London gold equities start the week lower as gold holds $990 support
The overnight session in Asia saw Gold futures continue to trade lower. Since trading below $990 to reach an intraday low of $987 at around 8:30 (BST), gold has slowly began to recovery as the morning progressed in London. The overnight weakness largely reflects the relative performance of the US Dollar. The ICE Dollar Index steadily rose in the small hours of Monday morning to reach almost 77.5.
Approaching midday in London, the December Comex Gold contract was changing hands at around $991.
Over the weekend a number of issues have dominated the gold debate, with several commentators discussing the long term potential of a gold market which has risen over 4% in September.
The key issue over the past week, aside from forex fluctuations, relates to gold's position as a global reserve asset. Last week the International Monetary Fund (IMF) announced it would be selling an eighth of its gold reserves to provide an appropriate level of liquidity to assist and support the worlds recovering economies.
Several reports over the weekend explored the implications of the IMF gold sale. Market commentators have identified that ultimately the selected method of transaction may indicate the relative strength of the current gold price. The IMF's primary goal is to sell its gold to another ‘official sector' entity, either a central bank or another recognised international entity. Such transactions would be conducted at prevailing market prices and would not change the official gold holdings.
Recent reports suggest that if successful, this sale method would indicate strong support for the current gold price as it implies confidence in the long term value of gold from its currently elevated price.
The alternative view among analyst and commentators is less positive. Should the IMF have to sell its reserves through the open market it will be required to ‘drip' the transactions through over a prolonged period to avoid disruption.
Whilst this would not cause a sharp fall in the price, many investors who are currently ‘long' on gold may fear their gains will be capped going forward. With speculators in the gold market maintaining a record level of net long positions, sustained caution may gradually evolve into broad profit taking.
Of course the gold market will not trade independently, without influence from the foreign exchange market, specifically the relative position of the US Dollar. Recent economic comment has lead to varied speculation in the wake of last week's G20 meeting.
Generally comments surrounding G20 emphasised the view that financial markets have stabilised and going forward global leaders and regulators will tighten capital requirements. A subsequently weaker dollar would be required to re-balance world markets.
Today World Bank President Robert Zoellick is expected to raise caution over the dollar maintaining its role as the primary reserve currency, highlighting the emergence of ‘other options'. Meanwhile Federal Reserve chairman Timothy Geithner reiterated his confidence in the Dollar on Thursday, stating that ‘the US backs a strong dollar to ensure it stays the world's reserve currency'.
Following last week's pull-back below $1,000, its clear that the longer term view for gold investors will continue to remain fairly clouded until the wider economic climate stabilises. Having almost risen to its all time highs in the past few weeks, many analysts and investor are re-evaluating their options until the macro picture becomes clearer.
Across the other commodity markets, precious metals were slightly improved after falling late last week. Silver stopped just 2 cents short of US$16/oz, while Platinum improved to US$1,275/oz.
In London major mining stocks opened Monday's session with losses.
Platinum producer Lonmin (LSE: LMI) was the leading faller among the blue chip miners, losing about 1.7%, while silver miner Fresnillo (LSE: FRES) and gold producer Randgold Resources (LSE: RRS) declined marginally.
Mid caps were weaker in early trade. In the FTSE 250, gold miner Petropavlovsk (LSE: POG), formerly known as Peter Hambro Mining, slid 2.4%, as did silver miner Hochschild Resources (LSE: HOC), while Aquarius Platinum (LSE: AQP) slumped 3.6%.
Kryso Resources (AIM: KYS) was the top performer in the sector after reporting impressive results from drilling at its Pakrut project in Tajikistan with multiple high-grade intersections. The company rallied almost 20% on the update, but gave back some of its initial gains as the session progressed.
Turkey focused Stratex International (AIM: STI) also performed well this morning against the sector gaining 6%. The move follows the announcement of a joint venture with North American listed Teck Resources (TSX, NYSE : TCK).
Uzbekistan focused gold miner Oxus Gold (AIM: OXS) was one of the leading fallers among the juniors, slumping 9%. Philippines focused gold producer Medusa Mining (AIM&ASX: MML), Argentina operating gold explorer Patagonia Gold (AIM: PGD) and Platmin (TSX, AIM: PPN) followed, shedding 7%, 6% and 5% respectively. Fiji focused gold producer Vatukoula (AIM: VGM) pulled back 3.4%.
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