Gold & Silver; Short-lived Rebound

Bullion Round Up

Bullion prices will remain under pressure as long as the US dollar index maintained a bullish stance. In addition, global equities are acting as a better alternative for investors and money managers as the outflow from gold backed ETFs continues. The general economic scenarios have also toned down from financial meltdown to a more stable outlook. Eurozone has not seen any of its members exiting from the single currency programme (instead it has added new members). The US economy is leading the way to modest recovery and added more jobs into the economy. Fed officials have confirmed their intention to cut back on the $ 85 billion QE programme as early as September. This week FOMC statement as well as chairman Bernanke press conference will be the key indicator to signify their intent.

After hitting a low of $ 1180, gold prices recovered somewhat higher on the back of short covering and some bargain hunters. However, the rebound has been disappointing as physical demand has not lived up despite the low prices. Buyers continue to stay on the side-line as they wait for prices to go lower. Hedge funds and speculators have continued to add into the short positions because they see lower prices ahead. The technical picture paints to lower low with a short term rebound. Resumption of the downtrend in gold price will continue for a little longer as the market shifted away from safe haven assets. Despite the negative remark, we argued that the selling has been overdone and have decided to take a contrarian view in the short run as per our previous commentary:

On the contrary, despite the fact that gold prices has dropped and its allure as safe haven asset is dwindling, we might enter into a corrective phase for a rebound higher. The increase in speculative shorts have made the case that it is an overcrowded trade and bouts of short coverings are expected before a retest lower. Ultimately, technical traders are targeting a low of $ 1150 to $ 1050 which could well happen in late Q3 or early Q4. Previous low at $ 1180 has given dip buyers and short sellers the reasons for a rebound. Production costs for mining the metal varies between different miners but some are quoting that the minimum cost comes in at $ 1200, which sets the floor for now. Supply disruption is expected as miners continue to lose money and this could well improve prices. Continue physical demand from developing countries such as China, India, Turkey and Russia play a major part. Other economists felt that gold reaction on QE tapering is overdone and the current setup has priced in more than what the market has anticipated.

Gold Technical

The rebound in gold prices must be treated cautiously - rising prices could just be a smoke screen to what could be coming next. Such corrective rebound may prove short-lived as the market continues to monitor speech made by ECB Mr Draghi as well as Fed’s Chairman Mr Bernanke. We felt that gold need to find a strong support before it can retest resistance that is currently set at $ 1236 / $ 1269 area. A retest of previous low or at $ 1200 could well be the catalysts for a meaningful reversal. We need to see more evidence of selling exhaustion before taking any long positions. With the rally in US dollar pretty much intact, it is far too risky to buy the yellow metal. Shorting the metal is far more favourable as it could retest $ 1180 and should it break lower, we see $ 1155 as the next target.

Traders Notes: Dip buyers are cautiously buying with a stop loss at $ 1150 - buying area is $ 1180 / $ 1200 / $ 1225 to go long. Expect a short period of short covering before the market resume lower.

Silver Technical

Given the weakness in US dollar index (consolidating), silver prices benefited and dip buyers were around to push it as high as $ 19.31. The white metal started off from last week low of $ 18.75 and managed to keep its gain above $ 19.00 area. However, the downtrend still persists and we fear that the rebound will be short lived. Any rallies must be sold but we are also aware that the market is near a bottom before it looks to consolidate in this downtrend. With gold prospect being negative, Silver prices fare no better in the short and medium term.

Traders Notes: Stay on the side line.

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09 Jul 2013 | Categories: Gold

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