Gold Hovers Around $1000/oz As Investors Await Wednesday

Gold is holding steady around the highly psychological $1000/oz level; experiencing some weakness on declining volume as investors nibble on an oversold Dollar.  However, the precious metal has avoided a retest of September 10^th lows thus far, indicating the pullback has been driven by profit-taking following gold’s impressive run to new 2009 highs.  We recognize tight resistances and supports, indicating gold should remain within a relatively narrow trading band due to the lack of global economic data.  Investors are taking the opportunity to lock-in profits across the board as they await Wednesday’s flood of economic data and central back meetings.  We notice similar weakness in the EUR/USD, crude, and the S&P futures.  However, all three are holding onto their technical supports, telling us continual consolidation may be in order for gold.  After all, the $1000/oz level is highly psychological, and the precious metal will need a large jolt to break free.  We have little reason to alter out positive outlook on gold trend-wise.  Meanwhile, investors should keep a close eye on the behavior of gold’s correlations for any indication of a substantial technical reversal.

One headline investors should take note of is the IMF’s desire to auction off just over 400 tonnes of its gold reserves.  China has taken interest in the offering with the nation seeking to diversify its massive reserve of Dollar-denominated assets.  Though the huge sale of IMF gold has not been finalized, such a transaction would represent a large boost in overall supply and reduction in demand, thereby weighing down on price.  China recognizes the price impact of such a move, and is requesting a substantial discount should it purchase the IMF’s gold.  Investors should monitor the situation closely since it could provide a sudden price shock to gold if the transaction goes through.

Technically speaking, gold’s psychological $1000/oz area should continue to serve as a strong support.  Our 2^nd tier uptrend line represents an important technical cushion since it runs through September 10^th lows.  A failure of our 2^nd tier could result in a sharp reversal.  As for the topside, 9/11 and 9/17 highs serve as technical barriers along with our 3^rd tier downtrend line.

Present Price: $999.75/oz

Resistances:  $1002.91/oz, $1004.78/oz, $1007.21/oz, $1009.08/oz, $1010.39/oz

Supports: $998.61/oz, $995.06/oz, $993.19/oz, $992.07/oz, $989.08/oz, $987.02/oz

Psychological: $1000/oz, 2009 highs and March 2008 highs

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Comment by Marco

2009-09-21 16:25:54

Good article, although I don’t think purchasing 400 tonnes of gold will make much of a dent in China’s “massive reserve of dollar denominated assets”. If I’ve done my calculations correctly,400 tonnes of gold at today value ($1,000 USD/OZ) represents about $27,280,000,000 dollars, which is a lot of money to me but is only a very small percentage of China’s dollar denominated reserves. I also don’t think that China would get much of a discount; they should be happy to pay spot because for them to accumulate 400 tonnes in the open market would surely act against them, as it would push the value of gold rather than the scenario you have painted.
I do think it would be an excellent purchase for China and they do seem to be the most likely buyer, although I’m sure that there are several other sovereign funds that would also pick up the slack, if any developed.

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Comment by Fastbrokers

2009-09-21 21:01:18

Hi Marco, thanks for your feedback, it’s always great to hear from our readers. W

hile you’re correct in that it would not make much of an impact on China’s total reserves, the comment concerns the overall supply and demand for gold. If China were to buy the entire 400 tonnes, then this would probably satiate their demand for a little while. Not to mention it is a noticeable boost of supply to the gold market. Lastly, we should also consider the temporary psychological impact this could have on traders. The retail investor is not rational and would likely trade the news. This is what I meant by an ‘immediate impact’, and I should have clarified that this would not have a lasting effect on the true fundamentals or trend of gold.

While this bit of analysis is food for thought, it should still be on the radar. Now, the purchase might not happen for a while since China will want a reasonable price ‘http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aiFltMY5g3BE’. Does this mean China will wait for a substantial pullback and then the purchase would have a counteractive, positive impact on price? I suppose we’ll have to see how the situation unfolds.

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