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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold and Commodities Sell off on Reversal of Recent Trends

Commodities / Gold & Silver Jan 16, 2008 - 09:52 AM GMT

By: Gold_Investments

Commodities Gold's expected correction materialised yesterday and gold was down $1.30 to $900.60 per ounce in trading in New York yesterday and silver was down 9 cents to $16.20 per ounce. Gold continued to sell off in Asian and European trading. The London AM Fix was at $881 (down from $904.75 the previous day). Gold also sold off in other major currencies. At the London AM Fix gold was trading at £450.20 (down from £460.76 yesterday) and €595.47 (down from €609.05 yesterday).


There has been a reversal of recent trends and the dollar has strengthened and oil and commodities have sold off from overbought conditions. Corrections in most markets were expected as recent movements had been sharp and fast and no market moves in a straight line in any direction. Rumours of an emergency FOMC meeting and emergency rate cuts due to a recession or likely recession in the U.S. will likely mean that any strength in the dollar is short term.

All eyes will be on U.S. inflation data, the TICs report, the NAHB housing market index and the Fed's Beige book today. The dollar will likely gain direction from these numbers. The TIC data is particularly important as it will show whether the creditors of the U.S. (particularly Japan, China and Middle Eastern countries) are still willing to fund U.S. consumption and the still very high trade and current account deficits.

Increasing risk aversion is evident in markets and particularly in international equity markets. A large number of U.S. banks announce results today which will also set the tone.

FX
With the Fed refusing to comment on the rumours of emergency rate cuts, the dollar found some support in early morning trade but that was not before it fell to fresh 2½ year lows versus the yen and a new record low versus the Swiss franc.

Growing concerns over the effect of a U.S. recession on German GDP growth weighed on the euro yesterday, as the single currency fell from just over 1.4900 against the dollar to a low of 1.4780 overnight. Resistance to the upside remains at 1.4970.

The increasing negative sentiment towards the banking sector helped trigger dollar selling against the yen through technical support at 107.20 with the currency pair trading down below 106.00. This momentum caused further carry trade unwinding against sterling and the euro as suspected. Technically eur/yen now looks vulnerable to a further sell off, however rapid appreciation of the yen is not something that will sit comfortably with the Bank of Japan who are not averse to intervening in the FX market and selling their currency. While this is possible, the probability remains low ahead of February's G7 meeting.

Support and Resistance
A correction has materialised as expected. Given the sharpness of gold's move in recent weeks a correction and consolidation is normal and healthy.

Support remains at previous resistance at around $840 to $850. However, traders and investors would be wise to continue to 'make the trend their friend' and gradually assume positions and use dips as buying opportunities. This is especially the case in the current macroeconomic and geopolitical climate.

We remain confident that gold is likely to remain above $840 and $1000 will be reached sooner than many market participants expect.

Silver
Silver has also sold off and is down to $16.00/16.02.

PGMs
Platinum was trading at $1586/1590 as per above. The fundamentals on platinum remain very favourable - Palladium was trading at $372/378 an ounce.

Oil
Oil is largely flat in European trading after yesterday's further sell off and NYMEX light sweet crude oil (FEB08) was trading at $90.61 a barrel. The slowing U.S. economy is leading to fears of demand destruction.

Gold Investments
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Gold Investments
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