Gold “Trying to Build Base” as Retail Demand Counters More ETF Selling

London Gold Market Report
from Adrian Ash, BullionVault
Fri 24 May, 08:45 EST

Gold “Trying to Build Base” as Retail Demand Counters More ETF Selling

The GOLD PRICE fell $10 per ounce after reaching almost $1400 for the 5th time this week in London trade Friday morning.

Silver held tight around $22.50 per ounce, managing only one-third of gold’s 2.0% gain for the week.

After yesterday’s 7% plunge Japan’s stock market bounced, but other Asian equities fell, as did European stocks.

US and UK markets are closed Monday for national holidays.

“There is a floor emerging around $1360,” says a New York dealer’s note, adding that bearish speculators wanting to profit from a fall in the gold price “may be inclined to wait” for a rally to this week’s high of $1414 before adding to their record holdings of short futures contracts.

Unless the gold price gets above Wednesday’s high, reckons technical analysis from Swiss bank and London bullion market-maker UBS, “the risk is for rejection and to resume the broader bear trend.”

But “while the trend is still bearish,” counters Russell Browne at Scotia Mocatta, “the metal is trying to develop a base.”

Given the 20% drop from 2011′s highs, the gold price “could take multiple weeks to consolidate and determine a direction,” Scotia says, pegging resistance at last week’s high of $1450 per ounce.

“That the gold price hasn’t completely collapsed,” says a note from Macquarie bank quoted by Reuters, “is testament to strong retail demand for jewellery, coins and bars” in the face of continued selling of exchange-traded gold trust funds by institutional investors.

Thursday saw another 1.5 tonnes of gold exit the world’s largest gold ETF. The SPDR Gold Trust has now shrunk by 25% from its all-time peak of six months ago.

The UK’s largest pawnbroker H&T today warned investors that every 10% drop in British Pound gold prices will knock £2 million ($3m) off its pre-tax profits.

Major government bonds meanwhile ticked higher as stock markets slipped, nudging interest rates lower on UK, US and German bonds.

To reduce “significantly the risk of a sharp rise in [Japan's] long-term rates,” says Nomura analyst Richard Koo, the Bank of Japan should clearly state it won’t let inflation rise above 2% per year.

Japan’s central bank vowed at the start of April to double its balancesheet to nearly $3 trillion by end-2015. The Japanese stock market has gained 29%, but government bonds have fallen sharply, doubling the interest rate on new 10-year borrowing from below 0.4% to more than 0.9% today.

“Pundits in the media, and especially on television, have devoted a great deal of attention to the subject of inflation,” says Koo. “The more people hear about it the more they are inclined to believe it, even if it is not true.”

“[But] recent history teaches us that inflation has fallen too low,” writes John Hopkins professor and IMF scholar Laurence Ball.

Commenting specifically on the United States, “Raising inflation targets to 4% would have little cost,” says Ball, “and it would make it easier for central banks to end future recessions.”

“Gold’s sensitivity to inflation is better than most other asset classes,” says Kleinwort Benson’s chief investment officer, Mouhammed Choukeir.

The private bank and wealth manager is now selling gold from client portfolios, however. Because with gold price “momentum now clearly negative and key technical support broken at $1500, it looks to be an increasingly expensive form of insurance.”

Kleinwort is increasing its allocation to the US Dollar – “a safe haven currency” – because the recent surge in world stock markets have been accompanied by “signs of investor complacency.”

Adrian Ash