2010-05-10

Gold bounce above $1,200

Although US equities have recovered most of the ground lost in yesterday afternoon’s rout, the sudden drop of more than 5% in the S&P index (in just a few minutes) was enough to see gold bounce above $1,200. We had thought gold would find strong resistance above $1,190 — but markets were in a panic after equities’ plunge. $1,200 now provides support to gold, as risk
aversion remains entrenched in financial markets.

However, we remain mindful that scrap continues to come to the market. The moves in US 10y government bonds yields are large for this very liquid market. The 10y yield has dropped from 3.80% at the start of last week, to 3.40% this morning (after falling briefly in chaos to 3.26% yesterday). These lower yields indicate three things:
  1. Firstly, the market is very risk-averse.
  2. Secondly, the dollar should still find support.
  3. Thirdly, higher-beta commodities,
which at this stage include all metals and energy except gold, could struggle to rally. (Risk aversion has been fueling ETF gold holdings.)

Gold support is at $1,200 and $1,180; resistance at $1,209 and $1,216.

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