Rational Exuberance?

The G-20 meeting in Mexico City failed to produce a pledge by its attendees to chip in with half a trillion dollars’ worth of fresh lending facilities for the IMF. The group signaled that if there is any new money to come from anyone to provide further help to Europe’s now three-years-long crisis, it would have to be doled out only after the region reassesses its financial safeguards next month.

At that point, the next meeting of the G-20 in Washington DC during April might take up the expansion of the IMF’s fund once again. The development left European stock markets on the defensive and it also made for a modest retreat in the euro this morning. That combination of trends bolstered the US dollar and resulted in fresh, albeit small-scale profit-taking in precious metals as well.

Spot gold dealings commenced the new trading week with a loss of $6 per ounce and the yellow metal was quoted at $1,767 on the bid-side. Silver prices fell by about a dime per ounce and initial indications came in at $35.32 the ounce in the white metal. Unless gold commences a decline to under the $1,680 area in the next few sessions, the interpretation coming from the EW technical desk allows for the yellow metal to aim towards not only the next logical overhead resistance price marker(s) ($1,795 to $1,820) but perhaps to the previous peak above $1,900 that was seen last September.

That the latest round of price increases in gold has been an overwhelmingly fund-engendered phenomenon is quite obvious. More worrisome on the other hand are certain trends in the physical markets (we covered the potential erosion in India’s 2012 imports and the decline in USA-based physical investment in 2011 in last week’s articles).

Well, you can now add VietNam to the roster of countries where domestic investors are suddenly "uncertain" about continued, (some say endless) gains in gold. VietNamNetBridge reports that local “investors have run out of patience. Together with the warning that gold would be no longer an attractive channel, the State Bank said it is tightening the management over the gold market and compiling the plan to mobilize gold from the public, which are all the big worries hanging over 12,000 gold companies.”

In any case, gold’s “paper” bullish sentiment is approaching certain levels (above 90% according to trade-futures.com’s Daily Sentiment Index) from which previous sharp corrections have ensued. Silver has some work left to do as it begins to encounter overhead resistance that extends all the way up towards the $37.85 overhead resistance level. If and when support near $32.62 is breached, the tenor of the market will tilt towards deeper corrections.

Both precious metals witnessed an increase in net speculative length in the latest reporting period covered by the CFTC. The commodities’ complex positioning makeup showed that more than one million bullish bets (as in: futures/options contracts) are in place in the wake of the most recent batch of wagering on higher prices being manifested by hedge funds and money managers.

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