Gold Bull Market Not Over But Gold Futures Show Disconcerting Bearishness as Greece Faces June Deadline

Bullion and Gold Futures prices dropped further again Monday morning, losing 1.3% to hit $1560 per ounce in London trade as commodities, world stock markets and the Euro currency all sank once more amid a failure in Athens to negotiate a coalition government. The Greek state may be unable to pay salaries and pensions “from the beginning of June” according to stand-in prime minister Lukas Papadimos – warning party leaders in a letter leaked to the press today – because May’s tranche of the international bail-out was cut and tax revenues are falling.

Spanish police this morning evicted the last 200 “indignant” demonstrators from Madrid’s Puerta del Sol after another weekend of protests. The price of Spanish government debt fell further on Monday, pushing 10-year yields above 6.2% ahead of an auction of new bonds later today.

Silver Bullion also fell hard, touching $28.44 per ounce and losing 8.9% from the start of this month. Gold has so far dropped 6.5%. “Gold has moved lower and is trading at levels not seen since December 2011, but we do not think the gold bull market is over,” says a note from Morgan Stanley analysts. Looking at the charts, “Technical damage has certainly been done [but] we do not think it is irreversible,” they add, pointing to a sharp rise in speculative “short selling” by Gold Futures traders now expecting prices to fall further. “The last time positioning was at these levels, prices embarked on a move higher, rallying to near $1,800 per ounce. We are buyers of gold here.”

Latest data from US regulators show large speculative players in Gold Futures and options cutting the number of bullish contracts they hold and raising their bearish bets sharply in the week ending last Tuesday. That led to a drop of one-fifth in their “net long” position, down to the equivalent of 376 tonnes – the lowest level since Dec. 2008, and down by almost 60% from last August’s all-time record. “Net speculative length [in Gold Futures ] appears decidedly weak compared to historical norms,” says Marc Ground at Standard Bank, “signalling a continued lack of confidence.” Ground calls the rise in speculative traders betting on lower Gold Futures prices “disconcerting”, because “while investors have over the past few weeks appeared cautious of running too short on gold, this fear seems to have evaporated.”

Over in the currency markets – where the Euro fell to new 4-month lows vs. the Dollar at $1.2860 – “We continue to target $1.20 for Euro/Dollar,” says Ground’s colleague, currency strategist Steve Barrow. “Whether this takes time, or comes in an instant, could depend on the outcome of Greece’s political impasse.” Energy, metal and food prices all sank once more Monday morning as European stock markets lost more than 2% of their value, with Madrid losing 3% and Athens dropping 5.3%.

At the weekend Swedish central banker Per Jansson said that “of course the question [of a Greek exit] is discussed.” Irish central bank chief, and fellow European Central Bank policymaker Patrick Honohan told journalists that “technically, it can be managed.” “We wish it to be possible for Greece to remain in the euro but Greece must live up to its commitments,” a spokeswoman for the European Commission said Monday morning. If Greece breaches the agreed terms of its bail-out deal then staying in the Euro would be “an impossible equation and I think in that sense it is an irresponsible statement,” said Finland’s Europe minister Alexander Stubb today about the ongoing calls for an end to cuts in Athens.

German chancellor Angela Merkel meantime suffered a drubbing in a state election on Sunday, with her Christian Democratic Union drawing only 26% of the vote in North Rhine-Westphalia, giving the coalition of Social Democrats and Greens a winning majority of 50%. Price inflation in Germany’s wholesale markets rose sharply in April, new data showed today, while industrial production across the 17-nation Eurozone fell much harder than forecast, down 2.2% year on year.

On the FX market, the Euro today hit fresh 42-month lows vs. the British Pound, but fell less quickly than Gold Futures or bullion, with the gold price for Eurozone buyers slipping beneath €39,100 per kilo for the first time this year.

For Indian buyers, “The weakness of the Rupee is countering the fall in the Dollar Gold Price,” says Jeffrey Rhodes, global head of precious metals at INTL Commodities DMCC in Dubai, speaking to the Wall Street Journal. “That’s likely to act as a drag on demand in the world’s biggest market.”

“There is hardly any work these days,” complains a Jaipur goldsmith to The Times of India. “First the 21-day long jewelers’ strike and now the increasing Gold Prices have rendered us jobless. “It is getting tough for us to survive.” India’s imports of Gold Bullion fell by two-thirds last month compared with April 2011. “We will be happy if [the total] crosses 800 tonnes this year” – a fall of nearly 20% from 2011 – says Dubai broker Richcomm Global Services.

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BullionVault14 May ’12

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