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Gold Stuck at $1,750 Magnet

 November 27, 2012 02:29 PM

(By Mani) Gold is trading in the $1,750 range amid declining physical demand and a stronger dollar. As European trading gets under way, the metal is showing little desire to budge from this price level.

This very confined trading zone has failed to inspire much trading flow, and the market feels more like its still in holiday mode.

"There hasn't been any stand-out feature as the week progresses. For now, participants remain in assessment mode, weighing up what, if anything, Friday's upside move implies going forward," UBS strategist Edel Tully wrote in a note to clients.

The extent of Friday's buying binge was evident with the large spike in open interest at the Chicago Mercantile Exchange (CME). Rising by more than 14k contracts, this amounted to the largest daily increase since June 1.

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The increase highlights the degree of pent-up interest that had been waiting on the sidelines for a technical move. The problem right now is that very little has happened since the breakout and the risks are that the new longs become restless.

"It appears that both recent longs and potential longs have no choice but to play the patience trade for now, some potential buyers have the view that a short-term pullback is in order after Friday's flutter, and are thus delaying their entry," Tully said.

Meanwhile, Comex December options will expire later today. For calls, the bulk of open interest rests at the $1800 strike with more than 3.2 million ounces (moz). With open interest so high, investors are anxiously waiting to see if gold moves closer to the much coveted $1800 level.

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The next highest open interest, of 7,038 contracts, rests at $1750, helping to explain why gold is hesitant to gravitate too far from its new best friend level.

"Unsurprisingly, physical demand is uneventful," Tully noted.

Indian demand has retreated, so too have volumes on the Shanghai Gold Exchange (SGE), and while some European buying was evident, once again, its size and consistency lack any price follow-through.

The Commitments of Traders (COT) report Nov. 20 shows that gold net longs increased by 0.90 moz, and its second consecutive weekly hike. Gross longs added 0.6 moz while gross shorts felt the need to cover 0.3 moz.

After the large increase in CME open interest on Friday, the next COT report is expected to show a decent inflow of gold specs. The Comex gold book now sits at 25.94 moz, about 2.62 moz above the recent low, but more importantly still 4.32 moz shy of the 2012 high.

In the week to Nov 26, gold ETF holdings gained 0.13moz, taking the global tally to a record high of 88.09moz. Investors added 40koz in the ETFS (LSE) fund, and 38koz in iShares fund. GBS (LSE) fund holdings extended by 22koz, Source fund was up 19koz and UBS fund rose 17koz.

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