(By Mani) Gold's dramatic sell-off has captured investor attention far and wide. The nearly $25 instantaneous plummet, resulting from the liquidation of over 1 million ounces (moz) on the floor, attracted many theories.
A fat finger trade was blamed. However, the overnight activity that followed gives a much clearer picture of where the buying interest lies. So far, that buying interest is certainly quite evident, despite gold's recovery back to $1720 levels.
"Physical demand didn't really react at the time, and although it was a public holiday in India in any case we wouldn't expect physical buying to kick in so soon after such a violent move," UBS strategist Edel Tully wrote in a note to clients.
For now, though, the market moves into a contemplative mode, with some participants licking their wounds while others weigh up the pros and cons of going long or short the yellow metal in its aftermath.
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"We don't think anything has materially changed for gold. Essentially the metal is back to where it was trading last week," Tully said.
This is another test of downside buying interest, but it also highlights the commitment issues that reside when the market attempts to climb higher. The recent confirmation of central bank buying action last month prevented the market from falling substantially below $1700, and expected this underlying buying interest to come into play once again.
"All in all, gold is temporarily wounded, nothing more, nothing less. Despite all the selling yesterday which was largely concentrated on the floor, we observed very little client appetite to follow the trend. That is a positive indicator to remember, in our opinion," Tully wrote.
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Perhaps the writing was on the wall for gold when it failed to react to dovish comments from Chicago Fed President Evans earlier this week that Fed purchases of $85 billion a month are required next year. Evans will become an FOMC voting member from January.
The Fed will be printing more money next year. This should become clearer at the next FOMC meeting on Dec 11/12. Up to now, gold hasn't been behaving as an asset that is pre-empting this additional money printing possibility.
"In our view, this scant regard means that price pullbacks leading into the next FOMC meetings are buying opportunities, including yesterday," Tully said.
Technically, gold found support at $1704.04, the 62 percent retracement of this month's rally. A closing break below this level would be further negative and trigger a deeper sell-off to 1672.75, the November low.
"A recovery from here needs to break above 1736.15, the 62 percent retracement of the latest sell-off to signal resumption of strength and target 1754.65, last week's high," Tully added.