Gold News

Gold Prices Rally as "Speculative Excess" Falls Back and "Smart Money" Slashes Its Bearish Position

Gold Prices jumped into the start of New York dealing on Monday, rising 1.3% from last week's 3-month low as world stock markets struggled to hold flat.

Crude oil ticked back above $74 per barrel, while European government bonds were unchanged but US Treasuries fell ahead of President Barack Obama's 2010 budget announcement.

Expected to reveal deficit spending of $1.56 trillion – overtaking last year's all-time record – the deficit will equal 10.6% of this year's projected GDP, pushing total debt outstanding up from 64% to 77% of annual output by 2020.

"With a [rising] trendline dating back to October 2008 coming in at $1070, gold remains vulnerable to further correction," says one London dealer in a note.

But also citing gold's 15-month trend line – which began at $683 after Lehman Bros. collapsed, and rose 79% to hit a daily run of all-time record highs in Nov. 2009 – "We are on the lookout for signs of basing," says a technical analysis from Barclays Capital.

"While most commodity markets have come under severe pressure over the past week, gold has held its ground impressively.

"Daily momentum oscillators are in oversold territory, while daily sentiment has reached extremes not seen since September 2008."

Only 15% of the non-professional Gold Futures speculators interviewed for the weekly DSI survey are now "bullish gold", says Barclays. Friday's poll of 22 gold-market professionals by Bloomberg News said that 11 expect Gold Prices to fall this week.

Last week, according to latest data from US regulator the Commodity Futures Trading Commission, professional and private speculators in Comex Gold Futures and options cut their 'net long' position by almost one-eighth, down to the lowest level since Sept. 1st at the equivalent of 814 tonnes.

The net long position of non-commercial players peaked above 1020 tonnes in late autumn '09, leading analysts to warn of "speculative excess".

Commercial traders, on the other hand – acting for miners, refineries, wholesalers and bullion banks – last week cut their 'net short' position by the same proportion as speculation eased back, down by more than 11.5%, the fastest drop since April last year.

Often called the "smart money" for taking relatively bullish positions ahead of strong gains, commercial traders en masse raised the 'bull ratio' of their long vs. short bets on the Gold Price to a 26-week high of 27.7%.

Over in global stock markets, in contrast, "We advise adding to positions on weakness," says a new report from J.P.Morgan's European team.

"We do not believe that this is the end of the [equity] bull market," agree UBS stock analysts Nick Nelson and Karen Olney, also quoted by the FT's Alpha blog.

Monday saw the start of Mining Indaba 2010 in Cape Town, South Africa – the "biggest industry junket of the year" according to Financial Times' correspondent Matthew Kennard, who writes that "The swagger (or at least a carefree jaunt) is back in the step of the great and good of the mining industry."

Silver meantime held in a tight range in early London dealing today, trading some 1.8% above last week's four-month low of $16.00 an ounce.

Over on the currency markets, the Dollar slipped vs. the Euro but the British Pound sank to its lowest level against the US currency in 2010-to-date after a series of voter polls, published in the weekend press, said this year's General Election – which must be held before June – will result in a "hung parliament", leaving neither major party in control of policy.

The Pound then fell further again, flirting with a 15-week low at $1.5850, on confirmation that the UK money supply shrank at its fastest pace on record in Dec. '09 – down by £22 billion ($35bn), even as the rate of increase in consumer prices jumped at its fastest pace since the current CPI measure began 13 years ago.

UK investors wanting to Buy Gold today saw the price rise 2.3% from last Thursday's 9-week low, trading above £683 an ounce as London's FTSE share index struggled to hold flat.

Looking ahead, Tuesday will bring an interest-rate decision from the Reserve Bank of Australia – the first developed-world central bank to raise its interest rates from "exceptional lows" so far since the global financial crisis.

Thursday brings interest-rate decisions from the Bank of England and European Central Bank, with no move expected from the current 0.5% and 1.0% rates respectively.

Before that, Wednesday will see the European Commission publish its review of Greece's annual budget plans – currently set to exceed 14% of GDP, rather than the 3% ceiling set by the treaty of European monetary union.

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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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