Gold has reversed trend

One basic assumption of technical analysis is that history is repeating. If you regard this assumption as wrong, just have a look at the chart of spot gold. Last week, gold traded slightly higher during the first three trading sessions but came under massive selling pressure the last two trading days. This is exactly the same trading pattern as in the preceding week. We pointed out last week, that gold had found some support at the trend line, which connected the November lows. As gold initially moved slightly higher, it appeared that this support would hold. However, the plunge on Thursday lead to a close far below this upward trend line and confirmed that the trend in the gold market has reversed definitively, as other indicators already pointed to a downward trend in gold.

On Thursday, the CME announced that the margin requirements for the metals contracts have been increased. While some longs might have liquidated their holdings following the announcement, we don’t regard the rise of margin requirements by the futures exchange as the trigger of the sell-off in gold and silver. The market was already under pressure during the European morning hours, when the CME had not yet released its statement. In addition, the decision of the CME was merely a reaction to the increased volatility and it is not uncommon that margin requirements rise with higher volatility and are lowered following falling volatility. Variations in margin requirements are the result and not the cause of changes in volatility.

There were three factors, which are mainly responsible for the plunge of gold and silver last Thursday. The day before, the Chinese CPI inflation figure had been leaked and the decline to 4.6% had reduced the fears in financial markets that the PBoC would hike interest rates or minimum reserve requirements again. However, together with the official release of the CPI figures, also the data for the producer prices were released and the PPI inflation came in higher than expected. Furthermore, the GDP growth in the final quarter of 2010 accelerated to 9.8% and the industrial production rose by 13.5%, beating expectations slightly. Therefore, the fear of another PBoC rate hike returned and stock markets sold off.

In the eurozone, there was a lot of talk about a restructuring of the Greek national debt. A newly appointed member of the economic advisors in Germany, the five wise men, gave an interview stating it would be unavoidable that Greece restructures its debt and Germany should be prepared to pay according to the guarantees given in May last year. Normally, this would have been positive for gold. However, the head of the EFSF (the European Financial Stability Funds) came up with a proposal for a voluntarily restructuring. The EFSF should borrow Greece funds, which it would use to buy back outstanding bonds at the current deep discounts between 40 – 50 % of face value. This plan led to an improvement of sentiment and sent yield spreads of peripheral government bonds over German bunds lower. The Euro strengthened versus the US dollar. The stronger euro was not favorable for gold as the flight out of the safe havens dominated.

In the US, existing home sales surprised by rising far stronger than the market consensus expected. This had a negative impact on the US Treasury market. The rising yields of bonds and notes make investments in gold and silver less attractive. Thus, on Thursday, there was a rare event of falling stock, bond and metals markets.

Investors’ sentiment might be the key whether gold will fall further or will find support at the reaction lows of October last year. According to the latest CFTC report on the Commitment of Traders, the large speculators have increased long positions for the first time in four weeks. However, they also have opened far more new short positions. Thus, the net long position dropped again by 12,379 to 164,993 contracts. Also the holdings of the biggest Gold ETF, the SPDR Gold Trust, declined initially further. However, after the plunge of gold on Thursday, bargain hunting set in and the holdings rose to 1,271.8 tons, which implies also a gain in the week over week comparison.

As we don’t expect that Chinese monetary policy would lead to a dramatic fall of GDP growth in China, we regard the fears in the markets as overdone. We also expect that a stronger Euro would be positive for gold in the medium-term. Thus, we would currently look more for support in the gold market for buying at lower levels.