Bargain hunting emerged overnight to underpin gold's grip on the psychologically important $1,200 level. Yesterday saw further consolidation after last week's stratospheric gains. The overbought conditions resulting from frantic safe haven buying practically guaranteed a pullback. Another bearish forecast by Goldman Sachs released in the midst of yesterday's selloff boosted negative sentiment.
Gold futures closed down $31 Tuesday, compared to an $8.50 loss for spot gold. This tremendous discrepancy made for great copy for those opposed to gold, but is easily explained by looking at the underlying conditions. Gold futures stopped trading at 2pm on Friday, and did not trade at all on Monday. Therefore, it had missed over 40 hours of market movements that it had to adjust to yesterday to match spot gold.
To emphasize how unexpected the recent "perfect storm" of crises led to gold jumping $150, John Paulson, one of the market's most prominent proponents of gold, trimmed his holdings in the SPDR gold ETF by over a third at the end of December. Gold bulls can take solace this morning that the support level at $1,200 not only held overnight, but saw modest gains. Gold in New York has risen $10 from yesterday's $1,200 spot close, to trade at $1,210 an ounce.
The technical outlook for gold this morning sees support at $1,195 if the $1,200 mark is breached, with the next support at $1,190. Gold is already testing our first resistance level of $1,210. If it can break to the upside from here, $1,216 should be the next hurdle.
The dollar is modestly higher this morning, providing a little bit of a headwind for gold prices. The greenback recovered earlier from an overnight dip caused by China's announcement that it will raise the interest rates on deposits in the Housing Provident Fund, effective Sunday. This fund allows Chinese to set aside a portion of their paycheck to save for buying a home. The new rate of return will be 1.5%
Oil "Agreement" Still In The News
The hard-working Venezuelan oil minister is in Tehran today, along with the president of OPEC and the Iraqi oil minister. With the Iraqi government hanging on to power due to economic and military support from Iran, it is assumed that Tehran will be calling the shots for both nations. The meeting is to negotiate a way for Iran to sign on to the "output freeze" agreement reached in Qatar yesterday. Iran has said that it is hardly fair to expect them to freeze their oil production at the level produced while under international sanctions, so the question then becomes what level should Iran be allowed to expand to.
With all the attention this agreement has attracted, it is helpful to step back and look at the facts: No one has actually done anything at all, so far. The pledge by Saudi Arabia and Russia to not expand output does not go into effect until all major oil producers sign on to the agreement.
Secondly, the oil glut will continue to grow under this agreement. Both Saudi Arabia and Russia were pumping as fast as they could in January. This agreement only states that they won't increase oil production. The question here is, could they actually increase production if they wanted to? Keeping everyone's production at January levels still means there will be 300 million extra barrels of oil hit the market this year, compared to projected demand.
Despite Goldman Sachs and many other investment analysts pointing out the above facts, crude oil prices are higher this morning by 2.5% on hopes and wishes that something substantial comes out of today's meeting in Tehran.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product