(By Mani) Gold seems to be going through an interesting phase as the yellow metal ventured in to the $1620 plus levels after the downbeat agricultural data provided some buying support. In addition, the gold's favorable correlation with oil offers further potential upside as the commodity is approaching its next resistance levels.
Since late June, oil has posted significant gains, with Brent up 29 percent and WTI rising19 percent. In contrast, gold has risen just 3.8 percent from its June 29 lows.
The gold/oil ratio at 14.17, versus a high of 17.65 in late June, reflects oil's outperformance. After hitting this year's high of 0.83 in mid-July, a breakdown of sorts has since occurred and on Friday the correlation hit 0.34. This suggests that gold has a bit of catching up to do relative to oil.
"It's fair to say that on a one-month rolling correlation basis the two commodities appear to be more correlated in H2 than the case was in H1, when the relationship at times was negative," UBS strategist Edel Tully said in a client note.
Gold's more sluggish response could prompt some investors to play the ratio trade with the expectation of the gold/oil ratio turning more in gold's favor.
Meanwhile, gold enjoyed a late flutter to $1627 on Friday, amidst very light volume, buy stops were hit, and the move was also enabled by shorts getting squeezed out from the earlier slide down to $1604.25. Gold likely got some support from corn prices, which hit a record on Friday, after the US Department of Agriculture cut its estimate for 2012 US crop production by another 13 percent due to the severe drought conditions.
"A price above $1620 certainly captures attention but does the metal have the urgency to trade higher? Momentum will be important here," Tully said.
Many would-be buyers are on the sidelines, waiting for the signal or catalyst to pull the trigger. On the way up to $1627 on Friday there was mainly selling, and gold did well to counteract this. However, that's not enough, either a new wave of buying is required or the braver investors in the pack need to move in, in size.
"The next major resistance is at $1629.35/$1631.60, the July 27 high and the 38% retracement of the February/May sell-off. A break above would certainly help get the party started in gold again. Such a move would attract momentum players off the sidelines, and potentially extend gold's gains towards $1658.86," Tully added.
Euro gold, which highlights the internal strength in the market, hit $1322. Sentiment from the ETF camp is also encouraging, with global ETF investment in gold reaching a record high of 81.67 million ounces (moz) last Friday. Flows in gold ETFs have turned positive this month, with investors adding 530 thousand ounces (koz) so far, after net outflows of 372koz in July.
In the week to Aug 10, gold ETF holdings advanced 0.38moz, bringing the global tally to a record high of 81.67moz. The bulk of the inflows were made in the GBS (LSE) and SPDR funds to the tune of 128.74oz and 103.10koz respectively. Investors also added 73.07koz in Source fund, 48.77koz in ETFS (LSE) fund and around 20koz each in UBS gold fund and iShares trust.
On the other hand, ETFS (NYSE) fund and ZKB trust fell by 24.36koz and 14.57koz respectively. The month-to-date change in total gold ETF holdings stands at 0.53moz.