gold has become increasingly undervalued relative to where we see fair value: $1,640

The gold price have started the week on the front foot, helped initially by a stronger Euro but also by firmer Asian and European equity markets after the latest Greek polls suggested that pro-bailout parties would garner enough votes to form a government. Turnover remains rather thin however, owing to the US Memorial Day holiday. While Greece looks a bit more stable, albeit only thanks to one opinion poll taken 3 weeks ahead of the election, Spain continues to sink into the mire with the
deteriorating BFA-Bankia situation the most visible of the country’s many problems.

The freefall in net speculative length finally ended, although the gains of the past week were meagre — only 10.2 tonnes, compared to the 140.0 tonnes lost in the previous two weeks. The net improvement was the result of 21.0 tonnes added to speculative longs. Casting a shadow on this improvement was the 10.8 tonnes added to shorts — marking the third successive week of increase. Net speculative length is only marginally off its 12-month low (344.0 tonnes compared to 333.8 tonnes), and consequently decidedly weak, compared to historical norms. So, while the mild turnaround is encouraging, there is still a long way to go before we’d say that confidence in gold has returned.

With gold below $1,600, we have seen increasing demand from Asia. Our Standard Bank Gold Physical Flow Index (GPFI) remains positive and has recently pushed higher. We still believe that gold has become increasingly undervalued relative to where we see fair value: $1,640.

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