Further consolidation required?

In the Far East on Monday, gold spiked up to $2146 and silver to $$25.90, when it was 18.30 EST on Sunday. It was short-lived, and a lack of follow through and profit taking rapidly took gold and silver back to below Friday’s official close in New York. Following this drama, gold has stabilised, trading in Europe this morning at $2030, down $42 from last Friday’s close. Silver has continued to weaken and is at $23.80, down a hefty $1.68.

Comex volumes have declined significantly since Monday, as the following snapshot illustrates.

This indicates that selling pressure is declining, with bulls having been mostly stopped out, which is hardly surprising. And so far, long positions are generally holding. That said, it appears likely that in the absence of renewed buying pressure, the bullion bank traders will almost certainly try to edge gold back under $2000. It will have to be carefully managed, because there are bound to be investors feeling that they have missed a bull market opportunity and are looking to buy below $2000. ETFs have seen a diminishing run of net selling, and that is likely to turn into net buying, putting the squeeze on markets short of bullion.

Our next chart is of the underlying technical position, which is bullish.

A dip towards the $2000 level not only clears out the short-term bulls, but the moving averages suggest increasing support down to $1951, which is the 55-day moving average’s current level.

Whether the shorts can manoeuvre gold down towards that level depends whether a sense of crisis for the dollar diminishes. Quiet pre-Christmas trading interest might provide the bears with this opportunity. Alternatively, an escalation of the Israeli-Palestinian conflict, or a possible rise in bond yields destabilising global currencies could bring about a renewed bear squeeze.

It’s worth bearing in mind that gold has been correcting a bullish trend in other currencies, and that dollar considerations are only part of the picture. The next chart of month-end values illustrates the point.

All else being equal, as the dollar weakens against the other major currencies we should see the dollar gold price rising, while perhaps it consolidates further in yen, sterling, and euros.  Falling US Treasury bond yields are behind the changing relationship between currencies, with the 10-year note yield having fallen to below 4.2%.

This decline in Treasury bond yields has taken much of the bearish pressure away from global markets, leading to a significant decline in the dollar’s trade weighted index, which is our final chart.

The decline in bond yields and the dollar’s TWI suggests that the sense of systemic panic is receding. But there are leveraged long dollar positions to be unwound, which leads to selling of dollars and buying of short positions in other currencies. While foreign investors have benefited from falling dollar bond yields, they now face currency losses if they retain their dollars.

And for gold, conditions are set to remain tight in physical markets, with central banks continuing to accumulate gold reserves.