A Look At Who's Buying Gold

Gold’s London AM fix this morning was USD 1,585.50, EUR 1,221.87 and GBP 984.17 per ounce.

Yesterday's AM fix was USD 1,627.00, EUR 1,250.77 and GBP 1,008.99 per ounce.

Gold dropped $31.90, or 1.95%, in New York yesterday, closing at $1,606.80/oz. Gold gradually fell again in Asian and European trading and looks set to test support at $1,580 per oz.

Gold hit a four-month low today despite deepening worries that political upheaval in Greece may sink the country into chaos, endangering the euro zone's efforts to end the debt crisis -- possibly leading to contagion and/or monetary crisis.

Some decent demand from South East Asia has been seen at the $1,600/oz level and there are reports from Reuters of a “semi-official buyer of gold” emerging “on dip below $1,600/oz”.

What's Driving Gold...Down?
Gold’s weakness yesterday may have been again due to dollar strength and oil weakness -- oil is below $97 a barrel (NYMEX). It may also have been due to wholesale liquidation, which created a new bout of "risk off", which has seen global equities and commodities all come under pressure.

However, gold’s weakness yesterday was also amplified by unusual-trading activity. As New York markets opened, there was an unusually large bout of selling, with some 6,000 gold futures contracts sold in minutes, which lead to gold's initial $10 fall, to the $1,615/oz level.

Momentum driven algorithm trading may have then led to follow through selling and the initial sell off may have emboldened tech traders to sell, leading to the fall below $1,600/oz.

Buy On The Downturn
Given strong store of wealth demand from the Middle East and China (as seen in figures yesterday), long-term buyers will use this sell off to accumulate more bullion.

Greece’s problems coupled with France’s election of socialist candidate Francois Hollande creates a disruption of old Franc-German alliances. Hollande and the socialist victory in France will likely be positive for gold as he favours looser fiscal and monetary policies in the EU.

Spot gold hasn’t seen these levels since early January and the next level of support for gold is $1,580/oz, then $1,545/oz -- the low on December 29th, 2011.

As has been the case in the early stages of nearly all bouts of sharp risk aversion in recent years, the initial beneficiaries have been the dollar, U.S. debt and German Bunds, while gold was more correlated with the euro and riskier assets.

However, gold’s correlation with risk assets have been short term in recent years. Gold has fallen less than other risk assets, based, then recovered, seeing sharp gains soon after the initial fall.

These recovery gains are often seen while equity and commodity markets have continued to fall. Similar patterns may be seen in markets again in the coming days and weeks, and short term gold weakness should again be used to ease into an allocation to gold.

Tweet This!
Nouriel Roubini has again taken to Twitter to engage in his semi-annual bout of name calling and frequent suggestions that gold is a bubble that will fall in price. He has been doing so since gold rose above $1,000/oz in 2008.

Overnight he tweeted, “Gold getting close to fall below 1600. In which caves are the gold bugs hiding...?”
This continues the recent meme regarding gold investors and store of wealth bullion buyers being ‘bugs’, people or animals who ‘hide’ in ‘caves’ or are “uncivilized” people.

Attacking the ball and not the man is a way to avoid engaging in real debate regarding the merits of gold as a diversification and as an academically and historically proven safe haven -- one that has protected people both throughout history and again in recent years.

It is interesting that Roubini has not written a paper on gold, nor has he conducted an interview about gold or written anything in recent years. He confines his simplistic, ill-informed, anti-gold comments to Twitter, where he can be brief and not challenged.

From a contrarian perspective, Roubini is a gift, as his name calling and anti-gold comments almost always coincide with an intermediate low in the price of gold.

Prudent diversifiers are advised to buy this latest dip -- what could be termed the ‘Roubini dip’ -- as many have done overnight and this morning, including store-of-wealth buyers in Asia and central bank monetary diversification buyers.