Short-term gold may find resistance to a move higher

Despite positive real economic news, especially out of China over the weekend, we maintain gold will push higher in Q4:10.

While the 10-year government bond yield in the US continues to move higher (from very low levels), the yield on the US inflation-linked government bond remains almost unchanged at around 1%, showing that the market expects real interest rates to remain low in the US. Low real interest rates are bullish gold.

The latest CFTC data indicates speculative interest is rising in precious metals. We noted in the Focus section that gold’s net speculative position is in line with the average level seen over the past two years when looking at the speculative length as a percentage of open interest (OI). Platinum doesn’t look overextended using this measure (although silver and palladium’s net
speculative positions are starting to look very high):

  • NYMEX Platinum’s net speculative length stands at 50% of OI, well below the highs of around 64% registered in May this year, and in line with the average of 49% over the past two years.
  • NYMEX Palladium’s net speculative length stands at 65% of OI. Palladium’s speculative length as percent of OI has not come down substantially since May and has hovered around these levels since the start of the year.
  • COMEX silver’s net speculative length stands at 28% of OI, well above the average of 21% of OI seen over the past 2 years. This is also not far off the highs of 30.8% reached in September last year.

However, as with gold we continue to see good physical demand for silver from both India and Asia. Short-term gold may find resistance to a move higher, especially on the back of positive data from China over the weekend. We see gold support at $1,242 and $1,240, with resistance at $1,260 and $1,265. We expect physical demand to provide additional support at the $1,230—$1,235 level.

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