Gold Charts Send a Warning

Physical gold investing prices higher early Wednesday as Asian stock markets slid, but a further rally in European equities again saw the price of gold pull back.

Slipping below last week's record-high Friday close of $1852 per ounce, the price of gold investing bullion bars was set at $1850 per ounce by the wholesale market's biggest players mid-morning in London.

Wednesday's AM London Gold Fix saw a fall from the previous morning for only the fifth time in 17 trading days so far this August.

"Yesterday's drop in prices has attracted an element of bargain hunting, which should provide support across the precious metals complex," says Standard Bank in its daily commodities note.

"However, with European stocks currently trading up it appears as if risk appetite is not completely absent, which could limit the upside for precious metals."

"The danger of a potentially deep pullback is ever present should risk sentiment improve," says VTB Capital's Andrey Kryuchenkov in London.

"[Tuesday's] price action reflects an 'outside day reversal warning'," says Russell Browne at bullion bank Scotia Mocatta.

"A lower close [Wednesday] will bring liquidation selling" by gold investing traders, writes Browne in his technical analysis of the price charts. "We expect initial support at previous week's close of $1815."

"We've come a tremendous distance and some consolidation and profit taking is not unexpected," reckons Chicago dealer Frank McGhee at Integrated Brokerage Services, speaking to Dow Jones.

Elsewhere overnight, ratings agency Moody's downgraded the sovereign bonds of Japan to Aa2—three notches below the "perfect" triple-A status lost by the United States at the start of this month—citing weak growth and huge government debts.

Japanese government bonds ticked higher in price, however. U.S. Treasury bonds also rallied Wednesday, while commodity markets held flat and New York stock-market futures pointed lower.

Over in Europe, Greek newspaper Naftemporiki today said that Athens has reached agreement with its Euro partners and IMF creditor on the sixth chunk of bail-out funds, despite missing targets on debt and deficit reduction.

"Finland's demands for collateral for its share of the Greek bailout are seen as destabilising the whole package," says Dow Jones.

"Default risk is on the rise," reckons ING strategist Padhraic Garvey in a note.

The yield offered by 2-year Greek government bonds today shot higher as prices sank again, reaching 42% per annum and trading above the previous record highs seen just before the 21st July crisis meeting at which a further €160 billion of external loans was agreed.

Currencies were little changed, however, leaving gold investing prices to drift some 4% below yesterday's new record highs for Euro, Sterling and other non-Dollar buyers.

"The correction after breaking $1800 [two weeks ago] was momentary, and the present macro environment suggests that this correction [from $1900] will be too," says a London dealer in a note, adding that the overnight drop in prices saw strong demand on Tokyo's gold futures market.

Physical "scrap gold" sales of jewelry by cash-strapped consumers, however, should see Japan—which has no domestic mine output—become a net exporter of gold for the sixth year running in 2011, reports Reuters from Tokyo.

But just as in Europe and North America, this surge in "scrap gold" sales has come against a rise in gold investing demand, with the volume of metal held by Mitsubishi UFJ Trust's exchange-traded gold fund (ETF) swelling some 12% so far in August and rising one-quarter by value to $284.9 million.

"Investors are seriously treating our gold ETF as a legitimate asset class, just like investing in equities, bonds and currencies," says deputy general manager Osamu Hoshi at Mitsubishi UFJ Trust.

Overtaking the S&P500 ETF to become the largest single exchange-traded trust fund in the world on Monday, the SPDR Gold Trust traded in New York saw investor redemptions equal to nearly 25 tonnes of bullion on Tuesday.

Now holding 1260 tonnes of gold bullion to back the value of its stock-market shares, the Trust peaked in June 2010 at 1320 tonnes.

The price of gold has risen over 56% since then.

Adrian Ash
Bullion Vault

Gold price chart, no delay

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is head of research at BullionVault—winner of the Queen's Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body—where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

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