Gold edges up

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Published Feb 21, 2013

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London - Gold prices recovered slightly on Thursday after plunging 2.6 percent in the previous session, edging back above $1,565 an ounce as lower prices tempted some buyers back to the market.

They remain vulnerable to further losses, however, after sliding through key chart support levels the previous day, with selling accelerating after minutes of the Federal Reserve's last policy meeting cast doubt over the scope of its stimulus plan.

The largest gold-backed exchange-traded fund, New York's SPDR Gold Trust reported its biggest outflow in 18 months on Wednesday, coinciding with the price drop.

Spot gold was up 0.3 percent at $1,566.90 an ounce at 13:00 SA time, while US gold futures for December delivery were up 0.7 percent at $1,566.40. Spot prices reached a low of $1,554.49 in earlier trade, their weakest since July.

The Fed minutes suggested the bank may stop printing the money that has helped to drive the recent rally in equities - a process known as quantitative easing - sooner than expected. QE tends to support gold, as it keeps interest rates low while stoking fears of inflation.

“Investor selling has been seen on the futures exchanges and in the physical ETFs, and partly that has been driven by what the Fed's going to do, and whether it's going to back away from QE earlier than expected,” Standard Chartered analyst Dan Smith said.

“The next week or two are going to be crucial. Are Chinese buyers going to come back heavily on these prices? Are investors going to see this as attractive from a medium-term perspective? I tend to think these are quite cheap prices for gold.”

Tumbling prices attracted buying interest in the physical markets overnight in Asia, with analysts and traders reporting high volumes traded on the Shanghai Gold Exchange.

However, that was not enough to push gold significantly higher.

“Selling has been incessant enough to hurt market confidence quite severely,” UBS said in a note. “While most of the selling has been seen on Comex, it is by no means restricted there - weakness is felt across the board and liquidation has come from various types of holders, even some with longer-term investment horizons.”

CHARTS POINT TO LOSSES

While it has steadied after breaking a succession of key support levels in the last week, gold is poised to post further losses before finding a base, according to analysts who study past price moves to determine the future direction of trade.

“Gold plummeted down through the bottom of its bearish trend channel (yesterday),” said ScotiaMocatta in a note.

“There is a long-term support trendline drawn off July 2011 lows which is currently providing support around $1,568. We expect this to break, and selling pressure to intensify,” it said. “Support is at $1,526, the May 2012 low.”

Financial markets were weak across the board on Thursday after the Fed minutes. Oil prices fell heavily for a second day, while European shares and the euro were further hurt by economic data that pointed to continued weakness in the euro zone.

Losses in industrial commodities like copper and crude oil helped weigh on industrial precious metals. Silver failed to benefit from a slight rise in gold prices, remaining down 0.1 percent at $28.49.

On Wednesday they hit a six-month low of $28.26 an ounce.

Platinum and palladium, this year's best performing precious metals, posted hefty losses on Thursday, with platinum falling more than 3 percent to a five-week low as concerns over supply from major producer South Africa eased.

Unlike gold, which is chiefly an investment and jewellery metal, platinum and palladium are used primarily in catalytic converters, and are therefore more heavily exposed to downturns in the economic cycle.

They have benefited from rising appetite for industrial commodities this year, but the strength of their climb has left them vulnerable to a correction, analysts said.

“They just went too far, too quickly,” Standard Chartered's Smith said. “If you look at the net speculative positions, they were dangerously long. The longer-term story is still a good one, but you're going to see corrections within the uptrend.”

Spot platinum was down 2.8 percent at $1,598.74 an ounce, while spot palladium was down 3.8 percent at $709.50 an ounce. - Reuters

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