JOHANNESBURG – The gold market finally succumbed to the threat of long liquidation by funds on Friday, as the price came crashing down in New York trade to briefly test levels around $310/oz. The fall sent bullion careering through long term uptrend levels of $316/oz, setting new support levels of $309/oz. Late Monday in European trade, the metal had recovered to around the $312/oz mark. Stuart Leslie, chief bullion trader at Standard Corporate and Merchant Bank in Johannesburg, said the fall in gold late Friday in New York trade, was caused by one of the large bullion banks exiting a long position on Comex. Analysts and bankers would not divulge the identity of the mystery seller, but one rumour doing the rounds was that Morgan Stanley had cashed in on a stale position after lacklustre bullion price action over recent weeks. Funds remain 3.8 million ounces long on Comex, a potential overhang that remains a bearish indicator for the time being while the metal struggles to gain upside momentum.
Metal analysts believe the fall in the price of Friday, which triggered a series of long liquidations, was helped along by the Japanese Central Bank massaging currency crosses to retain a favourable (read cheaper) exchange rate relative to the dollar, to keep exporters competitive. They argue that the resultant firmer dollar helped depress gold.
Leslie says, however, that the falling gold price had less to do with the weaker yen/stronger dollar than firmer looking equity markets. "Gold is less sensitive to the dollar after it peaked around $330/oz. It's more reactive to equities now and they seem to be holding their ground," said Leslie.
Surprisingly, the S&P500 shrugged off last week's separate Worldcom and Xerox disasters, and registered its first weekly gain in more than a month and a half. The broad US index is, however, still nearly 14 percent lower for the year. The good news on world markets, however, is hardly a bullish indicator for the safe-haven metal, but technical analysts say the general trend for the US markets remains negative and, almost to a man, economists say disaster for the Japanese is intractable.
According to UBS Warburg precious metals analyst John Reade, heavy Japanese public selling on Tocom pushed the price below its Friday close of $314/oz this morning. The selling is hardly surprising, given that Japanese government regulations aimed at buoying share markets has kept the Nikkei afloat this year, with cumulative gains of 10.52 percent. Sentiment among Japanese investors was also boosted last week by a record month-on-month increase in the country's business confidence index, a rise which could have more to do with a good World Cup campaign by the country's soccer team than a change in the country's flagging economic fortunes.
Against this glut of good news, Friday's drop in the gold price no doubt sparked some panic among the Japanese that their share market would outperform their main insurance asset. Reade warns that "further Japanese public selling is very possible". He also sounds a short term warning that the price could come under still more pressure.
"After the recent price declines gold is becoming more attractively priced, however, it is probably too risky to turn positive on the metal until the waves of long liquidation have abated," said Reade.
That said, though, very little has changed in the global economic and political landscape to warrant an end to the long term prospects for gold. The US deficit is as daunting as ever and whichever way you slice it Japanese banks are in trouble; Worldcom is unlikely to be the last of the financial scandal brigade, US corporate profits will come under more pressure, the Palestinians and Israelis are more intent than ever in continuing their war and the threat of more vicious terrorist attacks on the West is ever-present. All in all, a compelling long term picture for gold.
