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FOCUS: Gold Sideways; ETF Outflows, Stocks Hurt; Physical Demand, Accommodation Help

By Allen Sykora of Kitco News
Tuesday May 14, 2013 11:55 AM

(Kitco News) - Continued exchange-traded-fund outflows, strong equities and U.S. dollar gains are limiting the upside for gold, while recently strong physical demand and continued central-bank accommodation are providing support.

As a result, gold has largely consolidated or moved sideways over the last few weeks, waiting for a fresh catalyst to break in either direction, analysts said.

The June contract on the Comex division of the New York Mercantile Exchange plummeted from an April 11 close of $1,564.90 an ounce to a low of $1,321.50 on April 16. The market bounced and has been back above $1,480 a couple of times this month, although it lost momentum ahead of the psychological $1,500 area, resulting in consolidation amid a number of offsetting factors. June gold has ranged between $1,404 and $1,487.20 for roughly three weeks now.

As of 11:14 a.m. EDT, the June contract was nearly flat for the day after recovering from early weakness, trading down just 0.20 cent to $1,434.10 per ounce.

“We’ve got a battle going on here with strong physical buying…versus a higher dollar and stock prices, which are curbing safe-haven appeal,” said Sean Lusk, precious-metals analyst with Ironbeam. Technically, the metal needs to get back above the $1,500-$1,505 area to attract momentum-based buying, Lusk said.

Traders will monitor equities and the dollar, as well as future U.S. economic data for clues on how long the Federal Reserve might continue with its current pace of bond-buying known as quantitative easing, analysts said. One added that the market also will be watching to see if emerging-market central banks keep accumulating gold for reserves and whether worries about debt-plagued European nations having to sell some of their gold resurface.

“We’re having a hard time getting any conviction to the upside. What’s really hurting is the high stock market. That continues to be the investment of choice by many investors here,” Lusk said.

The Dow Jones Industrial Average and S&P 500 index have both hit record highs in recent weeks, prompting a rotation from some commodities and into equities.

“Everyone is looking for a pullback (in equities), but we’re just not getting one. Slight dips lately have just become buying opportunities,” Lusk said. And until that changes, pressure could remain on gold, he added.

A number of observers have cited the rotation into equities as one of the factors prompting an exodus out of gold exchange-traded funds so far this year. ETFs trade like a stock but track the price of the commodity, with prospectuses of the major metals ETFs saying that gold is put into storage to back the shares.

“The biggest negative continues to be the ETFs. We’ve had steady and constant ETF liquidation,” said Bill O’Neill, principal with LOGIC Advisors, adding that many suspect the exodus is not over.

Further, he said, once major hedge funds rotate away from such an asset, they typically don’t jump right back in anytime soon. “The big players are going to be slow coming back into the market,” he said.

Barclays, in a weekly research report, said outflows of gold from exchange-traded products was 381 tons for the year to date as of the end of last week. The bank described the metal as caught in a “tug-of-war” between these outflows and good physical demand.

Further, the stronger tone in the U.S. dollar lately has worked against gold, O’Neill and Lusk said. Gold is often bought as a hedge against dollar weakness, and vice-versa. Further, a stronger dollar makes all commodities more expensive in other currencies, thus potentially hurting demand.

The dollar this week topped 102 Japanese yen for the first time in since 2008, and the euro has fell back below $1.30 against the greenback after trading just below $1.32 last week.

Physical Demand, Monetary Accommodation Offer Support

On the other side of the coin, gold has found support from a massive pick-up in physical buying that occurred after last month’s sharp price retreat. Bargain hunters around the world stepped in to snap up the precious metal at lower prices, which came ahead of a key spring buying season in the world’s largest gold-consuming country of India. Demand was also described as strong in China and elsewhere, with a rise in premiums. U.S. Mint sales of 209,500 ounces of gold bullion coins during April were the strongest of any month since December 2009.

“We’ve seen a huge pick-up in physical buying that has buoyed gold in the last two or three weeks,” Lusk said. “It’s not just here (in the U.S.).”

Nevertheless, some observers have suggested the bargain hunting has abated some after gold bounced more than $150 from its April low to the early-May highs.

Spencer Patton, founder and chief investment officer at Steel Vine Investments, said he looks for last month’s lows to hold for gold, but said markets often re-test key support after bounces, meaning gold could probe below $1,400 again. “I think that would be buying opportunity,” he added.

Meanwhile, observers cite continued central-bank accommodation as a factor still putting a floor under gold. The Federal Open Market Committee is continuing to purchases $85 billion monthly in Treasury and mortgage-backed securities through a program dubbed by the markets as “quantitative easing,” meant to push down long-term, market-set interest rates. The Bank of Japan expanded its asset purchases this spring and a number of other central banks have cut interest rates, including the European Central Bank and Reserve Bank of Australia.

“There is the inescapable fact that we are printing $85 billion every month,” Patton said. “Having that as an overhang keeps some bid in the price of gold. It may not happen in one year or three years, but at some point there will be a very, very inflationary price to pay.”

Further, global central-bank “addiction” to accommodation could lead to further currency debasement, O’Neill said.

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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