METALS OUTLOOK: Sideways Trade Likely To Develop In Gold Next Week

10 December 2010, 2:53 p.m.
By Debbie Carlson
Of Kitco News
http://www.kitco.com/



(Kitco News) - As the end of the year starts to approach ever closer, some market watchers expect precious-metals prices to start to trade in sideways fashion, especially after gold moved to make new highs this week and was unable to gather further momentum.
Gold prices rallied to a fresh record this week, with the February Comex gold contract rallying to $1,432.50 an ounce on Tuesday, but were unable to sustain the push. Several market watchers said it’s likely that traders were looking to take out pre-placed buy orders – known as buy stops – resting at higher levels. But the move came on low volume, a red flag for veteran market watchers, and the next day prices started to crumble and continued to drift back under $1,400.
February gold on the Comex division of the New York Mercantile Exchange settled at $1,384.90, down 1.5% on the week. March silver settled at $28.605 an ounce, down 2.2%.
“The push didn’t bring in any momentum (buyers) and the volume wasn’t there. That was a big indicator gold was not going to hold its levels. We drifted back to where we ought to be,” said Frank Lesh, futures analyst at FuturePath Trading.
Lesh said barring any unforeseen circumstances, he expects gold will likely hold in a fairly narrow $50 trading range between $1,350 and $1,400 between now and the rest of 2010.
Analysts at Commerzbank echoed that idea. “Gold should remain well supported at its current level as long as the debt crisis in eurozone peripherals continues to simmer and make gold look attractive as a ‘safe haven.’”
Lesh said it’s likely a lot of the major players have closed most if not all of their books for the year, taking handsome profits. Once the New Year starts, it’s likely they’ll return to the market. He said the events that will support gold are not going away: problems with the eurozone, central bank buying, concerns about debt levels and fiat currencies.
Looking at technical charts, gold has strong support at $1,375, said Ralph Preston, senior market analyst with Heritage West Financial. Preston also thinks that gold will need some sort of new catalyst to push it out of its current range, something beyond what’s in the news now.
He said it looks as if gold might be trying to build another head-and-shoulders pattern on daily technical charts, with the left shoulder the highs from November and the head the high of this week. If gold trades in a sideways pattern, that could be a sign this chart pattern is forming. “We have to let the numbers direct us,” he said.
If gold either closes below $1,375 or trades under $1,350, it could take a trip down to $1,315, Preston said. On the upside, if gold can close over $1,410 it could try to test the recent high. A close over $1,426 could mean a test of $1,460. However, Preston said that a rally is less likely because of the lack of fresh news and the fact that it is the end of the year, which can also mean less trading volume.
The markets next week will likely focus on two items: what China might say in regards to its monetary policy this weekend and debate over tax levels in the U.S.
This weekend China will release a slew of economic data including producer and consumer price index, retail sales, industrial production and other reports. It’s expected Chinese authorities will have an announcement regarding monetary policy as well.
Overnight, China said it is raising the reserve requirement for banks by 50 basis points, effective Dec. 20. This is the sixth time China has done so this year and the second in the last month.
“The PBoC (People’s Bank of China) is expected to follow this up with its second rate hike since October, perhaps as soon as this weekend. The official China Securities Journal said as much as this on Tuesday, saying that the central bank may move rates around the release date of November inflation data, which are due out tomorrow (Saturday). Inflation has become a problem for China,” said analysts at Brown Brothers Harriman.
Tom Pawlicki, precious metals analyst at MF Global, said a rate hike in China could be bearish for gold and other precious metals as it “would diminish the ability of Chinese consumers to use excess income on investments like gold as well as their ability to buy other commodities. If the price of necessities like oil falls as a result, gold could suffer secondary reverberations from the perceived lack of inflation. A hike in policy would be justified given China’s currency peg to the dollar, which enables them to import accommodative monetary policy.”
Next week, the U.S. Congress is likely to restart talks about keeping the Bush-era tax cuts. President Obama and Republicans are in favor of extending all the cuts for two years, although some Democrats gave a symbolic thumbs down. Both Lesh and Pawlicki said they believe the tax-cut extension will be approved.
By Debbie Carlson of Kitco News dcarlson@kitco.com

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