Gold News

Gold Slips But "Downside Test May Have Finished" as "Smart Money" Slashes Short Position, "Weak-Handed Speculators" Quit

The price of Gold slipped in Asian and early London trade on Monday, holding above $1200 an ounce – and holding 1.4% above last Wednesday's 7-week low – as world stock markets extended their four-session gains.

The Dollar slipped against the Euro, Pound and Yen, but US Treasury bonds ticked higher, nudging 10-year yields down to 3.04%.

Silver also fell, dropping below $18 an ounce, as base metals traded in London lost more than 1% and US crude oil futures edged below $76 per barrel.

"Gold registered another down week, but only by a slim margin," says the latest technical analysis from bullion bank Scotia Mocatta of Friday's finish at $1212.

"With a doji on the weekly candlestick, the market may have now finished testing the downside in gold," says Scotia, pointing to last week's price-pattern of falling sharply (down 2.2%), only to recover and end unchanged.

New data released late Friday from US regulator the CFTC meantime showed commercial "industry-side" players in the Gold Futures and options market cutting their bearish position at the fastest pace since April 2009 last week.

Falling to a 13-week low, the "net short" position of bullish bets minus bearish bets held by miners, refineries and bullion banks – often referred to as the "smart money" – shrank by 16.1% in the week-ending last Tuesday.

Overall, the commercial traders' "bull ratio" – meaning the number of bullish contracts they hold as a proportion of all their directional bets on gold – jumped above 1-in-3, the strongest bull ratio since December 2008.

Non-commercial "speculative" traders meanwhile slashed their net long position (of bullish minus bearish bets) to the equivalent of 852 tonnes, also down by 16.1% from a week earlier as hedge funds and institutional players – as well as private investors – closed almost one contract in every twelve they held the Tuesday before.

"The latest CFTC ?gures suggest that weak-handed speculators are largely out of the market," says Standard Bank's latest Precious Metals Monthly.

"Much of the shift in the net [speculative] position had come from short-covering, and so it is unlikely that there is scope for much more speculative liquidation in the current environment."

Over in the Physical Gold bullion market, "The sharp drop to $1200 has seen strong physical buying reappear and scrap sales dwindle," Standard Bank continues, while Gold's Typical Summer Lull now looks set to see gold "treading water" in July and August – "all other things being equal".

Nevertheless, "Underlying financial tensions point to a buy-on-dips policy ahead of further inflationary concerns."

Friday saw a further "trickle" of redemptions, notes another London dealer, from the giant SPDR Gold ETF – the $51 billion gold-backed trust fund that trades as a stock in New York, Tokyo, Hong Kong and Singapore.

Slipping back to 1,314.5 tonnes, the SPDR's hoard of Gold Bullion – held at HSBC bank-vaults in London – peaked as June ended at 1,320 tonnes, more 16% greater from the start of the year.

"Debt on government balance sheets and worries that the world could be heading towards a double-dip recession are behind the gold surge," says Charles Cooper at London brokerage Oriel Securities, speaking to The Guardian newspaper.

The fresh threat of economic downturn, he says, means governments "could be tempted to print more money to dig us out of a hole.

"That could precipitate inflation, making gold even more popular as a safe haven."

New figures published Monday showed the UK's 2008-2009 recession cutting GDP more sharply than previously reported, down by 6.4% peak-to-trough.

This week brings a raft of consumer- and business-price inflation data from the European Union, United States, Japan and New Zealand.

EU regulators are now conducting "stress tests" on 91 major banks accounting for almost two-thirds of the 27-nation union. Results will be published on July 23rd.

Minutes from the US Federal Reserve's latest policy meeting will be released on Wednesday, with analysts and traders watching closely for dissent over the promise of exceptionally low policy rates for "an extended period", as well as any talk of fresh Quantitative Easing of the money supply.

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Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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