GOLD PRICES HOLD UP WELL AS DIPS ARE SUPPORTED

Gold prices shot higher yesterday to reach a high of $1,263.30, up 6.9 percent from the previous close as broader markets were showing increased stress with equity weakness, a weak dollar and strong yen. Gold prices closed at $1,239.60, silver closed up 2.6 percent, platinum closed up 1.9 percent, while palladium dropped 0.2 percent.

The base metals were mixed yesterday, nickel prices collapsed again, falling to a low of $7,550 and closing down 4.2 percent at $7,580, at the other extreme lead closed 2.1 percent higher at $1,709, zinc was up 0.4 percent, tin was down 0.8 percent, aluminium was unchanged and copper closed down 0.5 percent at $4,443. The weaker dollar seemed to provide some support while broader markets slumped.

This morning the base metals remain mixed, nickel has rebounded 1.2 percent to $7,670, copper at $4,474 is up 0.7 percent, aluminium is up 0.7 percent at $1,494.50, zinc is little changed, lead is off 0.2 percent and tin is off 0.4 percent. Volume remains extremely light at 1,039 lots.

The precious metals this morning are little changed with gold and silver off 0.1 percent, with gold prices last at $1,238.80, platinum is up 0.1 percent and palladium is up 0.2 percent. Platinum’s discount to gold remains high at $287 and the gold/silver ratio has increased to 1:79.

Equities suffered heavily yesterday morning as the markets seem to be getting more concerned about what the central banks can do next to try to bring about growth and ward off deflation. As the day progressed, equities started to rebound, but the Euro Stoxx 50 still closed down 3.9 percent, while the Dow was off 2.6 percent at the day’s lows, but closed off 1.6 percent. This morning, the Nikkei is down 5 percent, it was closed yesterday, the Hang Seng is down 0.9 percent, the ASX 200 is down 1.2 percent, the Kospi is off 1.4 percent and the Sensex is down 0.3 percent.

In FX, the dollar index is last at 95.62, after a low of 95.23 yesterday, the euro is strengthening, last at 1.1307, sterling is flat at 1.4462, as is the aussie at 0.7090, euro-sterling is weak at 0.7818, while the yen remains strong at 112.08, having been as high as 110.99.

Emerging market (EM) currencies are mixed, the rouble is firmer at 77.74, helped by the stronger oil price, with Brent crude up 4.5 percent at $31.36, the rupee is setting a fresh low at 68.44, the rand is steady at 15.8700, while the other currencies we follow are weaker, but not showing too much distress, but we will wait to see how the on-shore yuan trades next week to see if EM currencies keep their composure.

The economic agenda is busy today with German, Italian and EU GDP, German CPI, WPI, French non-farm payrolls, UK construction output, EU industrial production and there is an Eurogroup meeting today too. US data includes retail sales, import prices, University of Michigan consumer sentiment, inflation expectations and business inventories. FOMC member William Dudley is also speaking this afternoon – see table below for more details.

This week across most of the base metals has been about consolidation, with nickel prices the exception as they has sold off to fresh multi-year lows, while the rest have all pulled back to varying degrees, but with zinc and lead going on to rebound, while the rest have started to consolidate. Given the fallout in broader markets it is surprising, in some ways, that the base metals have not followed nickel lower. We would now expect more consolidation ahead of China’s return next week, but overall the metals remain vulnerable – the weaker dollar is no doubt providing some buoyancy.

Gold prices look overbought in the short term, but the dips continue to be bought, which suggests investors who missed the initial rally are keen to get in, prices are already up $4 while this report has been written. After such a strong week, we would not be surprised to see some profit-taking ahead of the weekend, but would expect dips to be well supported. Silver’s rally has been strong, but it has not attracted a rush of buying to the extent that the gold/silver ratio has fallen, which suggests investors are still wary of the metal. Platinum, likewise, is rallying, but is not closing the gap with gold prices and palladium is firmer but not in any hurry to play catch-up. It will be interesting to see how silver and the PGMs perform should gold pull-back.