Turning Paper Into Metal? Fat Chance!

The abbreviated trading week finished with a larger-than-two-percent value loss in gold and with not much fresh taking of major positions by market participants in the precious metals complex. In the wake of the deep losses incurred on Tuesday and on Wednesday the markets basically treaded water awaiting any lead from the Friday jobs report or from perhaps crude oil, copper, or the equity sector. The US dollar climbed  once again before Good Friday, this time vaulting to above the pivotal 80.00 figure on the trade-weighted index, as additional constructive news was received from the US jobs and consumer scenes. Friday was a bit of a different story however, as you will see below.

According to Daily FX’s technical analyst Ilya Spivak, spot gold hovered near the $1,625 area after having taken out the 38.2% Fibonacci expansion support figure at $1,634.76 and challenging the 50% level of same at $1,615.46 per ounce. Should a breach of that number take place, the immediate target points to the $1,596.15 mark, i.e. the 61.8% Fibonacci level.

The weekly Bloomberg survey of gold traders reported yesterday that for the first time in 2012 the group was bearish on gold in the wake of the Fed’s signal that additional monetary stimulus may not take place. Bloomberg also reported that, as of yesterday, spot gold’s 100-day moving average dropped below the 200-day measure for the first time in three years last week, reinforcing a bearish trend, UBS said in a report yesterday. Its 14-day relative-strength index is at 37.7, with a level of 30 indicating to some analysts that a rebound may be due. Whether or not that bounce was over with Thursday’s $10 gain, remains to be seen.

As well, the Bloomberg-surveyed gold trade appears to be apprehensive about India’s jewelers’ strike, now entering its third week. There are reports that Indian gold imports may have plunged by 81% in March and that they may drop by 40% in Q2. India’s gold baubles vendors normally move more gold in one year than the cumulative output of US and Australian mines. Their actions (and current inaction) bear close watching. However, on a more macro-level, the conditions that helped boost gold values quite significantly over recent years-a weak dollar and negative growth in global economies-appear to both be undergoing a shift which could make gold not quite as attractive within the commodity asset class as it has previously been.

This is the paradigm of the moment, according to Fidelity’s multi-asset fund manager, Trevor Greetham, who currently sees crude oil as being a superior hedge in safe-haven or inflation-protection terms. Meanwhile, Marketwatch’s regular contributor, Chuck Jaffe, notes that “what’s interesting about the market’s current decline in gold is that it has come on days that, just a year ago, would have sent investors running to gold for protection. Gold’s allure as a refuge amid crises seems to have been reduced, if only because the economy has picked up and talk of worst-case scenarios playing out in the United States and Europe has abated.”

As regards silver, the white metal is seen by the aforementioned  Mr. Spivak as “consolidating beneath the resistance level of $32.93 and exhibiting a head-and-shoulders setup that broadly implies a downside target at $26.4 per ounce.” A Reuters report appearing on CNBC yesterday suggests that record-high mine supply and sudden doubts about demand are casting “a long shadow over silver’s underlying fundamentals.”

One market observer, Angelos Damaskos, the CEO of Sector Investment Management notes that “the dislocation in the valuation between the very sharply rising gold price and silver, which underperformed for 10 years, was so large that the investment community jumped on the bandwagon and drove its price high within a year. Now we are back to the normal situation, where silver behaves much more like industrial metal. Investors are no longer looking at it as a safe-haven asset. It will probably underperform for a good few years." We had described the fundamentals flaws at work in the silver market some time ago in these columns.

As for platinum and palladium, well, the fundamentals-flavored market news and the value projections continue to be comparatively superior to those we are finding for gold and (especially) silver. BNP Paribas figures that palladium’s fundamentals will show steady improvement during the current year. The firm is projecting a 2012 palladium supply deficit as well as an average price of US$825.00 per ounce for the noble metal.

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