Futures Cleanout Leaves Gold in Better Position to Climb Higher

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"Investor uncertainty over the ability of QE3 to support prices and/or the longevity of Fed's open-ended commitment to easing has been acutely manifest in futures market positioning."

After Monday's Asian session saw new six-week lows, the dollar gold price recovered some ground to trade near $1,725 an ounce (oz) Monday morning in London, while stocks and commodities were broadly flat and U.S. Treasury bonds fell.

"Both the weekly and daily charts are pointing for an initial move to $1,693/oz," says the latest technical analysis from bullion bank Scotia Mocatta.

"Any bounce into the upper $1,730s will be a sell opportunity."

The silver price fell to its lowest level in seven-weeks this morning, hitting $31.75 per ounce, before it too recovered some ground in London trading.

At the end of last week the dollar gold price dropped more than 1% in less than an hour during Friday's U.S. trading, while silver also fell along with U.S. stock markets.

"Gold took out the week's low [on Friday] and large stop loss orders were triggered," says a note from Commerzbank, whose analysts say they expect physical gold demand "to pick up. . .at prices of just over $1,700."

"[This] is already evident in gold ETFs," adds the bank's Commodities Daily note this morning.

The volume of gold held to back the SPDR Gold Shares (GLD), the world's largest gold ETF, rose slightly on Friday to 1334.2, with 0.5% of its all-time high hit earlier this month.

Asian dealers meantime reported improved demand from India as the eupee gained against the dollar.

In New York, the difference between the aggregate number of long (bullish) and short (bearish) contracts held by noncommercial gold futures and options traders on the Comex—known as the speculative net long—fell in the week to last Tuesday for the first time in over two months, weekly data published Friday show.

"After eight weeks of consecutive increases, net speculative length has fallen," says Marc Ground, research strategist at Standard Bank.

"Investor uncertainty over the ability of QE3 to support prices and/or the longevity of Fed's open-ended commitment to easing has now been acutely manifest in futures market positioning."

"We view this clean-out as positive for gold," says a note from UBS.

"By removing some of the excess froth the metal is in a better position to start climbing once again. . .[although] a further reduction is necessary."

Over in Japan meantime, exports fell 10.3% last month, a sharper-than-expected drop, although the value of Japan's trade deficit last month was smaller than expected, according to data published over the weekend.

"Global economic uncertainty remains high, and we must be vigilant to the effect of financial and currency moves on the economy and prices," said Bank of Japan (BoJ) governor Masaaki Shirakawa Monday.

"The BoJ will continue to pursue easy monetary policy via steady purchases of assets."

Last month the BoJ extended its quantitative easing program, following announcements of new open-ended asset purchase programs by the European Central Bank and U.S. Federal Reserve.

Here in Europe, Spanish Prime Minister Mariano Rajoy's party extended its majority in the regional assembly of Galicia, Rajoy's birthplace, in elections held over the weekend.

In the Basque region, the Basque Nationalist Party won enough seats to allow it to lead a government in the regional assembly.

Speculation continues over when and whether the Spanish government will request a bailout, which would pave the way for the ECB to buy Spanish sovereign debt on the secondary market.

"[Rajoy will] want to hold off a couple of weeks before asking for the bailout to save face and show they weren't waiting for the elections," reckons political scientist Ken Dubin at Madrid's Carlos III University.

"[But] it's game on for budget cuts."

"We think Rajoy should request European support before the Catalan elections," adds Gilles Moec, London-based co-chief economist at Deutsche Bank.

"The market is likely to react quite negatively to yet another nationalist success."

Catalans go to the polls in their regional elections on Nov. 25.

Elsewhere in Europe, German chancellor Angela Merkel has said Ireland's financial sector is a "special case" with "unique circumstances," in a joint statement with Irish prime minister Enda Kenny issued Sunday.

On Friday, Merkel said that any direct recapitalization of banks from Eurozone bailout funds would not be retroactive, implying countries such as Ireland would have to absorb the cost of their banks' existing bad debts themselves.

"While the use of terms such as 'unique' and 'special case' will presumably soothe some of the concerns that followed Merkel's recapitalization remarks, the lack of any explicit commitments on the bank debt issue means that these concerns are unlikely to entirely go away," says Philip O'Sullivan, economist at NCB Stockbrokers in Dublin.

Ben Traynor

BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben writes and presents BullionVault's weekly gold market summary on YouTube and can be found on Google+

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Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events—and must be verified elsewhere—should you choose to act on it.

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