversed an early dip below £1000 per ounce – a level first reached as the Eurozone and US debt crises intensified in July 2011.

Credit ratings agency Fitch today cut Japan's status to "A+" with a negative outlook.

Commodity prices were mixed, with US crude oil almost 7% down from the start of the year as the Paris-based OECD consultancy cut its forecasts for Asian GDP and global energy demand.

For US investors looking to Buy Gold, "We believe that the significant 1532/1522 support area will be retested in the months to come and that it will give way when this occurs," says Commerzbank's latest technical analysis.

"A move back below 1568 keeps the bears alive looking for another leg lower," reckons Russell Browne at Scotia Mocatta.

"We continue to eye the topside resistance between 1625-35 as being fairly strong technically," says Swiss refiner and finance group MKS's Australian office.

"Traders need to remain cautious of negative euro headlines, which could easily propel the yellow metal lower."

After Greek and then Spanish banks were seen suffering a run by depositors, new data from Italy yesterday showed foreign investors withdrawing their money from Rome's debt.

"This largely confirms what we have seen from the Target 2 [cross-border banking liability] data," says Alan Ruskin at Deutsche Bank  – "that €268bn in LTRO borrowings (at the end of April) are making up for the net long-term capital outflow as Italian debt increasingly becomes domestically held."

Both Italian and Spanish government bond prices ticked higher on Tuesday, nudging yields down to 5.6% and 6.0% respectively on 10-year debt.

US, Japanese and German bonds all slipped, as did UK government gilts despite consumer price inflation slowing to 3.0% per year in April, according to official data.

Right at the upper limit of the central bank's official target range, that was the slowest pace of CPI inflation since Dec. 2009.

"Further monetary easing is required," says the International Monetary Fund's latest review of the UK economy, "provided via further quantitative easing (QE) and possibly cutting the policy rate."

UK interest rates have now been at a record low of 0.50% for 38 months running. The last such run of static rates was the 2.0% imposed between 1931 and 1954.

"If there's one area where the Bank of England has undoubtedly failed, it is with respect to its inflation forecasts and hence its inflation target," writes Steve Barrow, chief currency strategist at Standard Bank in London, noting that both the Bank of England and the European Central Bank are conducting internal reports into their handling of the financial crisis starting 5 years ago.

The ECB's report is due in June, with the UK report set for October.

"That policy options are limited may in fact be the main finding of these reports," reckons Barrow.

"The use of inflation targeting is unlikely to change...We doubt that the ECB will jettison [extraordinary measures] like SMP and LTROs – even if its report questions their usefulness."

Back in the bullion market, and "with gold below $1600, we have seen increasing demand [to Buy Gold ] from Asia," says today's commodities note from Barrow's colleagues at Standard Bank.

Comparing 2011's action around the same price point, "Clearly the physical gold market has adjusted to the higher Gold Price," writes Walter de Wet, "with rallies not being sold into as last year.

"However, while the physical market is providing support on price dips, the question remains: at what price will physical demand fall away?"

The price for Indian households wanting to Buy Gold rose 1% today in Mumbai according to Sify.com, coming within 2% of the all-time record at Rs 29,690 per 10 grams hit at the start of this month as the Rupee fell to record lows on the currency markets.

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