Shorts Risk "Overstretch" In Gold As Technicians Target $1180

LAST WEEK's losses of 3.6% in gold were extended Monday morning, with silver also falling again as world stock markets rose yet again.

Priced in Dollars, gold dropped below $1230 per ounce for the first time since the first week of July.

Silver added to last week's 4.5% drop against the Dollar to hit 3-month lows at $19.61.

Gold in British Pounds fell to new 39-month lows beneath £760 per ounce.

"With the Fed perhaps stepping back" from QE money-printing stimulus, says Jeffrey Sherman, a manager at the $53 billion DoubleLine Capital in Los Angeles, quoted by Bloomberg, "it's hard to make a case for inflationary behavior out there.

"People aren't as worried about inflation, thus you're not seeing people buying gold."

"Downside risks predominate in the short term," says a note from German investment bank and bullion retailer Commerzbank, saying that in Dollar terms gold "may well test the $1180 mark – its three-year low from the end of June."

Having called $1240 the "next support" late Friday, bulllion bank and market maker Scotia Mocatta's technical analysis also points to $1180, "the 100% retracement" of this summer's rally.

"The big issue is still the monetary tightening in the US," says analyst Michael Widmer at Bank of America Merrill Lynch. 

"As soon as [tapering] comes back, you will get further downward pressure."

"Absenting any change in the direction of the Dollar," agrees Jonathan Butler at Japanese conglomerate Mitsubishi, "gold could continue to retrace its late June low of $1180, at which point physical demand [from Asia] may re-emerge."

Despite holding at an $11 premium per ounce above the price of London settlement, Chinese gold prices also fell Monday in subdued trade.

Compared to China's GDP, private spending on gold has risen twice as fast in 2013 to date according to analysis by BullionVault.

Speculators trading US derivatives last week raised their net betting that the US Dollar will rise against other currencies by almost one-fifth to more than $15 billion.

Gold futures and options trading meantime saw speculative players cut their net betting on higher gold by 14%, down to the lowest level since early August.

Equal last week to fewer than 240 tonnes (including small as well as larger, hedge fund traders) the speculative net long position on gold averaged 722 tonnes in the five years to end-2012.

It's so far averaged 332 tonnes equivalent in 2013.

"Gold still looks like a good short in our view," the Wall Street Journal quoted technical strategist Chris Verrone at brokerage and money-managers Strategas Research Partners in New York on Friday, also targeting a fall to $1180.

But now, warns a technical analysis from French investment bank and London bullion market makers Societe Generale today, "The daily indicators are testing supports and [are] overstretched.

"This suggests caution" says SocGen, with $1222 acting as "a key support".

On the equity markets, meantime, the FTSE100 index here in London briefly poked its head above 6,700 for the fourth time in a week, but held 2% below June's near 6-year high.

Futures trading in New York's S&P500 index today put it ready to open above 1800 for the first time ever.

"External markets continue to create an unfavourable backdrop for gold," notes Barclays Captial.

"The physical market [meantime] lends little support during the seasonally strong period for consumption."

Adrian Ash

(c) BullionVault 2013

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