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Gold Extremely Choppy, Hit by Fund Liquidations

Commodities / Gold and Silver 2010 Feb 08, 2010 - 07:43 AM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticleTHE PRICE OF GOLD reversed an early 0.8% gain in London on Monday, revisiting Friday's finish of $1066 per ounce in what dealers called "lackluster" but "choppy" trade after last week's "widespread liquidation."

European stock markets also gave back an initial rally, while the US Dollar held the Euro near Friday's new 9-month lows.

The Japanese Yen extended its 10% surge of the last 3 weeks vs. the Euro.

"Gold did not get its usual double hit from a commodity-related sell-off plus distressed selling," writes Walter de Wet at Standard Bank in his latest Precious Metals Monthly.

"Rather, the falls [so far] in February were massively exacerbated by stop-loss trading."

Falling through what many technical analysts had called "strong support" between $1070 and $1075 last week, the gold price also slipped below the 15-month uptrend it began when the collapse of Lehman Bros. sparked huge gold investment demand in late 2008.

"Gold remains above its 200-day moving average," says one bank analyst today. "That comes in at $1023 an ounce."

"Gold looks firmer than silver," says another, noting that silver fell through its 200-day average on Thursday.

Government-bond prices also slipped early Monday, while crude oil and base metals were little changed, down 1.6% and 6.4% respectively from the start of last week.

Open interest in Comex gold futures and options shrank yet again last week, new data showed after Friday's New York close, dropping to a four-month low and contracting by 11% inside a fortnight by Tuesday's finish.

So-called "speculative" players – meaning non-commercial traders such as hedge funds and private investors – cut their bullish betting for the third week running, shrinking their "net long" position to 5-month low equivalent to 803 tonnes of bullish minus bearish beats.

That speculative position peaked above 1020 tonnes in late October. It has been cut by more than 22% since mid-Jan.

New York's SPDR Gold Trust ETF meantime regained two of the seven tonnes it had sold last week, but its holdings still shrank 0.5% overall to stand 2.5% below last June's peak of 1134 tonnes.

London's GBS trust – cross-listed across most of Europe's major bourses – dropped another two tonnes to stand at 121 tonnes, almost one-eighth below its record peak of June '09.

"Gold's grass roots activity is meeting alternate waves of buying and selling," says De Wet, "pointing to a period of extremely choppy trading.

"There is strong bargain-hunting going on after the fall, however, and gold's longer-term role as a risk-hedge is gaining increasing traction."

By lunchtime in London on Monday, gold was unchanged from last week's finish against all major currencies, trading at €780 and £683 an ounce for Euro and UK investors looking to buy gold today.

"I would like to believe that we have a reasonable underpin where we are and that the gold price can go higher from here," said Nick Holland, CEO of South Africa's Gold Fields mining company to Mining Weekly Online last week.

"There'll be continued growth of new [investment] funds looking to have a piece of gold...But I think we have to make peace with [much lower] jewelry demand."

The correlation of gold with other financial assets has risen sharply so far in Feb., with the daily connection between gold and the S&P500 stock index rising above gold's correlation with the Euro currency and even silver last week.

US stock futures pointed lower as the New York opening approached on Monday, while London's FTSE100 today reversed an early 1% rise, slipping back to last week's 3-month closing low at 5060 points.

"It's important to remember that equity values, stock prices, are not just paper profits," says former US Fed chairman Alan Greenspan, credited in a new biography , Panderer to Power, with developing the "asymmetric" US policy of never raising interest rates to prick an asset-price bubble, but always cutting rates after the bubble bursts.

"Stocks actually have a profoundly important impact on economic activity," Greenspan told NBC's Meet the Press yesterday, and a drop in stocks "is more than a warning sign."

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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