-- Posted Wednesday, 16 May 2007 | Digg This Article
I hate having to trot out the tired and typically misunderstood explanations of fund activity, book squaring and liquidation as the reasons for price drops, but it looks like that is exactly what the precious metals markets got smashed with today. Gold and silver both took a dive right at the same point today on a combination of position liquidations in the market, strong dollar news and oil prices falling sharply in afternoon trading. Essentially what happens on technical triggers is that all of these funds and futures players in the paper markets have black box models that dictate when they sell positions. If prices are tested repeatedly on the downside at a certain level, eventually we'll have a snowball effect and the momentum selling will just run the prices downward. That's what we saw today. I don't like the explanation any better than someone else who is bullish on prices, but it is what it is.
We're into a period where the market fundamentals seem to have temporarily lost their ability to send prices higher and the paper markets are controlling the price. This is never a scenario that lasts long, but has been particularly tough to watch the gold price pull back $30 per ounce in two weeks on only bullish fundamental news hitting the tape each day. The list of reasons the prices should be going up is as long as my arm…continued dehedging in the market by producers, less production each month from places like South Africa, the WGC report today showing increased total market demand, etc., etc. etc.
BMO Capital Markets, Scotia Moccatta and other investment groups have increased their expectations in the last day for gold prices to continue rising throughout the year. UBS and Citigroup have reiterated in the past week their expectations of prices well over $700 per ounce by year end.
Little solace at a time when prices seem to be heading in the other direction, but the fundamental changes in the market of supply and demand are what have gotten us from $256 per ounce to $660 today and the fundamental picture only continues to look better for the future. Right now is reminding me an awful lot of the Dec. 2004 to Sept. 2005 period. Prices traded down to sideways for those 6 months while market conditions on the supply/demand side continued to improve for a bullish run in the future. We're in the same type of box right now. Market conditions are prepping everyone for higher prices, it just hasn't come home to roost yet.
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DJ PRECIOUS METALS: NY Gold, Silver Pummeled By Technicals, Dlr
By Allen Sykora Of DOW JONES NEWSWIRES
Technically oriented selling resulted in sharp losses for gold and silver futures Wednesday, with the initial downturn blamed in large part on the stronger U.S. dollar, analysts and traders said.
June gold fell $13 to $661.50 an ounce on the Comex division of the New York Mercantile Exchange. Around the time pit trade was closing, the June contract at the Chicago Board of Trade was down $12.60 to $662. Comex July silver fell 38.5 cents to $12.93. Shortly after it closed, CBOT July silver was down 38 cents to $12.937.
Much of the selling pressure was technical in nature, said Paul McLeod, vice president of precious metals with Commerzbank. "We had been on an uptrend line that has been in place since January," he said. "We were looking at $665 (basis spot) as a holding point for that. As we fell below that, stops came off. It was a technically triggered, quick washout." The Comex futures also fell through levels where stops were said to be resting. The June contract had held slightly on either side of $666 on three of the last four sessions, and traders have been saying stops had emerged below this.
This level failed during the second half of the session, and the contract quickly fell as far as $660.60, its weakest level since March 20. July silver took out its recent low of $13.025 hit Friday. The contract has been as soft as $12.88, its weakest level since March 14.
Crude oil was also softer, and this tends to hurt gold. Late in the gold open-outcry session, June gold was roughly $1 a barrel lower for the day. Some of the pressure on gold and silver lately may be seasonal in nature, McLeod said. "The high-purchasing months for India have come and gone," he said, in reference to springtime festivals in the country.
Slear commented that the move out of the June futures, ahead of first-notice day on May 31, may be adding some weight to the market lately. June open interest has declined from roughly 235,000 around 1 1/2 weeks ago to below 190,000 as of the close of business on Tuesday. "That creates a natural pressure on the markets. This just might be a little bit early," Slear said.
Analysts lately have offered slightly mixed opinions on how much the recent central-bank gold sales have impacted the market, with the pace said to have picked up in recent weeks. Nevertheless, there likely has been some impact, as these sales tend to limit investment demand, said Stephen Platt, analyst with Archer Financial Services. "Really, it's the buying at the margin that can really have a pronounced impact on price," he said. "That's probably a factor to consider."
He also pointed out that the International Monetary Fund is also still considering whether to sell some of its holdings, as was the recommendation of an independent panel announced back in January.
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