Liquidation of "Crowded" Gold Trade Pauses But "Clean-Out of Weak Hands Necessary"

By: Adrian_Ash

BENCHMARK prices to buy gold for London settlement rallied more than $10 an ounce off new five-month lows beneath $1528 on Wednesday morning, bouncing as the Euro, world stock markets and commodity prices also paused this month's sharp liquidation.

Spanish and Italian bond yields also eased back but remaind over 6% after Spain's prime minister Mariano Rajoy told the parliament in Madrid there is "a serious risk that the markets won't lend to us or lend only at astronomical prices."

Over in Greece – where the daily "bank run" of withdrawn Euro deposits is now totaling some €700m per day – president Karolos Papoulias meantime appointed a judge to act as interim prime minister and set the date for an election re-run as 17th June.

"[Gold] selling continued in Asia today across all exchanges," says Swiss refinery and finance group MKS in a note.

"Market participants have given up waiting for a bounce," says a Singapore dealer. "The market will do what it needs to do to clean out the weakly margined before it becomes healthy once again."

Hedge-fund legend George Soros opted to buy gold in the first quarter of 2012, reversing previous sales according to new data from March 31st released yesterday and showing his fund more than trebling its position in the $60 billion New York-listed SPDR gold ETF.

Fellow billionaire hedge-fund manager John Paulson – who represents the largest single holder of SPDR Gold shares – maintained his clients' stake, leaving it unchanged for the first time since June 2011 at the equivalent of 53.8 tonnes.

Losing 8% since end-March, prices to buy gold have now lost one-fifth from the record Dollar peak of September last year – "the common definition of a bear market," notes Bloomberg News.

"This is an example of our old friend 'the crowded trade'," reckons John Ventre, manager of Skandia's Spectrum and multi-asset funds, speaking to Investment Week.

"Very many investors now own the asset, even though the market is in fact incredibly small. As investors – particularly levered ones like hedge funds – take losses in other parts of their portfolio, then selling pressure emerges across the board as investors pull their horns in."

The spot-price to buy gold "is not far from our downside target zone at the September and December 2011 lows," says the latest weekly report from technical analyst Axel Rudolph at Commerzbank in Luxembourg.

"Over the next few days a minor bounce back towards the breached 2008-12 uptrend line is likely to be seen before another down leg rears its head, probably by next week."

Together with gold Wednesday morning, silver bullion also bounced from new five-month lows, adding 50¢ to trade above $27.70 per ounce.

Over on the Hong Kong stock exchange, however, shares in Chow Tai Fook Jewellery Group – the world's biggest publicly listed jewelry retailer – closed 10% down at an all-time record low.

Along with the rest of Asia, the Hang Seng Index overall fell for the 9th session in ten, while US crude oil dropped through $93 per barrel and copper contracts dropped another 1.5% on the day.

"Gold's slide has to be put in perspective with other commodities," says Walter de Wet at Standard Bank in London, pointing to the 1-month drops in crude oil, platinum and copper.

While prices to buy gold have lost 7%, "Even [emerging-market] currencies such as the Brazilian Real and the South African Rand have depreciated 7.9% and 5% respectively against the US Dollar.

"Liquidation is taking place irrespective of market fundamentals."

"Jewelers don't know what to do," says Ronald Leung, head of Hong Kong's Lee Cheong Gold Dealers, speaking to Reuters.

"Maybe when the price has stabilised at some levels, they will start to reenter the market. There's a bit of scale-down buying."

Some wire reports said Wednesday that demand to buy gold had picked up despite a fresh record low in the Indian Rupee capping the new lows in the world's #1 consumer market.

"Amid drying-up demand in off season," says NDTV – pointing to the traditional summer lull between wedding and festival periods – these lower gold prices "could ease the burden on [India's] import bill."

India's gold bullion imports equaled some 2.6% of GDP last year, almost equal to the country's entire balance of trade deficit.

On top of 2012's quadrupling of import duty, "Gold imports could be discouraged by creating opportunities for more productive investments in the economy," writes RV Kanoria, president of the Federation of Indian Chambers of Commerce & Industry (FICCI) – fresh from urging the privatization of India's coal-mining sector – in the Economic Times of India today.

"A better investment climate through focus on reforms will steer investors to look towards ventures than just stock up gold."

By Adrian Ash
BullionVault.com

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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

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