Short covering rally likely in precious metals after a sharp fall

Last week gold fell by 8.5%, silver by 13.6%, platinum and palladium fell by less than 6%.6.0%. There were a number of reasons for the drop in the gold price. In our view it was a classic case of speculative investors taking advantage of gold-negative fundamental news and causing technical break-points to be breached, driving a self-fulfilling downward price spiral.

LONDON (Bullion Street): A short covering rally in gold is likely even as short gold contracts have fallen slightly as shorts remain elevated as per data released by US CFTC last Tuesday, according to ETF Securities Ltd (ETFS).

"Indeed, the stabilisation of gold prices may be an indication of that already occurring. However, the near-term outlook for gold is likely to remain weak as investors focus on the improving US economy and its implications for ess monetary easing. Even those bruised by last week's events are likely to return their attention to the fundamentals and over the longer-term, the outlook for gold remains constructive," ETFS added.

Last week gold fell by 8.5%, silver by 13.6%, platinum and palladium fell by less than 6%.6.0%. There were a number of reasons for the drop in the gold price. In our view it was a classic case of speculative investors taking advantage of gold-negative fundamental news and causing technical break-points to be breached, driving a self-fulfilling downward price spiral. The short-term fundamentals on their own were only mildly negative but once prices fell below US$1,550/t oz., an important technical support level, prices plummeted down to a two-year low, triggering margin calls, momentum and model-based investor selling. Some investors saw the new price level as an attractive entry point. While some short-term tactical players have reduced their long exposure to gold (and some have actively increased short positions), physical buyers have emerged as evidenced by expanding premiums in India and China and strong demand for gold coins, ETFS said.

Key events to watch this week:
The widening divide in growth between the US and the Eurozone is again likely to be highlighted this week, with Eurozone manufacturing indicators expected to show the sector firmly in contraction territory. In contrast, US Q1 GDP is expected to show the world's largest economy grew by 3% annualised over the period. As highlighted in the G20 statement, ongoing policy uncertainty and fiscal sustainability are key constraints to growth and this divide is unlikely to be bridged in the foreseeable future.

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