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Gold and silver looking constructive

Last updated 8/17/2012 11:15 AM ET (GMT -5) 0 Comments - Add your comment

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David Morrison

Market Strategist, GFT

Follow @DMorrison_GFT

Gold and silver had a very quiet start to the last trading session before the weekend. This was mildly encouraging for the bulls who could have expected some price retracement after yesterday’s gains. German Chancellor Angela Merkel triggered a rally in the two precious metals when she talked of the importance of the euro zone moving quickly to closer fiscal integration. Chancellor Merkel also referred to ECB President Draghi's recent comments when he said that the central bank would do "whatever it takes" to preserve the euro. Frau Merkel emphasized that Mr Draghi's comments were "in line with what European leaders have been saying for a long time." Gold and silver began to drift later in today’s session. But overall investors appear to be warming again to the two precious metals. The price action over the last three weeks appears to have taken gold and silver out of the danger zone. Investors are less fearful that last December’s lows will be revisited and instead feel that the period of price consolidation that has developed since May could soon end with a sharp move to the upside. Buyers have been encouraged by the news that hedge fund giants George Soros and John Paulson both increased their respective funds’ exposure to gold significantly in the second quarter. Although the World Gold Council reported yesterday that overall demand for gold fell 7% last quarter, central bank buying remains strong. Financial institutions and wealthy individuals are also net buyers, although this all failed to offset the drop in retail demand from India and China. Investors appear to be losing their appetite for the world’s two biggest currencies – the euro and US dollar. Meanwhile, there is a feeling that other go-to currencies such as the Canadian and Aussie dollar are looking overvalued, at least on a short-term basis. In order to diversify, investors have to look at smaller and less-liquid currencies, such as the Korean won and Singapore dollar. But they will also turn towards gold and silver – the two metals which have historically been considered real money. As evidence that gold is increasingly being used as money, CME Europe announced today that it, like its US parent company, will now accept gold as eligible collateral. However, gold and silver are still in thrall to the prospect of further central bank intervention. Consequently there is a danger that prices could fall if the US Fed, ECB or People’s Bank of China fail to provide additional stimulus over the next few months.

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About The Author

David Morrison has worked in financial markets for over 25 years. He joined GFT in February 2009 to deliver commentary and research for derivatives products. Before then David had been instrumental in setting up two spread betting companies, managed trading desks, and implemented and ran successful risk-management strategies.

He has appeared on Bloomberg, Reuters, and Sky TV, and is widely quoted by financial newswires. He has written numerous articles covering economics and trading strategies using fundamental and technical analysis.