Every year, the various commodity indices, that are used by hedge funds and index funds to benchmark against, have a reweighting of the various commodity inputs that are used to comprise each particular index. During this reweighting process, the percentage of some commodities are increased while the percentage of others are decreased. As a result, those funds benchmarking against the index, are forced to recalibrate their particular portfolios, selling some commodity positions while buying some new commodity positions in order to come into alignment with the new weightings.
Dow Jones/UBS recently announced that the precious metal component of their index will be increased by 2% from this year’s levels for 2013. This will benefit gold and silver to the extent of an estimated (by Credit Suisse analysts) to the tune of some $1.6 Billion in new money flows. The money will be evenly split between gold and silver.
There might be some buying in the metals this AM on this news given the fact that the Dollar is generally steady this AM, which would normally see some pressure on the metals. Bargain hunting occurred last evening in Asia down near $1700 and is sitll coming in against that support level on the charts.
Gold bulls need to get the price back over $1720 however and KEEP it there to stem the recent declining pattern and stabilize the market.
Strength in the mining shares as evidenced by the HUI is aiding the metals. That bullish flag formation on the weekly chart is still in force but was chipped away at by yesterday’s strong down day. Mining share bulls will need to take the index up through 510 for starters to give some further hope of validating the pattern. A close in the index below the 480 level makes the pattern null and void.
Author: Dan Norcini