February could be a weak period for physical demand

Gold held up well until yesterday morning when weaker equities and the stronger dollar started to weigh on all commodities. With gold breaking out of the lower end of its recent trading range, we now find it difficult to see major upside for the metal in coming weeks.

Currency fluctuations and appetite for gold in the physical market guide my analysis. While physical demand has not been exceptional, we have seen a steady buying interest during the past few weeks. This physical buying interest has no doubt supported gold in recent days. This physical demand is evident in how gold denominated in euro outperformed gold denominated in dollar — despite ETF holdings falling.

February could be a weak period for physical demand. Last year, between February and April the volumes of scrap gold that came to the market were large (as evident from the negative values in my index during that period). While there is no guarantee that such selling will be repeated, we may advise caution. From physical flow index has indicated higher buying interest than the same period in 2009; this is bullish. Some of the demand seems to come ahead of Chinese New Year (due on 14 February). However, note two observations:

  1. Firstly, last year Chinese New Year was on 26 January. Thereafter, physical selling started. This year, the Chinese New Year is three weeks later, on 14 February. Because Q1 is traditionally the weak jewellery period of the year, and should we see weakness in physical demand, this may not be the case until mid-Feb.
  2. Secondly, the current downward pressure which the dollar is putting on the gold price could motivate more scrap selling as investors try to cash in on high prices.
While we believe gold will test new highs in H2:10, the recent developments in financial markets and past evidence from the physical market seem to advise caution on gold for the next few weeks.

Comments

Post a Comment

Popular posts from this blog

Gold edges up on weaker dollar, dovish U.S. Fed policy bets

Image
 Gold edged higher on Monday, helped by a weaker dollar and expectations that the U.S. Federal Reserve will reiterate its dovish monetary policy stance this week. Spot gold was up by 0.1% at $1,943.58 per ounce. U.S. gold futures rose 0.1% to $1,950.10 per ounce. “Gold is firm on the basis that the Fed could adopt a further dovish message with respect to average inflation targeting,” said Michael Hewson, chief market analyst at CMC Markets UK. “If you want to have a policy of average inflation targeting, you’re going to have to go into detail as to how you are going to arrive at that particular outcome.” The dollar retreated on Mond ay, bolstering gold’s appeal for investors holding other currencies, ahead of the Fed’s policy decision due on Wednesday. “If inflation forecasts remain at 2% or below, this could offer gold a tailwind as the zero-yielding metal thrives in a low-interest rate environment,” said FXTM analyst Lukman Otunuga. Market participants are also wai...
Read more

For the gold price, two outcomes are possible.

Image
For the gold price, two outcomes are possible. First is a return to or near the April low ($1,277.40). Second is a drop to a lower low, $1,240 - $1,260. Yet a third possible outcome is that the June and December lows were not a double bottom and one further drop may come. I account that the least likely, and look for a low here by the end of the week, but I'm no more'n a nacheral born durnd fool from Tennessee, so what do I know?   You'd think that an institution charged with promoting the gold industry would produce reports that at least cast the best light on gold's prospects. You'd think wrong, if you're thinking about the World Gold Council. They've been negative on gold for, oh, the last 14 years or so. Today they issued a report that contained a nugget about Chinese business using physical gold as collateral for bank credit ($40 bn worth) but they managed to tease a gloomy forecast even out of this inventive monetary use. That and bad ...
Read more

The price of gold advanced as high as $1,603.40 per ounc

Image
The gold price broke out to a new all-time high above $1,600 per ounce Monday morning, rising for the eleventh consecutive trading session. The price of gold advanced as high as $1,603.40 per ounce before backing off to trade just the $1,600 level. The yellow metal gained on the back of a surge in borrowing costs for Italy, the latest European nation to see its bond market come under heavy selling pressure. The lack of a deal to raise the $14.3 trillion debt ceiling also helped boost gold prices. The eleven-day rise in the gold price is the longest winning streak since January of 1980. The gold price delivered another noteworthy performance last week, climbing 3.2% on its way to a series of fresh record highs. With Monday’s advance, the gold price extended its monthly and year-to-date gains to 6.6% and 12.5%, respectively. Last week’s two-day Congressional testimony by Chairman Ben Bernanke on the economy and monetary policy revealed that the Fed remains open to the...
Read more