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Kuroda Comments, U.S. Elections Underpin Dollar, Pressuring Gold; Sell Stops Hit

By Allen Sykora of Kitco News
Wednesday November 05, 2014 9:17 AM

Editor's Note: Updating earlier story to add additional comments from analysts

(Kitco News) - More dovish comments from the Bank of Japan and Republican gains in U.S. mid-term elections boosted the U.S. dollar to multi-year highs Wednesday and in turn sent gold to fresh four-year lows, traders and analysts said.

“There are a lot of negative forces, with people stepping out of the gold because of those two big stories today,” said Phil Flynn, senior market strategist with Price Futures Group.

The weakness accelerated on technical-chart factors, with sell stops reportedly hit when prices fell through short-term support around the lows from the last three days just above $1,160 an ounce.

“It was due to the stronger dollar. We breached the $1,160 level during the Far East time zone (trading hours), and there were some stops that were triggered, and there were further stops triggered around the $1,155 area,” said Afshin Nabavi, head of trading with MKS (Switzerland) SA.

“I think the trigger was the fall below the recent lows, which have been around $1,160 or there-abouts,” echoed Robin Bhar, metals analyst with Societe Generale.

“There is essentially more chart-based selling, with longs liquidating. Some of the momentum players are going short. The oil price fall and sell-off in the broad commodity sector are not helping.”

There were also signs of an apparent large sell order around the time the sell stops appeared to be triggered, he added.

Around 8:55 a.m. EST, gold for December delivery was $23.90, or 2%, lower at $1,143.80 an ounce on the Comex division of the New York Mercantile Exchange. The contract fell as far as $1,137.10 an ounce. On a futures continuation chart, this was its lowest level since April 2010.

December silver was down 57.8 cents, or 3.6%, to $15.375 an ounce. The metal’s low of $15.12 was its weakest level since February 2010.

Meanwhile, the euro has fallen as far as $1.24669, its weakest level against the dollar since August 2012. Meanwhile, the greenback has been as high as 114.842 Japanese yen, its strongest level against this currency since November 2007.

Investor and newsletter writer Dennis Gartman, publisher of The Gartman Report, said “gold predicated in U.S. dollar terms is under massive pressure with the election results weighing heavily upon gold prices as the dollar soars.”

Additionally, the election outcome has likely offered further support to equities, Flynn said. Ahead of the open on Wall Street, the December S&P 500 futures were up 13.10 points. For some time, analysts have said the strong stock market is probably siphoning money away from gold.

“By getting control of the House and the Senate, there is an expectation that there will be less regulation. And less regulation will probably mean more economic growth and jobs, so people are investing in U.S. stocks,” Flynn said.

George Gero, precious-metals strategist with RBC Capital Markets Global Futures, said “funds continue fleeing gold and metals to seek equity allocations before year-end.”

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But observers also attributed the renewed dollar gains to expectations for global central-bank monetary policy. In a nutshell, there are ideas that the Federal Reserve will start hiking interest rates next year while others, such as the European Central Bank and Bank of Japan, remain accommodative.

Peter Hug, global trading director for Kitco Metals, in his daily report, said the expected Republican gains were “all sideline chatter.” He said the stronger dollar overnight is largely the result of “the dichotomy of monetary policy between the U.S. and the EU (European Union) and Japan,” with this “the primary driver of weaker commodities.”

In particular, Flynn cited remarks from BOJ Governor Haruhiko Kuroda suggesting no limit to the steps the central bank may take to fight disinflation and help revive the economy. The BOJ surprised markets by expanding its quantitative-easing program on Friday.

“The Japanese central banker just buried gold overnight,” said Flynn, in reference to the stronger dollar’s impact on the metal. “He had his ‘do-whatever-it-takes’ moment and said basically the Japanese (central bank) is going to continue to print yen until they can get inflation up to their 2% target.

“This is causing the dollar to go up to new highs and making it very difficult for the precious-metals market right now,” Flynn later added.

Jonathan Butler, precious-metals strategist with Mitsubishi, attributed the “further capitulation” in gold to not only the renewed U.S. dollar strength but the recent drop in oil prices. Nymex December crude oil fell below $80 a barrel in recent days and bottomed at $75.84 on Tuesday. This was crude’s lowest price since October 2011.

“The drop in oil prices is generally positive for the U.S. economy, plus it implies further deflationary pressure – which is negative for gold,” he said. “From here, $1,045 may be a key support level – gold reversed from this level back in early 2010 – and physical demand from Asia can be expected to return at current levels.

“Much will hinge on the ECB’s (European Central Bank’s) announcements tomorrow. An expansion of stimulus measures would be negative for the euro…and a further weakening of the euro implies downside for gold.”

Psychologically, the next important support areas for gold are $1,125 and $1,100, Nabavi said. Traders are now awaiting Friday’s U.S. nonfarm payrolls report, he added. In particular, they want to see whether it is strong and thereby reinforces ideas of Fed tightening next year.

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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