Gold Technically Damaged

By: Mark_OByrne

Gold's sharp sell off yesterday (Gold closed at $907.40 down $18.60; Silver at $17.45 down 79 cents) has continued. Gold traded sideways in Asia before selling off again late in Asia and in early trading in Europe. Stock markets in Asia were mixed overnight but European markets have recovered from early losses and the FTSE is up nearly 0.5% in the session so far.

A lot of technical damage was done to gold (and silver) yesterday and further selling could be seen by momentum traders and the shorts pressing their advantage to inflict maximum pain on weak speculative longs with short term aims who may be forced to capitulate thereby intensifying the sell off. However, strong physical demand internationally (see below) is likely to cushion the sell off and result in gold finding strong support again between $850 and $870.

The weekly CFTC data was very bullish showing that longs have begun to significantly rebuild their positions after the recent sharp sell off. Net gold longs increased to their highest position since August 2005 prior to the sharp increase in prices witnessed subsequently ($432 in early August and then increased to over $700 by May 2006).  While yesterday's and today's sharp sell off may slowed the longs gallop it seems likely that this sell off will again be another sharp sell off prior to gold's primary bull market trend reasserting itself.

With oil falling nearly 5% for the week so far, gold was bound to come under pressure and should oil continue to fall then gold may come under pressure. However, gold is likely to outperform oil in the medium to long term.

Today's Data and Influences
Later today Durable Goods for April will be released in the US. They are expected to be weak and could thus provide some support to gold.

Gold Charts in GBP

Demand for Gold as Inflation Hedge Surging in Emerging Markets (as seen in Vietnam)
In recent days we have noted the surge in demand for gold in China and in the Middle East through Dubai. Further news of surging demand for gold as an inflation hedge in emerging markets came from Vietnam yesterday. Vietnam's retail investment in gold in the first quarter this year amounted to 31.5 tons, making the country the biggest gold consumer in the world, the World Gold Council says in its most updated quarterly survey Gold Demand Trends.

Vietnam's arrival into pole position in the retail investment sector ousts India from the top slot with 31 tons, a decline by half from the first quarter in 2007 as Indian purchasers withdrew from the market and waited for lower prices. The report says the surge in Vietnam's demand was partly a response to soaring inflation, which hit 11.6% in 2007 and prompted a rush to buy gold, reflecting its perceived qualities as a hedge against inflation.

Demand was also spurred by the performance of gold relative to other investments such as equities and real estate, which have declined in value over recent months while gold has strengthened.

Furthermore, gold investments have been increasingly marketed by Vietnamese banks. High interest rates enable local banks to offer an interest rate on gold deposits since they can profitably sell the gold for dong, lend the dong out at high interest rates and hedge their gold position by entering into a forward buying agreement with an international bank. Many Vietnamese prefer to hold gold rather than dong and the fact that this gold can earn interest from commercial banks makes it still more appealing as for investment option, says the report.

Vietnam spent 1.2 billion U.S. dollars importing some 43 tons of gold in the first four months of this year, said the Vietnam Association of Finance Investors.  The State Bank of Vietnam has decided to allow gold dealers and banks to import additional 3.5 million tons of the precious metal this year. Vietnam's gold consumption is forecast to exceed 80 tons in 2008, doubling that in 2005, according to local experts. The country now houses some 8,000 gold businesses.

Yesterday's Action
There was no obvious reason for gold to be down some 2% yesterday. Gold started to fall sharply in price prior to oil's sell off (indeed oil was up 0.17% when gold started to sell off aggressively). Similarly, the dollar was only slightly up (up 0.3% against the EUR and GBP and actually down 0.4% against the CHF and down 0.6% against the JPY ) when gold began its sell off.

A more likely reason was early profit taking which was subsequently exacerbated by the sell off in oil and another tentative dollar rally. Gold was up 3% last week and silver surged nearly 8% and thus profit taking would be expected in the early part of this week.

If the dollar closes below EUR 1.60 we could see some sharp dollar selling and another steep fall in the dollar. The last thing the U.S. government needs is a run on the dollar at this sensitive financial and economic time and it is possible that there was market intervention, possibly by the Working Group on Financial Markets.

As we pointed out in our market rap yesterday evening, a good way to support the dollar is to short the anti-dollar or gold. Talking heads and more gullible pundits on the financial networks will point to the falling price of gold as proof that inflation is not an issue, the dollar is fine and all is again perfect in the economic world and investors can go back to sleep. If only it were that simple.

Gold is likely to be well supported at these levels, especially as physical demand internationally continues to surge (as seen in the latest gold demand figures from Dubai which were up 73% and by surging demand and record imports into Vietnam).

Silver
Silver is trading at $17.27/17.35 per ounce at 1200 GMT.

PGMs
Platinum is trading at $2035/2045 per ounce (1200 GMT).
Palladium is trading at $435/440 per ounce (1200 GMT).

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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