Gold Fantasy Over?

Ended the 1-month long broad-ranged consolidation with a severe downside break, gold for December delivery tumbled to as low as 786.7 yesterday before rebounding to 804.5 at NY close. Major reasons for the selloff were cash-raising activities to cover losses in equity markets by liquidating gold positions, lower inflation pressure as shown by flat Sep CPI (0% MoM, +4.9% YoY, both were below consensus) as well as USD strength.

Today, the precious metal traded with a soft tone after yesterday's 4% decline. Currently trading at 801.4, weakness to 775.2 cannot be ruled out with stock markets performance and economic data as swing factors. 822.5, lowered boundary of the trading range has turned from support to resistance.

Obviously, we expected a breakout, but not on the downside. Gold price rallied as it provided shelter for capital during times of crisis. However, history did not repeat this time. Well, not yet. Technically, we expected the decline from 1033.9 in March would be contained at 739.6 support and yield resumption for earlier rise. Therefore, recent falls were only corrections of the long term rise.

Dollar strength has been putting pressure on gold price which is dollar-dominated. In recent days, floods of money to the Treasuries have pushed up the greenback against major currencies which weighed on the precious metal. However, if things start to reveal the inflationary nature of bailout plans and weak economy is leading to rate cuts, dollar would weaken and give rise for gold's strength.

USD fell today as the market awaits the hosing data to be released later today. US housing starts and building permits to be reported at 2030 EST were expected to come down to 872 000 and 840 000 from 895 000 and 854 000, respectively. Also contributed to dollar's pullback was market speculation on another rate cut by Fed in the meeting on Oct 29.

Stock price movement has been an indication for oil price these days. The benchmark oil futures fell 6.3% to 68.57 yesterday before settling at 69.85. Despite brief recovery today, outlook remained bearish and extension of recent decline is highly likely.

From the weekly supply report from the Energy Department, US fuel demand was on average about 18.6M bbls/day during the past four weeks, the lowest since June 1999. Moreover, both crude oil and gasoline inventory rose significantly for the week ended on Oct 10.

OPEC has rescheduled the emergency meeting to next week from Nov 18 as selloff in oil price was sharp recently. Some members commented earlier that ideal price should lie between $70 – 90. The close Thursday apparently exceeded that range. The question now is not about whether the cartel would announce a cut but how much it would be. Analysts generally expected an amount more than 1M bbl/day. While it's yet to see how balanced demand and supply would be after the cut, one thing rather clear is: if economic growth is below 3%, OPEC would not be able to defend oil price using reduction in supply. The rational behind is that consumption decline during that time would be too fast for OPEC to react!