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Gold, Silver Snap Back From 'Oversold' Territory After Swiss Referendum

By Allen Sykora Kitco News
Monday December 1, 2014 2:05 PM

Editor's Note: Updating earlier story with additional comments from analysts, current prices

(Kitco News) - Talk about volatile. Talk about gold and silver.

The metals have continued a dramatic comeback after an initial sell-off Monday. Traders are chalking up the strength largely to short covering, with gold headed to an outside reversal higher and also above its 50-day moving average for the first time since late October. Some safe-haven buying also emerged after a downgrade of Japanese debt and weak manufacturing data around the world, market watchers said.

The rally was a dramatic turnaround after overnight weakness triggered when Swiss voters resoundingly rejected a referendum that would have required their central bank to more than double its gold holdings.

In overnight screen trading, gold for February delivery traded as low as $1,141.70 an ounce overnight, which was a loss of $33.80 from Friday’s pit close. However, around the 1:30 p.m. EST pit close, the metal was $43.80 higher for the day to $1,219.30 an ounce.

March silver  fell as far as $14.155 an ounce, which at the time was a loss of $1.401 an ounce. On a futures continuation chart, this was the lowest level since August 2009. However, since the metal has shot back higher all the way to $16.655, a gain of $1.099 for the day.

Going into the weekend, analysts had suggested gold might sell off if the Swiss measure failed, but did not look for the weakness to be lasting since it was already expected, based on media polls.

The precious metals went out on a weak note in after-hours electronic trading Friday on sympathy selling with crude oil. Then results of a Swiss gold referendum on Sunday showed that 77% of the populace voted against the measure, a far more one-sided result than pre-election polls had suggested.

Had it passed, the Swiss National Bank would have been required to buy enough gold so that 20% of its reserves were in the precious metal. Analysts had estimated this would have meant 1,500 or more metric tons would have to be bought, compared to current holdings of 1,040.

Failure of the measure initially may have emboldened bearish traders to re-establish short positions, analysts said. Gold hit a three-week low, while the decline in silver carried to a five-year low as “stops after stops” were triggered, said Afshin Nabavi, head of trading with MKS (Switzerland) SA. These are pre-placed orders activated when certain chart points are hit.

But prices turned around just as dramatically as they fell. And they have kept climbing throughout the New York trading day.

Several traders cited apparent short covering, which is buying to offset positions in which traders previously established short, or bearish, bets.

Charles Nedoss, senior market strategist with LaSalle Futures Group, said heavy buy stops were also triggered. Most recently, these occurred around $1,200 an ounce and above, he said. Market participants will be closely monitoring open interest data for Monday, when it released on Tuesday, for confirmation on whether this was in fact covering, he added.

He also said gold was helped when crude oil snapped back sharply. Nymex January crude was up $2.19 to $68.34 a barrel after a low for the day of $63.72 that was the weakest price in five years.

“Crude is almost $5 off its lows,” Nedoss said. “I think a lot of people (shorting the gold market) were hanging their hat on that and the whole deflationary aspects of that, and now crude is closer to 70 bucks than 60 bucks. That’s one of the things that turned this around.”

Technically, he added, gold was headed toward an outside reversal higher. This is when the market first falls below the previous day’s low, but then closes above the previous day’s high, generally seen as a sign of technical strength. Additionally, Nedoss said, February gold is back above its 50-day moving average, which comes in at $1,205.50.

Another trader said gold and some of the other commodities might be getting tugged around by large orders from big players. “I’ve been telling customers the elephants are at play and we might have to hide,” he quipped.

Some of the recent weakness may have been liquidation and or fresh selling headed into the end of November, for not only gold but copper and crude oil, he said.

“It seems to have blown up in somebody’s face, and other people might be sitting there saying ‘thank you very much,’” he said. “I can’t account for it other than that. These are stupendous moves, especially gold….It could be we’re putting a bottom in place. We certainly have what appears to be the making of an outside reversal….I think it’s a combination of things – technical as well as some big guys doing some big things.”

He said there was also a remarkable move in the December-March copper spread since early last week. “And the outright markets are doing similar things. Copper has got a pretty sizeable range today.” March copper was 5.15 cents higher to $2.8975 a pound after an earlier low of $2.7775.

Bill O’Neill, one of the principals with LOGIC Advisers, said some of the strength in gold appears to be a flight to safety.

“We have concerns about  Japan being downgraded by Moody’s,” he said. “We saw a series of weak PMI (Purchasing Managers Index) indicators out of China and Europe. All of that has created a bit of a concern  and an atmosphere that is constructive for gold.

“We were way overdone on the downside in thin holiday conditions….I think it’s a positive sign for the market that it has staged a nice comeback here.”

When the rally began overnight, bargain hunting emerged on the physical market, before short covering in early European trading hours, Nabavi said.

“You had a heavy sell-off on the Swiss vote. I think things were overdone and you have buying back here,” said Tommy Capalbo, precious-metals broker with Newedge, citing short covering and profit-taking by shorts.

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Phil Flynn, senior market strategist with Price Futures Group, said even though gold reacted negatively to the Swiss vote, the market was not expecting the measure to pass anyway.

“With the weak economic data we’re seeing across the globe right now, I think there is an expectation that we’re going to see more stimulus in China and everywhere else,” he said. “So I think the market got a sense that we over-reacted to the downside.”

Flynn also cited the Moody’s downgrade of Japan as a factor supporting the gold market.

“When you get a downgrade like that, fears of default kind of ring in your head. You go back to the old safe-haven play,” he said. “So I do think the Japanese downgrade definitely played into the rebound.”

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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