2009-10-20

Speculative length still rising

Risk appetite continues apace. While growing down side risk to gold, the amount of liquidity flowing to precious metals is likely to limit any sell-off. Of note is the substantial decline in the correlation between precious metals and the US dollar in recent days (the dollar has been trading around $1.4900 against the euro for the past few days). Most of the investor doubt this correlation will remain low, and a weaker dollar should continue to support precious metal prices.

Upside for gold is still limited. Continue to see scrap gold entering the market. At the same time, there was also some ETF gold selling. ETF Securities reported selling of 8.06m oz on Friday. While investor do not expect large-scale ETF selling, there is clearly some resistance in the gold market at the moment. As a result, I do not advise adding any new long positions. A correction towards USD1,020-USD1,030 could be a buying opportunity. Support is at USD1,040 and USD1,030, with resistance at USD1,060.

There is still a clear disparity between speculative activity in the gold market and what we observe in the physical market. Speculative activity remains high on the back of dollar weakness.
Speculative length for gold continues to rise. According to CFTC data, non-commercial long positions have jumped 69 tonnes, from a week earlier, to 982.6 tonnes. At the same time, the noncommercial short position has risen only 1 tonne, to 80 tonnes. This leaves the net non-commercial position at 902.6 tonnes. This position is more than double the longs have seen in April when the equity markets started their recovery, and a massive 735 tonnes higher than the lows reached in November last year. Net speculative length now accounts for 42% of total open interest — the highest level in at least two years.

The CFTC figures show a very bullish speculative market. However, over the past two weeks, investor continued to witness a very weak physical market (refer to Commodities Daily of 14 October 2009). Continue to see scrap flowing to the market at current price levels. As a result, we believe gold will find it difficult to move higher. A gold price closer to USD1,030 might see physical buying return. While most of the investor still believe gold could reach USD1,100 in Q4:09, they are increasingly seeing strong resistance from the physical market. For the first time in many weeks, investor believe that there should be a price correction towards USD1,020-USD1,030 before the gold price will move higher again.I think buy dips to make better profit.

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