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Speculations On A Gold And Silver Price Rally Increase

Published 09/03/2012, 06:07 AM
Updated 07/09/2023, 06:31 AM
Speculators increased bets on rising gold prices to the highest since March as mounting speculation that the Federal Reserve will expand its record stimulus drove bullion to its second-biggest monthly gain this year.

Money managers raised their net-long positions by 19% to 131,687 futures and options contracts in the week to August 28, U.S. CFTC- Commodity Futures Trading Commission data show.

September will be an important month for gold, with a number of key events, says Ira Epstein, director of the Ira Epstein division of the Linn Group. Moody’s will review Spain’s sovereign-debt rating, Spain will announce results of bank stress tests, the European Central Bank meets September 6, Germany’s Constitutional Court is scheduled to rule on the legality of the country’s funding for the European Stability Mechanism on September 12, and the Federal Open Market Committee meets mid-month.

Further, India’s seasonal demand tends to pick up, although it is not expected to be as strong as in past years. “So, it seems to me pretty clear that September is going to offer the markets with a series of events that have the potential to be market movers,” Epstein says. He later adds: “Keep in mind that gold has traded basically sideways this year so I think it logical to assume that gold Bulls are looking for a reason to jump into gold. Given all the events taking place in September and the seasonal tendency of gold to rally at this time of year, if gold doesn’t rally, the bulls will be very disappointed and the bears will come out of hibernation.”

Hopes from ECB, Fed and China Build-Up for Gold Rally:
Bernanke didn’t officially offer quantitative easing in his speech but it’s surely on the table, as he is of the opinion, further quantitative easing can do more to help the struggling job market and high levels of un-employment are of central concerns in the US now. Market attention will now be on the European Central Bank meeting, the U.S. August nonfarm payrolls report and Chinese economic data.

The ECB meets Thursday to discuss monetary policy and market participants are waiting to see if the bond-buying program announced earlier in August by ECB President Mario Draghi will finally see the light of day. Draghi said on Aug. 2 that the ECB is working on a bond- purchase program to lower yields that policy makers will decide on at this month’s meeting.

The two foreseen outcomes of the ECB meet are that Draghi will either start buying bonds, which will lift markets, or he will wait for an official bailout request, which will cause markets to again fall. ECB may also choose to hold back some details of the plan until the German Constitutional Court rules on the legality of Europe’s permanent bailout fund on September 12. Italian and Spanish bond yields have receded since Draghi promised on July 26 to do whatever is needed to preserve the euro.

US August nonfarm payrolls report is expected on Friday. Bernanke’s comments on Friday at the Jacksone Hole Symposium about the “stagnation of the labor market” makes the jobs report significant. If there is a big miss to the downside, the market will aggressively price in a large QE for the September 13 FOMC (Federal Open Market Committee) meeting slated for September 12-13. On Saturday September 9, several Chinese Economic Data releases like inflation data, industrial production, trade balance and retail sales are expected.

Rising expectations of a Gold and Silver Rally:
Speculators increased bets on rising Gold prices to the highest since March as mounting speculation that the Federal Reserve will expand its record stimulus drove bullion to its second-biggest monthly gain this year. Money managers raised their net-long positions by 19% to 131,687 futures and options contracts in the week to August 28, U.S. Commodity Futures Trading Commission data show.

Combined bets across 18 U.S.commodities fell 1.9% to 1.3 million contracts, still near the highest in 15 months. The Standard and Poor’s GSCI Spot Index of 24 commodities gained for a fifth straight week, the longest rally since June 2011, reported Bloomberg. Comex Gold futures prices on Friday rallied sharply to hit a fresh five-month high following the much-anticipated remarks by Federal Reserve Chairman Ben Bernanke at a Fed symposium inJackson Hole and are now within easy striking distance of $1,702.

German central bank chief Jens Weidmann’s reported threat to resign leads to further speculation that the ECB monetary policy will soon be eased further and Draghi could announce a fresh and large monetary stimulus package. Investors accumulated a record hoard of gold in ETFs last week, exceeded only by the U.S. and Germany when compared with national reserves. U.S. sales of bullion coins jumped 28% in August. Gold had jumped 70% as the Fed bought $2.3 trillion of debt in two rounds of quantitative easing from December 2008 through June 2011.

The S&P GSCI Index rose 6.2% in August for a third straight monthly gain, the longest rally since April 2011. Gold climbed 4.5% last month, exceeded this year only by January’s 11% jump. The MSCI All-Country World Index of equities advanced 1.9%, and the dollar fell 1.7% against a measure of six trading partners. Eighteen of the 24 commodities tracked by S&P increased in August, led by a 13% gain in Silver, the biggest jump since January.

Soybeans and corn rose to records last month as the most-severe U.S.drought since 1936 scorched fields. Europe consumes 18% of the world’s copper and accounts for 22% of oil demand. The U.S. is the world’s largest oil and corn consumer, and China is the biggest user of metals, soybeans and cotton. Inflows to raw-material funds totaled $1.37 billion in the week ended August 29, the fourth gain in five weeks. Almost all the gains were attributable to gold and precious-metal funds, which took in about $1.35 billion.

Holdings in gold backed ETPs are up 4.4% this year, reaching a record 2,460.46 metric tons on August 29. The amount of silver held in global ETPs has risen for four months, the longest climb since December 2010. Funds increased their Silver holdings by 46% to 25,527 contracts in the week to August 28, the fifth straight gain, the CFTC data show.

Downside movements in gold, silver prices cannot be ruled out till Thursday:

Gold seems vulnerable to downside corrections for now and could retreat to the first support at $1,652.5, which also was earlier a crucial resistance for an upside break. The next and the most important level of support for gold prices can be expected in the $1603 to $1594 range. Gold may again rise if this support range holds. If not then, gold prices may enter a Bearish trend with decline Targets set for $1540 & then a huge slump towards $1396 also.

Similarly, silver can expect a soft support at $29.80 and then at $28. A sustained weakness below $27.55 may lead silver prices hurtling towards 24.85 or even lower. Crude oil faces an immediate upside resistance at $98.65 and a downside support around $91. A break above $98.65 may push oil prices towards $104.50 to $106.75 also. A downside sustained momentum below $91 may trigger declines towards $80.20. A decline in gold, silver, crude oil and metals towards their important support levels for a longer term, should ideally trigger opportunistic buying for further upsides.

Gold and PGMs get support on South African Labor Issues:

A strike at a Lonmin mine turned deadly when police opened fire on striking workers. With many organizations in that country pointing the finger of blame at the government and its leadership and anger surrounding poverty in the country being fueled by these regrettable events, it is unlikely that labor stability will return to South Africa any time soon.

In fact, it increasingly looks as though opposition groups are using this unfortunate incident to further their political cause, which includes income redistribution and possible mining sector nationalizations. South Africa provides three-quarters of global mine production. It is very likely that other major operations in South Africa may be affected in the coming weeks, including gold operators.

Tech Specs for MCX Gold and Silver Prices:

MCX Gold Prices for October contracts rallied up to Rs. 31,405 on Saturday and MCX Silver Prices for December contracts shot up sharply to Rs. 61,170. MCX Gold may remain strong till trading is supported and prices remain above Rs. 31,150 for a further upside move to Rs. 31,609 or 31,879 also. But if MCX Gold October Prices slip below the Rs. 31,123 level, declines to Rs. 30,862, 30,385 & further to 30,115 may also be seen.

MCX Silver may also remain strong till prices remain above Rs. 60,301 for a further upside move to Rs. 61,885 or 62,812 also. But if MCX Silver December Prices slip below the Rs. 60,193 level, declines to Rs. 59,338, 57,682 and further to 56,764 cannot be ruled out. A decline in gold, silver, crude oil and metals towards their important support levels for a longer term, should ideally trigger opportunistic buying for further upsides.

The Uncertainty at ECB may keep Gold Price Rally on Hold:

Draghi faces a trade-off as he sweats on a solution ahead of the September 6 meeting. In addition to governments dragging their heels, tensions between the ECB and Germany’s Bundesbank are growing. Go too far in trying to calm the Bundesbank and he risks ending up with a dud of a plan that has no impact on markets. Not go far enough and he risks more Bundesbank ire.

A Bundesbank spokesman declined to comment on Friday on a report in the mass circulation Bild newspaper that Weidmann, who has stressed his opposition to the strategy, had considered quitting several times in recent weeks but had been dissuaded by the German government. In Berlin, a government spokesman said Chancellor Angela Merkel supports Weidmann but declined to comment on the report, which lays bare a deep rift within the ECB over the bond scheme that is increasingly being played out in public.

Stepping up the pressure to attach conditions to the plan, fellow German ECB policymaker Joerg Asmussen said late on Thursday the ECB should only buy sovereign bonds if the International Monetary Fund is involved in setting the economic reform programmes that should be demanded in return. “Opposition from Weidmann and reservations from some other Council members will mean that ECB bond purchases would be highly conditional, be focused on the short end and would not aim to bring yields down quite as much as Italy and Spain might like to see,” said Berenberg Bank economist Holger Schmieding.

The ECB is studying ways of intervening in the short-term bond market based on strict conditionality and the countries concerned agreeing to aid programmes with the eurozone bailout funds. The ECB was hurt by its experience last year of buying Italian bonds, only for Italy’s then-prime minister, Silvio Berlusconi, to renege on reform promises he had made to get the ECB to step in.

Austria’s ECB representative, Ewald Nowotny, addressed the ECB taboo of directly financing member states, saying there was a difference between buying bonds directly from governments and purchasing them on the secondary market to get yields down. That tallies with Draghi’s position, who said on Wednesday the ECB must employ “exceptional measures” at times to fulfil its mandate, his argument being that official euro zone interest rates are at record lows yet borrowing costs in some of its members are sky high, so monetary policy is not working as it should, reported Reuters.

Weidmann cannot stop Draghi’s programme and he has managed to isolate him to some degree by winning German Chancellor Angela Merkel’s tacit support for his scheme. Weidmann could still undermine the programme’s impact.

Asmussen’s comments on IMF involvement in plans to accompany ECB intervention show there is pressure from policymakers at the bank other than Weidmann to stiffen the plan’s conditionality. The IMF is notorious for tying strict conditions to aid andMadridis likely to take a dim view of that notion. Spanish Prime Minister Mariano Rajoy has said he will not ask for any further help, to add to a bailout of Spanish banks worth up to 100 billion euros, until the ECB strategy is clear.

A successful Italian bond auction on Thursday pointed to confidence among investors that the European Central Bank will keep its word and take measures dramatic enough to get a grip on the eurozone’s debt crisis. In Beijing, German Chancellor Angela Merkel appeared to temper China’s fears about the damage the crisis could wreak on the world economy, while French President Francois Hollande, on a visit to Madrid, said he could see a case for ECB intervention. Since ECB President Mario Draghi vowed a month ago to do whatever it takes to save the euro, Spanish and Italian bond yields have fallen markedly, particularly for shorter-dated maturities.

Now he has to follow through. At a policy meeting this week, Draghi is expected to reveal the ECB’s terms of engagement for intervening in the bond market, reconciling an unwilling German Bundesbank to the plan while avoiding conditions that will scupper its effectiveness. Credible ECB action to lower Italian and Spanish borrowing costs would buy the two countries time to reduce their debt and push through economic reforms to boost growth potential.

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