Gold & Silver; Bearish Outlook!

Bullion Round Up

Better than expected ADP nonfarm payroll data sent gold and silver lower to retest support at $ 1456 (50% retracement area) and silver at $ 23.41. The initial reaction was a selloff but strong demand came in to push prices back up, indicating that traders are taking time to digest the job data and overall sentiment is that the Fed will remain accommodative. ISM non-manufacturing index came in weaker which added a twist on how well the US economy is recovering. The Fed could face more mixed data as certain economic indicators showing positive numbers while the other core numbers lagging behind. UBS Joni Teves simply put into context “While there has been some scaling-back in recent Fed commentary, this has not been deemed sufficient as yet to warrant a sharp rally to unwind the fears of an earlier end to QE that have been seeping in since the beginning of the year.”

We must stress once again that gold and silver is in a corrective bull market after the massive selloff. Investors and analysts might argue otherwise - opting to say that this is the beginning of a bear market for years to come. Call us naïve, but we are well aware that after this rebound ended (somewhere around $ 1500 to $ 1522 area) - prices could retest previous low at $ 1327 or even lower as some estimate at $ 1300, $ 1250 or $ 1100 even! We do not have any crystal ball to project how low prices could go to but a revisit to $ 1325 looks highly possible.

After the second corrective down phase, we see a slow recovery on prices given that the global economy environment continues with accommodative stance and policy. Structural reforms among the Eurozone countries continue to be an obstacle for EU politicians. There is no quick fix solution on high youth unemployment, possible disinflation as well as an economy that show contraction. ECB will maintain low interest rate and remain open minded to unconventional fiscal and monetary tools if necessary. Meanwhile, Fed recent statement also offers such flexibility of increasing or decreasing the monthly QE programme. All of this is done in light of the changes in economic environment. Economists felt that both central bankers are giving off a negative vibe that the worse is yet to come.

Gold Technical

Gold buying may slow if prices rally to $1,500, and a “significant number of funds” may place bearish bets above that level, Credit Suisse Group AG said in a report yesterday - quotes from Bloomberg. Last Friday, we saw that gold attempted to push higher but failed to break resistance at $ 1488. In addition, the better than expected ADP job numbers sent fear among the gold community that Fed might reduce the $ 85 bln QE programme. Soon, the market settles with a rebound and the stock market could only care less but posted an all-time high on the Dow - breaking past the 15,000 barrier and the S & P 500 breaching 1,600.

We would like to repeat our advice from our previous commentary that the gold market could see possible slowdown in physical demand which may weaken gold rebound. In addition, continuous outflow of funds from ETF only increase selling pressure. Investors who are still holding will be wary of a possible margin call again. “The fundamental picture, for now, has changed,” said Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Copenhagen. “The investment community or those trading paper gold in futures and ETPs are still heading for the exit.”

One of the biggest worry is that gold could start to break lower and short sellers continue to add pressure. A break below $ 1456 (50% retracement) could easily take gold to a low of $ 1404. However, a break pass $ 1404 will give the bears more control and prices could fall to revisit $ 1325 again.

Silver Technical

Prices whipsawed after the release on the better than expected ADP job numbers. Silver tested the 38.2% retracement area of $ 24.32 but failed to gain above that level. Instead, it fell to retest the lower trend line (see below chart) and rebounded strongly. This indicates that the uptrend rebound is still in progress and wild swings are to be expected. The swings in US dollar index only add more volatility in the precious metal complex.

However, we must continue to warn that the rebound could be on its last leg and a break below the lower trend line (Daily Chart) could spell more downside pressure on the white metal. The market remains bearish and this rebound could prove short lived as the speculators are positioning for more price weakness in the next few weeks.

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07 May 2013 | Categories: Gold

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