2011-05-06

Gold were on the back foot


Once again, Gold were on the back foot yesterday, with silver leading the way down. A stronger dollar added to this weakness, although another increase in silver margin requirements was the main impetus for the downward momentum. COMEX announced that, as of close of business on 9 May, initial margin requirements for silver contracts would be raised to $21,600, with maintenance margins rising to $16,000. This represents a significant increase, over only two weeks, and has prompted many investors to reconsider their silver positions. A sell-off has ensued, with silver pushing easily through the psychological $40.00 mark, revealing a market heavy with speculative length. The fall in silver prices has dragged the Gold complex lower,

Gold, too, might be able to slow down its descent on reports that central banks are increasing their holdings of the metal. The IMF reports that some $6bn worth of gold was added to the central bank reserves of Mexico, Russia and Thailand during February and March. However, this we don’t feel this is significant enough to turn sentiment, and foresee a short-term move below $1,500. Our strategic view on gold remains constructive, owing to continued (albeit slower than in 2010) growth in global liquidity. Given that we expect further downside in base metals, as well as the short-term pull back in gold, the potential downside for silver looks large. Silver’s vulnerability is particularly acute owing to the strong rally we’ve seen in recent weeks.

Gold support is at $1,491 and $1,480. Resistance is at $1,529 and $1,555.

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