Physical Demand Could Determine Gold Price Direction...

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How the physical market reacts to gold’s drop under $1,300 an ounce Friday could determine next week’s price direction for the precious metal, market watchers said.
December gold futures fell Friday, settling at $1,284.60 an ounce on the Comex division of the New York Mercantile Exchange, down 2.2% on the week. December silver fell Friday, settling at $21.317 an ounce, down 2.4% on the week. 

In the Wsj News Gold Survey, out of 34 participants, 18 responded this week. Of these, four see prices up, while 12 see prices down and two see prices sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.
Gold prices fell under $1,300 after a much stronger-than-expected U.S. October nonfarm payrolls report. The Labor Department said 204,000 jobs were created in October, nearly double the expectations going into the report. September and August employment numbers were revised up by a combined 60,000, while the unemployment rate rose to 7.3% from 7.2%. That was likely an effect of the shutdown.

Analysts said they expected the federal shutdown to have impacted the jobs figures, but the Labor Department said survey responses appeared normal. One downside to the higher-than-expected figures was that labor participation, which showed the lowest reading since 1978.

Gold market watchers said prices fell on thoughts that the stronger jobs report, along with Thursday’s higher-than-expected gross domestic product data, mean the Federal Reserve may consider tapering its bond-buying program known as quantitative easing, earlier than expected.
Andrew Busch, founder and editor of The Busch Update, said the Fed may still be cautious even with the economic improvement.

“The U.S. economy is creating jobs and wage gains sufficient for the Fed to begin tapering in December if they want. They will most likely be cautious again and wait until January.  For the markets, this data along with the Q3 GDP supports the view that the U.S. economy has returned to being the major engine of global growth,” he said. 

Whether gold continues to fall next week depends on physical demand, which has been largely absent lately, said Afshin Nabavi, head of trading at trading house MKS (Switzerland) SA in Geneva, Switzerland. How Chinese and Indian buyers act on Monday will be critical in determining price direction.

“Monday is going to be really important. If there’s no improvement on demand in the physical front, prices could fall to $1,250,” he said. Physical buyers have been disinterested in gold because the market’s recent range-bound trade between roughly $1,350 and $1,275, he said. If prices slip out of the current range, that could spur physical interest, Nabavi said. Part of the problem, though, is the overhang of supply on the market which has outweighed demand.

Kevin Grady, owner of Phoenix Futures and Options, agreed. “If the market breaks support at $1,270-$1,275, prices could fall to $1,250. The key is the $1,250 area and if any physical buying comes up. We’ve seen that happen before,” he said.

George Gero, vice president with RBC Capital Markets Global Futures and a precious metals strategist, said now that it is almost mid-November, it will be time to watch the jewelry industry and see what trends emerge of the December holiday season.
He said he’s “not too optimistic on prices” for next week because of the jobs data, but expects some bargain hunting to come in which may limit the downside. 

Grady mentioned that open interest in gold futures rose when prices fell on Thursday, which is generally a sign of new short positions established and is considered bearish. Given how speculative traders increased their net-long positions in the most recent Commodity Futures Trading Commission’s commitments of traders report, there could be more long liquidation ahead, he said.
Looking toward next week, the U.S. economic calendar is light. Greater attention will be turned to China. Weekend economic data to be released include industrial production, fixed asset investment, retail sales and consumer price index data.

Additionally, between Saturday and Tuesday the historic meeting in Beijing, the Communist Party Third Plenum takes place which could have long-term ramifications for commodities markets. Details of what the plan might be are unknown, but China-watchers said focus is likely to be on financial, tax and social security reforms.

However, Barclays and Nomura analysts aren’t expecting a lot of details or decisive action immediately. That could mute the immediate impact on markets. However, the longer-term impact will be more important.


“The stakes are high for commodity markets. If Chinese policymakers decide on a set of moderate reforms while protecting robust economic growth, we expect the impact on commodities would be neutral to positive, as the recent strength in Chinese demand was supported by strong infrastructure spending. However, if the government sets out plans to rebalance the economy more forcefully, sentiment toward commodities demand, especially base metals, could turn negative,” Barclays said.

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News Source: www.reuters.com