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Gold Bullish as Correlations Normalize, Analysts Expect More Upside in Silver

Commodities / Gold and Silver 2010 Jun 16, 2010 - 08:39 AM GMT

By: Adrian_Ash


Best Financial Markets Analysis ArticleTHE PRICE OF GOLD eased back from an early 1-week high vs. the Dollar on Wednesday, trading 0.8% higher from yesterday's London Gold Fix as a rise in Japanese equities failed to spur European stock markets.

Euro investors wanting to buy gold saw the price rise further as the single currency dropped, trading more than 1.9% above Monday's low at €32,400 per kilo.

Government bond prices rallied as equities stalled, pushing the yield offered by 10-year US and German debt back down to 3.29% and 2.66% respectively.

US crude oil contracts slipped 1% to $76 per barrel.

"We view [Tuesday's] price action as consolidation before another leg up," says bullion bank Scotia Mocatta in its technical note.

"[Gold] remains bullish while $1197 holds."

"Yesterday's performance in precious metals was bullish," agrees Walter de Wet at Standard Bank. "Buying gold on dips remains our preferred strategy [as] the bias is for a break to the upside.

"We look for more upside in silver too."

Silver prices also dropped back early Wednesday, easing 0.8% from a new June high at $18.72 an ounce.

Warning of a potentially "large double top" in gold, "volume has been tailing off," says Phil Smith for Reuters Technical in Beijing, "which is consistent with such a pattern.

"Early days, but one to watch."

That said, "Correlations for gold are now beginning to normalize," Smith goes on. "[Gold's] correlation with the Dollar is coming off high positive towards negative where it normally is.

"Likewise, the positive correlation with the stock markets is returning" – signaling a reversal of mid-May's "switch in sentiment regarding risk."

Averaging a positive daily correlation with the Euro vs. the Dollar of 0.52 since the start of 2000, gold last week showed its sharpest negative correlation since the single currency was launched a decade ago.

From last Tuesday's reading of minus 0.89, however, gold's correlation with the Euro – on a rolling 1-month basis – ended last night at minus 0.25.

It would read +1.0 if they moved perfectly together in lock-step with each other vs. the Dollar, or –1.0 if they moved in absolute opposition.

Also noting that "Gold bucked its recent negative correlation with the Euro" on Tuesday, one London dealer today points to Friday's expiry of June call options on the massive SPDR gold ETF trust fund.

Although volatility in the financial markets has subsided from mid-May's spike, he says, "that could change [for gold] given the significant role the ETF has taken on in this market."

Adding almost 8 tonnes last week to the physical hoard backing its securitized trust-fund shares, the SPDR gold ETF held 1306 tonnes of metal by Tuesday's close.

Compared with the world's largest central-bank holdings, that would put the New York-listed trust at No.6 – ahead of China (1054 tonnes) and behind France (2435 tonnes).

"I think the upside for gold is still very strong in terms of safe-haven flows," says one Singapore analyst, Wong Eng Soon at Phillip Futures, speaking to Reuters.

"There seems to be a preference for large funds to be long on volatility, take on more downside protection, and be less correlated with wider markets. This suggests risk aversion is still prevalent."

Ahead of Wednesday's US factory-price data – and ahead of tomorrow's US consumer price data – new figures here in the UK today showed average earnings growth lagging inflation yet again for British workers, most spectacularly for private-sector employees who do not earn a bonus.

Excluding bonuses, private-sector UK wages rose 1.2% in the year to April. Retail price inflation that month hit a 19-year high of 5.3% annually.

Earlier Wednesday, Indian bullion dealers confirmed the seasonal slow-down in local gold demand was underway, but "We've seen some physical buying from Thailand," said a Singapore wholesaler to the newswires.

"I think [Asian] consumers will continue to buy gold on dips. People are still confident on gold more than anything."

On the Gold Mining supply side, meantime, analysts at Morgan Stanley warned today that expansion of Australia's massive Olympic Dam project may be halted by the country's proposed 40% mining "super tax".

"Under the [tax] as proposed, expanding the project has no economic value in our view," writes analyst Craig Campbell in a note.

The site's owner – BHP Billiton – lists Olympic Dam as the world's fourth largest copper deposit, fifth largest gold deposit and No.1 uranium deposit, as well as a "significant" reserve of silver.

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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