Gold looks towards physical buyers for support

Following two months of trading sideways, gold made a strong move lower yesterday and has continued lower today. With several key technical indicators broken during the previous days and a dollar moving higher, gold, in the end, only had one way to go. With cash and secure government bonds once again attracting interest, highly liquid investments like gold are very easy to exit and this helps to explain why it, surprisingly to many, has been hurt more than other markets - considering the market driver at the moment predominately stems from polical anxieties in Europe.

Speculative investors are holding much smaller long positions than during previous corrections, especially compared with the two "flash crashes" back in December and February. Traders will therefore be keeping a close eye on the behaviour of physical buyers who supported the market on both previous occasions and investors in exchange traded products which have only seen a limited outflow during the last month. My suspision is that they will only begin to get worried should gold move into negative territory and take out the December low at 1,522.

For now, everyone is talking about support at 1,550 which either means we will find support ahead of that level or get another leg down to test the December low. The move down has been necessary in order to re-ignite some interest from the leveraged investors who have been losing interest as of late. The big question is obviously if these investors view the downside as more attractive and subsequently begin to build short positions instead.

Potential buyers should probably stay on the fence and wait and see how this unfolds. A move back above 1,610 will be viewed positively and could signal the end of this down move.

Source: Bloomberg