22nd August 2011

Bullish

More talk of QE3 Lack of action to tackle debt Dollar looking weak again

Bearish

Build-up of shorts in gold Equities weak, possible dash for cash No QE3 announcement is made

Outlook
Short Term Medium Term Long Term Challenge Consolidate Extend gains $1,900-2,000 $1,780-1,820 Above $2,000

Last Week: Gold started in orderly fashion on Monday in two-way trading following the previous weeks volatile price flows but buying interest returned during US trading after data showed a decline in manufacturing activity in the New York area and weak demand from foreign investors for US long-term assets. The metal tested back to $1,770 per ounce in after-market trade, bolstered by intervention by the Swiss National Bank to halt the appreciation of the franc, and continued to gain ground on Tuesday. It touched $1,788 after more disappointing data (eurozone flash GDP and US housing) and a negative reaction to the meeting between French President Nicholas Sarkozy and German Chancellor Angela Merkel. Although that summit resulted in a proposed tax on financial transactions and closer joint governance of economic policy, no agreement was reached on increasing the eurozone bailout fund or the selling of eurozone bonds. News on Wednesday that Venezuela was planning to nationalise its gold industry and rehouse its official holdings within its own central bank kept gold underpinned before it cleared $1,800 on Thursday and continued to fresh highs after data revealed a dramatic drop in the Philly Fed Manufacturing Index to -30.7 from 3.2 and a slowdown in existing home sales. Economic jitters pushed gold to a record $1,878.75 during Friday's European trading before paring gains to close the week up 6.3 percent around $1,850. Silver finished the week with a nine-percent gain, having hit a threemonth peak of $42.95 per ounce during electronic trading late on Friday. Monday marked the 40th anniversary of President Richard Nixon's announcement that the US would abandon the gold standard, dropping the $35-per-ounce peg and allowing the dollar to float freely. Gold hit new lifetime highs in other currency denominations last week including the euro, sterling, the Canadian dollar, the Swiss franc and the rupee. SPDR ETF gold holdings rose 30.5 tonnes last week. Retail interest remained brisk, with the US Mint reporting Eagle sales totalling 83,000 ounces of gold and 2.13 million ounces of silver in the month to date.

The Week in Numbers NYSE Liffe US Gold Oct Mon 15 Tue 16 Wed 17 High 1745.70 1785.50 1794.60 Low 1736.30 1760.60 1783.70 Close 1757.10 1783.60 1792.50 Silver Sep High 39.690 40.091 40.580 Low 38.884 39.325 39.800 Close 39.363 39.837 40.351 * week's high, week's low & change on week

Week* Thu 18 Fri 19 1828.00 1876.20 1876.20 1794.30 1830.00 1736.30 1820.40 1850.50 109.30 40.789 40.120 40.684 42.519 41.245 42.391 42.519 38.884 3.277

Week Ahead: The Federal Reserve signalled at last years Jackson Hole symposium that it was considering the second phase of quantitative easing (QE2), which started a strong run-up in asset prices. That set a precedent the market expects chairman Ben Bernanke to lay out a range of policies at this weeks symposium intended to bolster the ailing US economy. Prior to Bernankes speech on Friday, the market will get further insight into the state of the global economy via various economic data (see table on right). With growth forecasts for many advanced nations being lowered, this data could have a serious impact on markets. Bullion will be driven by three factors this week: economic data, EU debt developments and Bernankes Jackson Hole speech. Negative data could well be supportive for gold in the run-up to Friday. Bullion could correct if Bernanke fails to hint at further QE but indications of further easing could well push prices towards $2,000.

df Researched and Analysed by E-Mail: press@thebulliondesk.com

FOCUS Gold underpinned by fundamentals; gold/silver ratio supportive for silver

The World Gold Council published last week its latest Gold Demand Trends report for the second quarter when gold initially rallied to what was then a record $1,575 per ounce on May 2 before consolidating in a broad range between $1,475 and $1,550. Despite the record gold price in US dollars, the report showed a five-percent quarter-on-quarter decline in total demand in volume terms and a 17-percent year-on-year decline. But while the rising price affected tonnage off-take in that period, demand on a dollar basis grew to $44.5 billion, the second highest quarter on record. Indian and Chinese growth was particular strong rising middle-class wealth, inflation and festival purchases prompted buying interest. Jewellery-related purchases rose 17 percent year on year in both countries while coin and bar sales increased 44 percent in China and 78 percent in India despite local prices rising four percent and five percent respectively. Supplies into the market also declined year on year although there was a sharp 20-percent quarter-on-quarter rise when the new highs in gold triggered an influx of scrap sales. Recycled flows were up 22 percent in addition to primary production but this was partially offset by approximately 10 tonnes of producer-related buying for dehedging after being net hedgers during the first quarter. Purchases from various central banks also resulted in a net 69.4tonne rise in officials holdings, a slower pace compared with the 122.9 tonnes added between January and March. The second-quarter data and more recent statistics describe a bullish price environment for gold, with the market driven by strong investment demand that is outpacing moderate supply increases. Gold has rallied strongly in recent weeks while equities have soured on growing growth concerns but the accompanying chart highlights some interesting developments between two industrial commodities silver and oil. The rise in the gold/oil ratio reflects lower demand expectations while US and eurozone debt problems undermine economic activity; meanwhile, despite its industrial demand base, silver has been keeping pace with gold while retail investors seek the metal as a cheaper alternative. The silver/gold ratio, having dipped below 44:1, could test the bottom of the previous 1:39-42 range, suggesting a rally back towards $47 per ounce.

Technical Analysis Gold

Gold closed bullishly last week for the seventh consecutive week, raising the short-term prospects of a reversal. The momentum indicators are positive but both appear vulnerable to rolling over. The metal has support from the 5 WMA and the 20 WMA. It closed well over the top of the Bollinger bands for a second week last week, indicating the metal is technically overbought. Silver is well supported by the small up channel at $1,781-1,704 and the long-term up channel at $1,6981,615. Upside resistance remains at the psychologically important levels of $1,900-$1,925-$1,950-$2,000. In the short term, we feel that silver is overbought but such scenarios can become very overstretched in genuine bull markets. So while we believe a correction is overdue, we will remain positive in the short term until the stochastics cross and break lower. We are bullish in the medium-to-long term.

Technical Analysis Silver

Silver closed positively last week, forming it largest green candle since the week of April 18. The metal has retraced lower so far this week and is now trying to consolidate around the 61.8% Fibo level at $43.13. The stochastics are positive but look vulnerable and the RSI is neutral positive. Silver has support at $42.27-$41.45-$41.07 (50%), $40.89 and resistance at $44.62-$45.52 (UTL). Given last weeks gains, it is understandable that silver is consolidating on last weeks close but the fact it has gapped higher and had to retrace lower suggests a lack of follow-through buying. While silver is still trading inside the long term bullish up channel of $45.52-38.12, we remain positive in the medium-to-long term. In the short term, however, we wonder whether silver might consolidate or correct slightly lower before resuming its upward path. Trader Talk:
What I'm seeing right now is basically a crisis of confidence, more so than an economic crisis or financial crisis necessarily at this stage" Natalie Trunow, chief investment officer of equities at Calvert Investment Management

df Researched and Analysed by E-Mail: press@thebulliondesk.com

Market Drivers Dollar Index Gold & Silver ETFs

This weekly chart shows the dollar holding in a sideways range just above the recent lows. So although the dollar is not losing value at present, it is not showing any signs of gaining value. This suggests that the market is waiting to see whether the US embarks on another round of policy that will ultimately debase the currency further, i.e. will another tranche of quantitative easing (QE3) follow?

ETF investors started to take profits two weeks ago but last week they bought afresh. Holdings across the gold ETFs we follow climbed 25.8 tonnes and holdings in the silver ETFs climbed 16 tonnes, having dropped 324 tonnes in the previous week. As the chart shows, there is ample opportunity for a return of strong buying of silver if investors have the nerve to re-enter the volatile market.

Funds

Gold : Silver ratio

Despite another rebound in gold prices last week, the net long fund position on gold fell 3,487 contracts as new shorts outweighed new longs. This suggests the market is getting nervous about the extent of the gains. In silver, more longs entered the market, while shorts covered. Perhaps the unease in gold will see some rotation from gold to silver.

The run-up in gold prices had left silver behind, raising the gold/silver ratio. But we thought it unlikely that silver would be left behind if gold continued to rise. So silver seems to be embarking on a game of catch-up once again. The gap higher in silver on Monday bodes well and, with QE3 in the air, the ratio may fall further.

Conclusion As the Trader Talk quote above suggests, the market may be having a crisis of confidence. It seems neither central bankers nor politicians have answers to the debt problems or for career/party political reasons do not want to take them. This raises the question: how will this debacle end? Will governments inflate and debase their way out of the problem, will they default or will they come up with a way to grow their way out of the debt spiral? Last weeks poor economic data has sparked more talk of QE3. Since that would be a soft default it debases the dollar by printing more money gold's continued rise and the dollar's retreat close to the bottom of its recent trading range come as no surprise. If QE3 is announced, we would expect more dollar weakness and stronger bullion prices but it may be too early to expect the Fed to announce QE3. There is a risk that the market may be disappointed if no QE3 is unveiled at this weeks Jackson Hole symposium, which could lead to a pullback in bullion prices. The symposium does not wind up until next weekend so there may be room for bullion prices to run higher this week. But judging by gold's over-performance relative to silver in recent weeks and with some signs that the funds are getting nervous of golds rapid ascent, money may move back into silver rather than push gold higher still. This is especially so should the powers that be manage to stabilise market confidence again, which could boost the outlook for industrial metals once more, giving silver the edge over gold.

df Researched and Analysed by E-Mail: press@thebulliondesk.com

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df Researched and Analysed by E-Mail: press@thebulliondesk.com