Daily Market Update

Gold Investments Market Update – Speculative Paper Sellers V’s Long Term Physical Investors

Gold

Gold finished trading in New York on Friday at $821.50, down $36.00 and silver was down 71 cents to $14.48. Gold continued to fall in Asian and early European trading and is trading at $809.00/809.60 per ounce (1100 GMT).

Speculative Paper Sellers V’s Long Term Physical Investors

The breach of the psychologically and technically important $845 – 850/oz level yesterday saw a massive wave of stop loss sell orders being executed leading to gold plummeting more than 4%. Hedge funds, institutions and trend following black box traders had significant stop loss orders beneath this level and this has led to the significant retrenchment.

Gold’s short term trend remains firmly down on falling oil and commodity prices, a stronger dollar, rallying equity markets and renewed risk appetite.

Yet, gold looks increasingly oversold after falling more than 20% in less than a month (from a high of $988 on June 15th to $810 today) and now being well below the 200 day moving average and at 8 month lows. Gold is now at levels last seen at the end of 2007.

Despite the savage recent sell off, it is worth remembering that gold remains up by more than 20% since this time last year at the outset of the ongoing financial crisis.

There is again strong physical demand internationally at these levels, especially from the Indian subcontinent. Reuters reports significant physical demand for gold in the mid $800s as gold stocks are scarce and premiums high ahead of the first festival of the Indian buying season, the Raksha Bandhan festival.

Initial fears regarding the health of the monsoon season have been allayed and this should result in the usual very significant and sizeable imports of gold into India in the coming weeks.

As usual the Indian subcontinent’s voracious appetite for gold imports should result in a floor being put under the gold market and mean that prices remain supported at these levels.

The speculative paper sellers in the derivative and futures markets have clearly won this latest bout in the gold markets. However, long term value investors are likely to again have the last laugh as the physical market and real supply and demand issues will again likely lead to higher prices in the coming weeks.

Gold is now very oversold on all sorts of technical indicators and bargain hunters will be buying with both hands at these levels.

Stagflation and Geopolitical Risk

Stagflation has not disappeared simply because of a sharp correction in commodity markets and a rally in stock markets. The UK’s property market has ground to a halt amid what is being termed a “mortgage drought” and this has happened as official figures confirmed that prices for UK-manufactured products last month rose by 10.2 per cent from a year earlier, marking their fastest annual pace of increase since 1986. Official inflation is set to reach 5% in the coming months as goods prices surge.

While oil has corrected sharply, it is important to remember that oil remains up more than 60% since this time last year and nearly 20% since the start of 2008. Stagflation is clearly affecting most major economies and this will likely result in gold rallying back as sharply as it has fallen in the coming weeks.

Also, geopolitical risk remains and the war in Georgia has the potential to degenerate into a more dangerous conflict. Russia, is clearly flexing its muscles in the Caspian region and this has implications for European and western energy security.

This Week’s Data and Influences

Today sees the release of the U.S. trade report for June, which is forecast to show a rise in the deficit. The U.S. needs a lower dollar in order to boost exports and the recent rally in the dollar will likely lead to an increased deficit in coming weeks.

Gold and Silver

Gold is trading at $809.10/809.60 per ounce (1100 GMT).
Silver is trading at $14.35/14.40 per ounce (1100 GMT).

PGMs

Platinum is trading at $1481/1488 per ounce (1100 GMT).
Palladium is trading at $308/315 per ounce (1100 GMT).

Mark O'Byrne
Executive Director

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