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Debbie Carlson

METALS OUTLOOK: Index Rebalancing Could Continue To Support Gold

By Debbie Carlson of Kitco News
Friday Janurary 3, 2013 1:57 PM

(Kitco News) - Gold prices started off 2014 on a strong note and gains could continue for at least part of next week as traders who follow commodity indexes continue to reallocate assets.

Traders will also watch to see if the physical buying that greeted 2014 will continue now that prices have risen from the lows of this week.

February gold futures rose Friday, settling at $1,238.60 an ounce on the Comex division of the New York Mercantile Exchange, up 2% on the week. March silver also rose Friday, settling at $20.128 an ounce, up 0.39% on the week.

In the Kitco News Gold Survey, out of 34 participants, 17 responded this week. This was less than normal, with many still away from their desks for an extended New Year’s holiday. Ten see prices up, while six see prices down and one is neutral. Market participants include bullion dealers, investment banks, futures traders and technical-chart analysts.

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Annual index rebalancing is one of the few market movements telegraphed well in advance of the actual trade. The various commodity indexes, such as Standard & Poor’s GSCI commodity index and the Dow Jones-UBS Commodity index, usually announce by the fourth quarter how they are rebalancing their commodity weightings for the next year. Like any annual rebalancing, markets that have rallied see their weightings pared back and markets which fell see their weightings shored up. Gold and silver make up a part of these indexes, and given the sharp losses seen in 2013, the overseers of the index increased the weightings of these two metals to start 2014.

For firms that mimic the index, they must buy and sell their holdings accordingly to reflect the new index composition. Index rebalancing usually begins official in the first full week of the new year, but some market participants traders like to get ahead of the action in order to benefit from when rebalancing begins in earnest. Many market sources attributed the strength in gold and silver this week to index rebalancing, even in the face of a stronger U.S. dollar.

Kevin Grady, owner, Phoenix Futures and Options, said he expects rebalancing will be a factor next week, too, but ultimately does not see prices holding the gains they’ve put in this week.

“I think gold will be lower next week. I think you are seeing some new money coming into gold (this week). Some people (are) buying back … (what) they needed to sell at year end to offset their equity gains,” Grady said.

However, Richard Baker, editor of the Eureka Miner, disagreed and said gold’s action in the early part of the new year should hold up long enough to at least let the yellow metal test technical chart resistance at $1,240 next week.

Not only has the physical demand supported gold, but the metal has gained against the equity market and in value relative to other key commodities, he said.

“It is noteworthy that gold rallies as the U.S. dollar index gaps higher – the two typically trading in opposition. Gold gained significantly on global commodities oil and copper for the week as those two bellwethers feel the headwinds of strong dollar and re-emerging concerns about the global growth trajectory. My gold target of $1,240 per ounce anticipates the rally will extend into next week but find significant resistance around the $1,250 level,” he said.

Gold attracted physical buyers when the metal touched the $1,180s area just as 2013 wound down, several physical market observers said, as bargain hunters, particularly from Asia, stepped in to shop at discounted prices. Those who see gold gaining further into next week said there’s a good chance that buyers will continue to snap up inventory as the Chinese New Year holiday occurs at the end of the month, which gives them an extra incentive to buy.

Peter Thomas, senior vice president, Zaner Precious Metals, said he saw a pickup in physical demand for both gold and silver coins as the year ended and the new one began. Although he said he’s not sure of the impetus to step up and buy at this particular time, he said he suspects prices became attractive.

“I think a whole lot of people saw $19 silver and said, ‘this looks interesting.’ And with gold, a lot of it is close to production costs. I think there were a lot of people sitting in the weeds waiting for the new year. The buying is good for a pop, but I don’t think we’re near a bottom. There are just so many big players who made so much money leaning on the market,” Thomas said, adding he also saw a little interest by people who bought gold for retirement accounts.

There was a little bit of tightness in the physical market recently, but Thomas chalked that up to temporary factors. “The U.S. Mint quit producing metal around the roll over from 2013 to 2014 coins, so there was a bit of an artificial shortage and premiums rose a bit,” he said.

Thomas said he’s expecting 2014 to be a volatile year with big price swings being the norm. After gold prices rose for a dozen years and fell sharply for much of 2013, he said the market now “has to find itself” and look for equilibrium.

 “Is $1,234 cheap or expensive? It’s a good question. I think between $1,100 and $1,200 we’re going to see violent moves, with $30 breaks and rallies (normal). The flavor of the market is much different now; it’s a much more global market,” he said.

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By Debbie Carlson dcarlson@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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