Gold Negative YTD In Dollars But Bull Market Not Over — Morgan Stanley

Gold’s London AM fix this morning was USD 1,563.00, EUR 1,213.79 and GBP 972.62 per ounce.

Friday’s AM fix was USD 1,580.75, EUR 1,221.69 and GBP 980.98 per ounce.

Gold fell $12.70 to close at $1,581/oz in New York on Friday. Gold has fallen again today and has now erased the gains for the year. Gold edged up in early Asian trading as bargain hunters lifted prices from four month lows, but gains were capped and prices gradually fell and falls continued in European trading.

Cross Currency Table – (Bloomberg)

Support is at $1,550/oz and a close below that level could see gold test strong support at $1,523/oz and $1,533/oz – the lows in December and September 2011 respectively.

Greece looks certain to leave the single currency – something that was denied could ever happen by policy makers, central bankers etc. for many months. A Greek exit from the eurozone would damage confidence in the single currency bloc but not necessarily be ‘fatal’, Irish central bank chief and ECB policymaker Patrick Honohan said over the weekend.

“Things can happen that are not necessarily imagined in the treaties. it is not necessarily fatal but it is not attractive”, Honohan said.

For Greeks who have left their life savings in euros in Greek banks it might prove fatal to their finances as capital controls are suddenly introduced and their savings are forcibly converted to the Greek drachma overnight. It is estimated that the drachma could quickly devalue by between 20% and 50%.

Spanish 10-year bond yields have surged to over 6.29% leading to concerns of contagion which is leading to sell offs in most markets including gold. However, gold’s recent correlation with risk assets will again be short term and buyers should again focus on the long term and gold’s proven long term diversification, wealth preservation and safe haven qualities.

While gold is now negative year to date in dollar terms, it remains 0.7% higher in euro terms. This shows that recent gold weakness is primarily due to the recent bout of dollar strength.

Gold in USD – Daily (1 Year)

Money managers in gold futures and options have cut their net long positions by 20%, CFTC data showed Friday. The plunge means that bullish gold bets are at their lowest level since December 2008 (92,498 contracts), as speculators aggressively unwound their bullish bets in the precious metal after recent price falls.

Gold in Euros – Daily (1 Year)

Bullish silver bets on a silver rally tumbled 32% to 7,159, the biggest decline since late December. This is bullish from a contrarian perspective.

In the physical market, jewellery makers and speculators took advantage of last week’s drop in prices according to Reuters and there are reports of physical buying interest and indeed “tight supplies” in the physical market.

Gold prices dropped 3.7% last week and silver fell 5.1% to $28.89/oz. The smart money, especially in Asia, is again accumulating on the dip.

Demand for jewellery and bullion in India has dipped in recent weeks but should resume on this dip – especially with inflation in India still very high at 7.23%.

Also of interest in India is the fact that investment demand has remained robust and gold ETF holdings in India are soon to reach the $2 billion mark.

Gold in GBP – Daily (1 Year)

Morgan Stanley has said in a report that gold’s bull market isn’t over despite the recent price falls.

Morgan Stanley remains bullish on gold as it says that the ECB will take steps to shore up bank balance sheets, U.S. real interest rates are still negative, investors have held on to most of their exchange traded gold and central banks are still buying gold.

Weak hands are again being shook out of the gold market but it remains prudent to retain an allocation to gold and those who do so will be handsomely rewarded in the coming months and years.

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(Bloomberg) — Gold May Be Due Short Term Bounce This Week on Technicals

Gold may be due a ‘short-term bounce this week’’ based on technical analysis, according to Christopher Grosvenor, chief executive officer of Grosvenor Research & Analysis. The following are comments from Grosvenor by e-mail yesterday. RSI is relative strength index.

“Gold could be due for a short-term bounce this week. Big picture, gold may find support in this zone and form the right shoulder of an inverse head and shoulders price pattern that dates back to the end of September last year.”

(Bloomberg) – IMF To Add $2.3 Billion To Reserves Amid Rising Risks

The International Monetary Fund said it had estimated net income of $2.3 billion in the fiscal year ended April 30, which it will add to its precautionary reserves as a protection against growing risks.

“The Fund is facing increased credit risk in light of a surge in program lending in the context of the global crisis,” the IMF staff wrote in a report released today.

“While the Fund has a multi-layered framework for managing credit risks, including the strength of its lending policies and its preferred creditor status, there is a need to increase the Fund’s reserves in order to help mitigate the elevated credit risks,” the staff said in the report.

The Washington-based IMF is co-financing loans to Greece, Ireland and Portugal to help stem the European debt crisis, with Greece representing the IMF’s largest loan on record. As a result, the IMF last month decided to raise reserves in the medium term to about $30.8 billion.

Net income last year was about $6 billion, including a profit of about $4.9 billion from gold sales.

(Bloomberg) — Gold ETF Assets in India Top Record 100 Billion Rupees in April

Assets in bullion-backed funds in India, the biggest gold user, exceeded a record 100 billion rupees in April as investors bought the metal for a haven and to diversify away from stocks.

Gold exchange-traded funds, or ETFs, had 102.2 billion rupees ($1.9 billion) as of April 30, more than double the 48 billion rupees a year ago and up from 98.9 billion rupees in March, the Association of Mutual Funds in India said in data on its website on May 11.

Holdings in bullion ETFs globally were 2,383.395 metric tons on May 11, the highest level this month, data tracked by Bloomberg show. Gold futures in India traded near the all-time high reached in December, climbing to within 0.5 percent of the record on May 3 as a weaker local currency boosted prices, while the nation’s benchmark stock index had its biggest weekly decline of 2012 last week.

“The perception in India is at least you don’t make a loss in gold. It’s a safe investment,” Kishore Narne, head of research at AnandRathi Commodities Ltd. said by phone from Mumbai. “When the equity market is not looking attractive and the headline space is grabbed by gold, more investors are being diverted into gold.”

Bullion for June delivery fell 0.1 percent to 28,335 rupees per 10 grams on the Multi Commodity Exchange of India Ltd. as at 10:48 a.m. in Mumbai. Futures are up 3.7 percent this year.

“Gold was traditionally a jewelry-based market, now it’s turning into an investor-based market,” in India, said Narne. Investors will continue to buy gold while prices in India are above 25,000 rupees to 26,000 rupees per 10 grams, he said.

Assets in ETFs were also boosted during the month by buying for an auspcious festival day and as prices rose, said Chirag Mehta, fund manager with Quantum Asset Management Co. in Mumbai.

(Bloomberg) — Silver Traders Trim Bets on Price Rise, CFTC Data Shows

Hedge-fund managers and other large speculators decreased their net-long position in New York silver futures in the week ended May 8, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 12,563 contracts on the Comex division of the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-long positions fell by 3,021 contracts, or 19 percent, from a week earlier.

Silver futures fell this week, dropping 5.1 percent to $28.89 a troy ounce at today’s close.

Miners, producers, jewelers and other commercial users were net-short 17,899 contracts, down 5,844 contracts, or 25 percent, from the previous week.

Each Friday the CFTC publishes aggregate numbers for long and short positions for speculators such as hedge funds and institutional investors, as well as commercial companies that buy or sell futures to protect against price moves. Analysts and investors follow changes in speculators’ positions because such transactions can reflect an expectation of a change in prices.