By Jon Nones and Tim Wood –
St. LOUIS (ResourceInvestor.com) — Gold futures closed at their lowest level in a week after dropping as much as $7 during today’s trading to close with a loss of $6.30. A sharp decline in crude prices and a firm dollar were major contributors.
“Now, with the market closing just above key support at $445/oz, it will be interesting to see where we go from here. I don’t have a crystal ball but if December gold does close below $445, things could get ugly for a few days,” Dale Doelling, Chief Market Technician of Trends In Commodities, told Resource Investor.
Crude prices plummeted almost $3 to $63.27 per barrel following a report by the Energy Information Administration (EIA). This helped ease investor concerns that recent record-high energy prices may slow economic growth. U.S. stocks were up on the news as investors moved to the broader markets instead of gold as a safety net.
Peter Grandich, Editor of ‘The Grandich Letter’, told Resource Investor that an over-bought energy sector could present a short-term challenge for gold.
“A marked increased in Comex open interest these last few days has suggested significant short-selling is once again taking place. An extremely overbought energy sector that appears finally ready for some serious profit-taking, is also a short-term challenge for gold,” he said.
Furthermore, a 1% rise in the Producer Price Index in July was largely perceived as keeping upward pressure on U.S. interest rates, and thus propelling the dollar to two-week highs against the euro.
“The fact that December gold got into seriously overbought territory, while the dollar was seriously oversold has been the overriding factor in the market the last few days,” said Doelling.
Grandich further links gold to oil prices in saying, “[T]he absolute key to either chances of success or failure rests with the direction of the U.S. dollar. There, a dramatic move up or down is likely to rest on whether key support at 86 basis the U.S. Dollar or 92 resistance is taken out,” said Grandich.
However, Grandich sees the dollar going in only one direction.
“I believe the U.S. dollar has only one direction long term – DOWN! Therefore, I think gold will be more of a ‘buy the dips’ versus ‘sell the rallies.’”
The writing was also on the wall per the most recent CFTC commitment of traders data for gold. For the week ending 9 August, data shows that Large Commercial net short positions increased dramatically even as Non Commercial positions increased to camouflage that somewhat.
There was a massive increase in net long gold futures to the tune of 52,100 contracts, of which 49,700 contracts were new.
That left the net long position at 41% of total open interest, which is close to the highest level ever. Traditionally that has signaled a top. That seems to have worked out in today’s price action after pushing gold dramatically higher last week.
Newsletter writer John Doody also had an important observation, telling clients of the Gold Stock Analyst that China Central Bank clarity on its Yuan policy likely drove last week’s price increase.
Doody wrote: “The People’s Bank said the weighted basket that the Yuan will float against will be in “currencies of the countries to which China has a prominent exposure in terms of foreign trade…” In as much as Euroland and Japan are co-equals to the US as China’s trading partners the basket will require a significant reduction in purchases of US Dollar securities in order to boost Euro and Yen holdings.”
Despite today’s setbacks, Grandich says gold will remain bullish.
“Gold is seeing some of the best two-way trading in years. Bottoms first at $408, then $415 and most recently at $420 has given gold a solid technical foundation to challenge the old highs above $450,” he said. “Solid physical buying during what’s normally a seasonally weak period and the ability to rise despite a stronger U.S. dollar, have also been key bullish factors.”
Another aspect to possibly consider is India’s market. With religious festivals approaching in India, the world’s largest gold consumer, demand for gold jewelry will most-likely pick up.
Indians see gold as an auspicious metal, which they give as a gift during religious festivals and weddings. Demand normally picks up from August with the beginning of the festival season and peaks in November during Diwali, the Hindu festival of lights.
“We have worked off some of the froth in gold and the dollar has rallied but I don’t think these short-term retracements are done quite yet. I remain long-term bullish on gold but nothing goes straight up, Gold included.”
December gold closed at $445.20 an ounce on the New York Mercantile Exchange, down $6.30, or 1.4%, for the session.
Source: Resource Investor