Gold & Silver; Temporary Squeeze

Bullion Round Up

Does the current breakout warrant higher prices or has the media overblown the potential for higher prices? We would like to take this opportunity to remind our readers that gold continue to trade in a bearish market environment. The current rebound may well be a short one as we have not seen enough evidence that gold prices could recover and continue higher. Ironically, we are starting to share the same view as Chairman Bernanke that our understanding on gold could be rather limited. Recent monotonous price movement has led many investors asking questions about the prospect of holding gold as safe haven assets. We have seen outflow from gold backed ETFs as the primary instigator on the fall in price. Physical demand from China, India and Middle East managed to support the recent price action. In addition, the GOFO rate on gold bullion has been trading in the negative zone for the past 10 day’s added pressure. Speculators have decided to cover their shorts at this level but further advancement in gold price may remain limited due to various resistance levels at $ 1338, $ 1350 and $ 1375.

We have covered the current temporary short covering event weeks before it happened (see our previous articles). As a forward looking publication, we will not discount the fact that gold could maintain this bull run in the event that physical demand increases, confidence among investors are restored and more short covering among the sellers (as we approach end of July). Short term support is at previous resistance (now support) at $ 1301 level but other supports are at $ 1270, $ 1250 and $ 1208 area. With a weaker US dollar index, gold prices can maintain its current rebound. However, we will remain cautious on US economic data that could well increase the potential of “septapering” or even increase the size of tapering.

Gold Technical Outlook

The recent price action in gold reached our short term objective at $ 1325 / $ 1338 area. We continue to see strength in the current rebound and prices could consolidate in the next few days. However, we advise caution because investors and speculators may change stance should the US economic data improved. Chairman Bernanke made it clear that tapering is data dependant and he promoted an accommodative stance for now. Global equities rally on the back of his dovish remark, followed by other risk assets. Given that gold reached an oversold territory (when it was trading at $ 1180), there are rooms for dip buyers and speculators to trade higher. Bloomberg survey shows that hedge funds are more bullish and have increased their long bet on gold.

Prices could continue higher after it break pass previous resistance at $ 1298 and the psychological level of $ 1300. Potentially, prices could retest $ 1325 and short covering rally may push the current rebound higher. Despite that, the medium term bearish perception has not changed. Once the rebound rally is exhausted, we would strongly recommend our readers to short sell the yellow metal again.

Traders Notes: Expect a short period of short covering before the market resume lower. Short sellers are looking to short at $ 1326 and $ 1338 area target remains open at the moment. Stop loss is advice at $ 1350 area.

Silver Technical Outlook

Silver prices managed to break above the psychological level of $ 20.00 given the recent strength in gold and dollar weakness. Investors also favoured taking a long position on the white metal as some called for the end of the bear rout. Others claimed that silver has reached a bottom and it is starting to consolidate. However, we continue to see a persistent downtrend and fear that the rebound will be short lived. Any rallies must be sold at the moment unless it trade above $ 21.60 level to give the bull a chance to recover.

Traders Notes: Stay on the side line. Only a break above $ 21.60 will give the bulls more ammo to retrace higher.

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23 Jul 2013 | Categories: Gold

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