Gold & Silver; Tapering - An Experiment

Bullion Round Up

Bullion prices continue to be under intense selling pressure after months of ETFs outflows, good economic data, a strong rally in global equities as well as low inflation numbers. The talk of reducing QE programme added more weight to be bullish on the safe haven metals. Prices buckled under these pressures and it left many weak hand investors flushed out of the market. SocGen call the end of the era on gold as great asset reallocation is happening. Meanwhile, Goldman Sachs made a bearish bet to cut their long positions and short the yellow metal. We think that the Fed is undergoing an experiment by throwing different mixed signals and scenarios to fully understand how the market digests the word tapering. However, the key remains on the US labour market and how far it has improved. This Friday ADP numbers could set the tone on the dollar index as well as gold prices.

Building up to the second half of 2013, the US Federal Reserve seems ready and determined to cut back the QE programme as they witnessed positive economic data. However, chairman Bernanke remain cautious but very clearly under pressure to cut back on the $ 85 billion programme sooner than later. The continuous rumble and uncertainty only exacerbate holding gold as an inflation hedge or safe haven assets. Outflows in ETFs were an every month occurrence but lately the selling seems to have abated. Physical buying has picked up given the lower prices but investors’ confidence remains at an all-time low. Contrarian investors argued that such setup is optimal for a reversal on gold prices. The increase in negative sentiment could soon be too one sided and short sellers may have to unwind their short positions. Short covering remains to be the only hope to see higher gold prices as long as the situation favours it.

However, the short term outlook on gold remains murky as prices trade in the range of $ 1380 to $ 1420. It is becoming a repetitive ritual that one must short gold if it re-enter or break above $ 1400. The short sellers have interest to do so and this indicates that a break above $ 1425 will encourage more short covering. On the other hand, a break below $ 1380 could spell trouble and selling pressure could increase again. The risk to the downside remains but short term trading favour a higher gold price. If the situation permits, a weaker dollar index, correction in equity, increase uptake on ETFs product and with a decent physical demand may help gold retest resistance at $ 1424 area. However, our long term projection is to see this small rebound to falter and gold to retest previous low at $ 1321 or even lower.

Gold Technical

Market remains choppy as gold has once again faced selling pressure after it broke above $ 1400.00. It is becoming a repetitive ritual as the higher prices above the psychological level is rejected time and time again. The US dollar index rebounded from the low of 82.50 to a high of 82.95 but despite the weakness, gold continue to fail and retain the gains made. An initial break below $ 1405 was enough to send prices lower to break $ 1400.00. Investors are sending a clear message that dip buying will continue if prices dipped below $ 1390 but the short sellers are determined to short those rallies. We are growing sceptical at the rate that gold is going - that the fundamental and technical correlation exists.

Looking forward, a short term rally in a bear market is to be expected. Another bout of short selling opportunities is in the making and we would not be surprise that resistance at $ 1487 will be strong.

Traders Notes: Longs are taking positions at $ 1391, $ 1398, $ 1400, $ 1406 and $ 1414 with a stop loss ranging from $ 1373, $ 1385 and $ 1390 area. Profit target sets at $ 1424, $ 1445 and $ 1460 area.
Shorts are taking positions at $ 1404.50 and $ 1420.00 with a stop loss at $ 1425 area. Profit target is sets at $ 1400 and $ 1395 area.

Silver Technical

It will be a dull market if we do not see wild swings on silver prices. We previously warned that silver prices did not manage to break previous high of $ 23.19 and indicate further bout of weakness. The white metal gave back most of its gain but found support at $ 22.39 area. The hourly chart shows a potential rebound from this support line as the stochastic fast line is pointing higher. However, the MACD continue to trade negatively and that may well mean further consolidation before a change in direction.
Technically, it has got rooms to move higher but it could continue to trade in this range of $ 22.00 and $ 23.50. Only a break above $ 23.35 will it encourage the bears to do more short covering.

Traders Notes: Longs are taking positions at $ 22.40 area but with a wide stop loss at $ 21.75. Potential profit area comes in at $ 23.20 area and others are targeting higher numbers.

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05 Jun 2013 | Categories: Gold

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