Physical market resists a higher gold price

While the political turmoil in the MENA region is inflating investment demand for gold, physical demand for the metal has been lacklustre. The rise in investment demand is evident in the increase in the net long non-commercial gold position in the physical market over the past 4 weeks, but also in the steady rise in gold ETF holdings since the start of February.

However, the physical market is in a seasonally weak period. With gold approaching $1,440, we see physical selling consistently outpacing physical buying. The intensity of selling activity as a result of resistance to a higher gold price, is not yet as strong as the same period in 2009 and 2010. The main difference between now and the two previous years, is buying interest continues to appear on dips at the moment (currently dips towards $1,400), which is offsetting some of the selling pressure.

The move in the physical market, from providing support in January and early February, to providing resistance, is evident in our Standard Bank Gold Physical Flow Index (GPFI) which has recently declined from close to all-time high levels during the middle of February to negative territory last week (see graph). A negative value indicates we observe a physical market that is on net a seller of gold, while a positive value indicates we observe a physical gold market which is
on net a buyer. Physical gold demand is weak and we are entering a period where rallies in gold are likely to attract more scrap and other gold selling. Our view on gold remains unchanged. We maintain that the metal could reach $1,500. While we still target $1,500 to be reached in Q3:11, MENA tension may push gold towards our target earlier. Tactically, where we saw fundamental
support, and value, below $1,340 at the end of January, we now see fundamental support below $1,370.

The main reason we do not bring forward our target of $1,500 is the seasonal weakness in physical demand — we believe that resistance in the physical market has assisted in capping
rallies in gold the past two weeks — and that it may continue to cap rallies for a few more weeks


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