200-Day Average Highly Significant for Gold as Liquidation & Caution Drive New 7-Week Low

The price of gold fell back to new 7-week lows in London on Wednesday, giving back a 1% rally from Asian trade as world stock markets and commodity prices also fell after the U.S. Federal Reserve kept its monetary policy unchanged on Tuesday.

Dollar investors saw the price to buy gold dip below $1,624 per ounce, down over 5% from last weekend, as copper prices sank to a 2-week low and U.S. crude oil fell through $100 per barrel.

Silver prices fell to their lowest point in 10 weeks, dropping through the $30-level first seen in November 2010.

Persisting with its $400 billion switch into longer-dated US Treasury bonds, the Fed on Wednesday also repeated its vow, first made in Dec. 2008, to keep short-term U.S. rates at "exceptionally low levels" for the foreseeable future, "at least through mid-2013."

"Some macro hedge funds are liquidating gold holdings and taking profits in a difficult year," "As trading volume typically drops toward year-end, we expect increasingly volatile price swings."

"We have the beginnings of a real bear market, and the death of a bull [in gold]," reckons Dennis Gartman, author of the eponymous $5,000-a-year investment letter, who began advising subscribers not to buy gold in August according to Bloomberg.

"So much damage has been done to the psychology of the market in the past week and so many late longs have been caught off guard that we think wholesale liquidation, and perhaps forced liquidation, shall be the outcome."

The volume of gold bullion held to back shares, however, in the New York-listed GLD exchange-traded trust was unchanged Tuesday, equal to $67.8 billion and keeping world ETF holdings near the all-time record set last week.

Over in Hong Kong this morning, "There is a lot of talk about 200-day moving average," said one dealer's note, "only 1-2% away from current spot gold."

"The gold price has not broken below this moving average since 2009," says a London dealer. "It is therefore a highly significant level of support, and a breach would be very bearish indeed."

Analysis by BullionVault this morning put the average gold price of the last 200 sessions at $1,610/oz.

Joining the price's low points since Lehman Brothers collapsed in late 2008, gold's uptrend now comes in just below at $1,600/oz, "the level held repeatedly in the volatile September-October period," says another wholesale dealer.

On the data front Wednesday, Eurozone industrial production showed a 0.1% drop in October from September, defying analyst forecasts of a rise in the value of manufacturing, mining and utilities output.

UK unemployment held flat at 8.3% of the working-age population last month, but average wages for those in work grew just 2.0% from a year earlier. Consumer price inflation was 4.8%.

Money-supply growth in China, the world's fastest-growing major economy, and now the second largest consumer market for physical gold, showed a slight slowdown, with the M2 measure of currency in circulation and bank deposits rising 12.7% year-on-year, just below analyst forecasts.

"Consumers should look to buy the dips in gold," reckons a note from Standard Chartered bank, pointing to strong Asian demand to buy gold.

"Any [price] weakness is likely to be short-lived and problems in the global economy will be supportive over the medium term."

The Euro currency today fell through $1.30 for the first time since January, buoying the price for Eurozone investors wanting to buy gold above €40,200 per kilo.

Italy this morning had to pay a post-Euro record of 6.47% to borrow 5-year money, after German chancellor Merkel yesterday blocked any increase in the Eurozone's €500 billion "stability mechanism" fund.

"As long as the dollar is gaining, at least until the end of the year, gold will not be in the best position and will remain under pressure," says Nikos Kavalis, a commodities strategist at RBS in London, speaking to Reuters.

"The market is tending to want to see things from a cautious point of view. We are near the end of the year and no one wants to be particularly heroic."

Adrian Ash
BullionVault
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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