PRECIOUS METALS
Gold bounces after free fall

Tue, 16 May 2006

Precious metals prices bounced back on Tuesday morning, following Monday's sharp losses when gold gave up around $20 an ounce and platinum around $30/oz.

On Friday spot gold climbed to $730.30/oz — its highest level since January 1980, largely on the back of speculative fund interest driven by the oil price, the weaker dollar as well as inflation and geopolitical concerns.

However, massive long liquidation by investment funds knocked gold very much lower on Monday. Ironically, although this correction was highly anticipated as long overdue, it seemed the market was not geared up for it as prices gapped about with momentarily lapses, Standard Bank said in its precious metals comment.

Gold in free fall

Gold went into a free fall on massive long liquidation, dropping from $715 to $700 without skipping a heartbeat, with wide spreads and jittery quotes. A pause at the $700 psychological level soon gave way to further weakness. Light short covering in New York lifted gold again, but was pressured lower once again on more funds long liquidation as well as some fresh selling.

Market conditions were difficult as spreads widened in reaction to the volatility, and this created exaggerated price movements whenever some bits of news or rumour circulated in the market, Standard Bank added.

Gold fell to a low of $679.50 offered where physical and bargain hunting stepped in to support the market as gold closed at $683.50 bid, down 3.9 percent on the day.

AFX reported overnight that gold futures tumbled almost $27 an ounce on Monday to close at their lowest level in one week as a rally in the dollar spurred broad declines in precious-metals prices.

Vicious correction

Friday marked the beginning of a "ten percent to 20 percent correction that can literally take place in a manner of days, but more likely weeks, since copper, gold and silver had extremely high overbought readings," said Peter Grandich, editor of the Grandich Letter.

After several days at its highest level in 26 years, gold for June delivery fell to a low of $679 an ounce on the New York Mercantile Exchange before closing down $26.80, or 3.8 percent, at $685 an ounce. The contract hasn't traded or closed at levels this low since May 8.

The metal has now lost $47 since reaching a high of $732 in electronic trading on Friday, which was the highest price seen since 1980. The contract ended on Friday, however, with a loss of $9.70.

"Gold has bounced today after yesterday's drop, but it's very quiet — there is not much trade going through. We are just waiting for New York to see how they kick off," said a Johannesburg based trader.

Long term outlook positive

Standard Bank added that although the short term expectation for gold is weak as the metal runs its course of correction, the longer term outlook remains positive on unchanged strong fundamentals in the long run as opposed to short term speculative implications in the near term with the metal looking overextended.

"Gold could likely find some scaled down support from $665 to $650, as it consolidates to build a base for new attempts to rally back higher," it said.

At 1.15pm local time, gold was quoted at $685.50/oz from $678.98/oz at its overnight close, and well off its intraday low of $674/oz.

Platinum was last quoted at $1277.50/oz, up $6.50/oz from its previous close and off its intraday worst of $1262/oz. On Friday platinum climbed to $1337.50/oz — its highest level ever.

Palladium was last quoted at $362/oz from $368.50/oz at its overnight close. Last Friday, palladium reached $404.50/oz — its highest level since January 2002.