Monday, August 10, 2009

>Gold sleepwalks towards sustained break of USD1,000

Singapore - Gold is just 8% below it's record high and yet there's absolutely no excitement or euphoria in the market, unlike on previous occasions. From a contrarian perspective, however, that lack of bullishness could in itself be a positive sign.

Gold's stuttering progress towards another test of the USD1,000 a troy ounce level and a lack of interest in the physical market have many analysts ready to call a top, but others believe pressure is building for a sustained breakout.

Previous spikes over USD1,000 in March 2008 and February this year were brief and prompted deep corrections.

However, it could be different this time, they say, given a lack of the euphoria associated with previous market peaks. There is little evidence of long-liquidation by physical or ETF holders and the metal's technical set up is bullish.

According to Barclays Capital technical analysts, the range of the past 16 months is very similar to the consolidation period back in 2006 and 2007 before the break of USD845/oz, the previous record high seen in 1981.

"As such, into the fourth quarter, we expect a return to the secular bull trend for a move toward the $1,033 (March 2008) peak and beyond," Barclays said in a report.

"I think we will see a breach of $1,000 in the next four to six weeks and will then move to a whole new higher trading range," said a senior commodities trader at a European bank in Singapore.

The trader said that far from seeing the quiet nature of the market as a negative, the fact that gold has appeared well-supported above $900 without any help from India or the Middle East, or any ETF accumulation, was bullish.

"India's imports have collapsed this year, but how long can that last? I know the monsoon has been poor so the farmers might not buy as much, but at some point India will come back to the market," he said.

In the first half of 2009, India's gold imports plunged to just 61.8 tons, from 139 tons during the first half of last year, according to the Bombay Bullion Association.

There is little buying interest elsewhere in Asia too, but there's also a lack of selling with spot gold premiums firm in Singapore between 50 cents and USD1.

Beh Hsia Wah, a trader at United Overseas Bank in Singapore said that while the fabrication side of the market was dull, even ahead of the festival season, on the investment side, there was not much sign of liquidation.

"At this point I think people will be holding on. There are so many reports flying around about USD1,000 gold," she said.

"I'm surprised there hasn't been much physical selling from anywhere in Asia this week despite the fact that we have traded above $960," said Anderson Cheung, director of precious metals at Mitsui Bussan in Hong Kong.

Cheung said he expects gold to test USD1,000 by September at the latest, as the metal, along with other commodities, benefits from a long-term reallocation of fund investment into commodities.

ETF Market Remains Dormant

There has also been an almost spooky lack of action in Exchange Traded Funds (ETFs) where gold holdings have been relatively stable since March, despite a gold price that has fluctuated between an $865/oz low in April and a $990/oz high in early June.

According to UBS, global ETF holdings fell in July to 52.25 million ounces at the end of the month, from 53.7 million ounces at the end of June, the first significant decline since September, but it remains to be seen if this is the start of a trend.

Since the first gold ETF products came to the market in 2003, holdings have enjoyed a sustained uptrend and now sit 3% below their peak of 54 million ounces hit on June 24.

The restrained level of ETF liquidation, despite low inflation readings and bullish equity markets, is easy to explain, according to the senior trader at the European bank. "Gold has become a retail product again. The average ETF investor is thinking of inflation over a ten-year time horizon, not making a quick profit."

The July dip in holdings has also been complicated by the news that Greenlight Capital, a $5 billion New York-based hedge fund switched its gold exposure from the SPDR gold ETF (GLD) into physical bullion, apparently due to storage costs being lower than the fees associated with the ETF holdings, although the fund made no public comment on the issue.

Analysts have suggested more funds might be taking this option, helping explain falling ETF holdings in a month when the gold price rose.

USD Weakness Is Necessary, Not Sufficient

In the absence of much physical demand or ETF accumulation, the dominant factor pushing gold up has been the weaker dollar.

Since gold hit its recent low of USD905/oz on July 8, the euro has risen to USD1.4360 from USD1.3832, while gold has advanced to $960/oz.

In contrast, against a strong euro, gold hasn't made much progress, rising just EUR8 since July 8 to EUR670/oz, while it is flat at GBP570 against the sterling. This partially explains why there appears little excitement about the recent rally in the market. For large parts of the globe, nothing really has changed.

However, things could change if there is a sustained a move above USD1,000. The two seminal moments in gold's long bull run since 2001 were the breach of USD500 in November 2005 and the push through the old 1981 record high of USD845/oz, in January 2008.

Both moves yielded higher trading ranges but were achieved as gold rose against the major currencies in tandem, not just the dollar.

The Bank of England's decision Thursday to inject a further GBP50 billion into the U.K. economy by buying more government bonds will hearten gold bulls in this regard.

The bull case is that central banks have no plan B, and persistent weak loan growth in both the UK and the Eurozone will force monetary authorities to follow the Fed and stay dovish, despite their apparent concern over inflation.

In a sense bears are caught between a rock and hard place with signs of successful reflation - fiscal and monetary stimulus to expand output and curb deflation - likely to be interpreted as gold-bullish. By the same token, continued signs of deflationary pressure will only draw even more grandiose monetary policy moves, further energizing gold bulls.