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Gold Under Pressure Again - But Showing Resilience

On the face of it gold should trading at near record highs ahead of the German vote on Europe's bail-out fund later today. In addition we have jobless claims data from the US which once again will be scrutinized for any evidence that there is growth in the US economy - or not.

Yesterday the VIX Index rose above the 40 level again to close at 41.29 which underscores just how nervous the financial markets are to developments in the Eurozone. With Greek debt paying 23% (they went to the ECB and IMF at 7% for aid), it is clear that the status quo is unsustainable.  Beyond sovereign debt issues there remain questions about the deeply under-capitalized European banks - and in some
cases solvency. Meanwhile Italian 10 year yields on their bonds have edged up to 5.6% while Portugal are paying 11.3% for their debt which also is not sustainable.

From a record all time high of $1920 just 3 weeks ago, gold has shed over 20% of its 36% gain on the year to date with strong selling pressure seen during Asian trading hours both yesterday and again today. This beggars reason.

Perhaps most damaging of all for gold has been the price volatility which has prompted many investors simply to back off for the time being. Gold at this time is largely un-readable in that it is behaving contrary to reason. The best argument for weaker gold prices has been the relative strength of the US dollar, but this fails to take account the enormity of the economic crisis on both sides of the Atlantic.   

After falling to a low of $1582 in Asian hours today gold has again found good buying beneath the market and staged a decent rally and was last trading at $1,627. With excellent physical demand in the market we would expect gold to form a base around these levels. On the charts gold has long term technical support at $1532 - the two month low seen earlier this week.

Political and economic stories in Europe will remain very much in focus today and tomorrow but it remains to be seen what sort of impact it may have on the bullion markets. Investors with a long term horizon will almost certainly keep the faith, those with a short term speculative position in the market will have to take their chances and puzzle with us why gold is not $400 higher.

Ross Norman
Sharps Pixley, London

29 Sep 2011 | Categories: Gold

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