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Gold's Ability To Hold Up After Strong Data Seen As Encouraging Sign

By Allen Sykora of Kitco News
Friday December 6, 2013 11:59 AM

(Kitco News) -Analysts say gold’s ability to hold up despite improving U.S. economic data this week – including nonfarm payrolls on Friday – is a sign that the market may be trying to put in a short- to medium-term bottom.

They note that the markets by now may have largely factored in the start of tapering of the Federal Reserve’s quantitative easing, meaning less downside pressure from a factor that has hurt gold for much of 2013. Also, with many speculators known to be short – or holding bets on further price declines – there is an expectation that they soon turn into buyers in order to exit these positions and capture any profits ahead of year-end.

“It has been resilient,” said Sean Lusk, head of commercial hedging at Walsh Trading.

There’s still the risk for more weakness, of course. Gold’s technical posture is considered weak, rallies have been limited, some investment banks have lowered their price forecasts, and expected Fed tapering has generally been seen as a bearish factor.

The market could at least temporarily be in a phase where traders both sell into rallies and buy dips, said Afshin Nabavi, head of trading with MKS (Switzerland) SA.

Nevertheless, gold is steady so far Friday even though the government reported a stronger-than-forecast 203,000 rise in November non-farm payrolls. That’s a change from the last jobs report on Nov. 8, when the Comex February futures lost $23.80 after the government said payrolls climbed by 204,000 (revised slightly on Friday to a 200,000 gain).

The last two months were the strongest back-to-back gains in the labor market since February and March. The jobless rate fell to a five-year low of 7% from 7.3% in October.

After the jobs report, gold initially looked like it would continue its past tendency of plunging on strong data, seen as a sign Fed tapering would come sooner than previously thought. The metal instantly fell to a session low of $1,210.10 an ounce from $1,228.70 two minutes ahead of time.

But several minutes later, a snapback began that carried the price as high as $1,245. As of 11:52 a.m. EST, February gold was trading at $1,232, which was up 10 cents for the day.

“It failed to break down (holding around the low for the week), so a lot of short covering came to the market,” Nabavi said.

He described prices as remaining range-bound for now despite the strong jobs data. “We can’t break above $1,250 and can’t break below $1,210,” he said. On the upside, a break of $1,255 could prompt a rally to $1,270, and a break of this in turn could lead to a test of the $1,300 region, Nabavi continued.

As the calendar advances toward year-end, he continued, traders are tending to either hang onto existing positions or else square up, which could mean buying from shorts. Few participants appear to be actively initiating new positions, he continued.

“I’m not saying (the recent low around) $1,210 is the exact bottom,” Lusk said, suggesting there’s still potential for more declines yet this year. Any downside would be exacerbated if gold should slide below the lows for the year near $1,180, which likely would trigger heavy sell stops, or pre-placed orders activated when certain chart points are hit.

“But you’ve got to remember coming into the end of the year, there’s a lot of money on the short side of the market,” Lusk said. ““What do we know about the funds that trade this money? They want to take profits before the end of the year.”

This type of book-squaring could pick up around the middle of the month, he added.

Lusk said markets already may have largely factored in the start of tapering. “Sentiment is clearly that it’s coming; it’s just a matter of when,” he said. If so, this might limit further price pressure from such worries.

Likewise, he pointed out that the dollar remains softer despite constructive U.S. economic news. The euro was at $1.36940, up slightly from $1.36660 late Thursday.

Tapering “should be bullish for the dollar, which would put some pressure on gold on the downside,” Lusk said. “I think traders are viewing this as a lot of it us priced in already. That’s why we’re getting these bounces (in gold) lately.”

Gold also surged on Wednesday, which was linked to short covering as well, despite a strong report from ADP showing an increase of 215,000 private-sector jobs last month, as well as a government report showing a 25.4% year-on-year rise in new home sales during October.

Steve Scacalossi, director of global precious metals with TD Securities, said in an early-day note to clients that physical demand has been strong this week. It was “particularly buoyant in India, we understand, perhaps not surprising” after a 23-week low in gold prices around the middle of the week.

Charles Nedoss, senior market strategist with Kingsview Financial, said technically, it would not appear that gold has necessarily put in a bottom. But psychologically, the metal’s ability to hold up after strong data would suggest the market could be finding substantive support, he continued. All of this leaves uncertainty in the market.

“It’s been a very, very tough trade,” he said.

Participants might be asking themselves: “Should I be long? Should I be short? Should I be long? Should I be short? You know what, maybe I should just have stayed home,” Nedoss said. “These are the kind of days you could get chopped up very quickly.”

By Allen Sykora of Kitco News; asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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