Gold and Silver Risk October Correction Ahead of U.S. Election Day

Today’s AM fix was USD 1,766.75, EUR 1,369.36, GBP 1,088.37 per ounce.
Yesterday’s AM fix was USD 1,758.50, EUR 1,361.91 and GBP 1,084.96 per ounce.

Gold fell $8.60 or 0.49% in New York yesterday and closed at $1,764.50. Silver slipped to a low of $33.594 then rebounded in New York, but it still finished with a loss of 1.62%.

[16]Gold Seasonality Chart - Heatmap

Gold edged up today, on investor expectations for continued strength in the yellow metal linked to recent ‘stimulus’ packages employed by central banks globally.

With all major central banks now engaged in some form of QE, we now have ‘QE Everywhere’ and the race to competitively devalue national and supranational currencies has intensified.

In the ‘beggar thy neighbour’ great game that is the global currency war, the only winners will be those that are fully diversified with physical gold and silver and those that own their bullion and other assets in the safest ways possible.

German business sentiment dropped for a 5th straight month this September. The Munich-based IFO Institute’s Monthly Sentiment Index hit its lowest level since early 2010 and the outlook component hit its worst level since May 2009.

The sentiment highlights the scepticism that many German companies have towards Mario Draghi’s plan to ‘stimulate’ the European economy.

The German experience with ‘stimulation’ was not a pleasant one and they are rightly wary of inflation and currency depreciation.

With the eurozone debt crisis dragging into its 3rd year, it is inevitable that Germany would begin to feel the pain that other countries have been living with for the past few years. However, German businesses and tax payers are increasingly concerned about the risk that contagion poses to the German bond market, economy and the single currency.

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In recent weeks, gold and silver have seen the strong gains that were anticipated by the bulls.

Gold is 11.5% higher and silver is a sharp 24% higher in the last three months alone.

In the past month silver is up 11% and gold is up 5.7%.

As in all bull markets - two steps forward are often followed by one step back and a period of correction and consolidation is quite possible.

This week will see the end of September trading and September is, along with November, one of the strongest months to own gold.

Next Monday (October 1st ) we commence volatile October and October is one of the weakest periods for gold and has often seen sell offs (See Graphics). This may be due to gold’s short term correlation with equities and October can often be a brutal month for stocks.

Traders might be advised to tighten up stop loss positions and or take profits. The majority of investors should continue to buy and hold as selling and buying again incurs costs and there is always the risk that October may see gold strength – especially this year given the very strong fundamentals.

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However, investors who wish to book a profit and were considering selling, for whatever reason (sometimes out of necessity), would be advised to try and sell prior to October.

After the very strong gains in stock markets in recent years there is a real risk of a stock market correction now and gold could again show short term correlation with stocks.

[19]Gold in Dollars Daily 20009-2012 – (Bloomberg)

We believe that while a correction in stocks and gold is quite possible we do not believe it will be significant for either asset class and the risk of a 16.8% fall in gold as was seen in October 2008 is quite low.

Should a correction materialise very strong support will be seen at the $1,600/oz level.

However, we think that gold may come under pressure in the run into the U.S. Presidential election on November 6th and therefore advise caution until early November.

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For more information on gold’s monthly performances over the last 11 years and over the last 40 years, see our recent blog ‘September And November Best Months To Own Gold’ [21].

NEWSWIRE
(Bloomberg) -- U.S. Mint Silver-Coin Sales in September Exceed August Total
The U.S. Mint’s sales of American Eagle silver coins have climbed to 3.125 million ounces this month, according to the Mint’s website.

Sales were 2.87 million ounces for all of August.

(Bloomberg) -- Fed’s Policy Easing Should Be Bullish Gold, Nomura Says
FOMC’s latest policy easing, on many different fronts, should be bullish gold, and hence makes Nomura’s year-end target of $2000/oz more attainable, analysts Saeed Amen and Geoffrey Kendrick says in note yesterday.

?Continued loose policy by other central banks is also likely to be supportive of gold, as evidence by outperformance of gold against rest of G-10 since FOMC meeting

?From tactical basis, Nomura would look to buy on (shallow) dips, in particular around $1750/oz area, with a $1850/oz target in coming weeks

?Lack of larger pullback from the highs, even with speculative positioning high, suggests that short-term sentiment is quite robust

(Bloomberg) -- Kazakhstan Expanded Gold Reserves for 13th Month in August
Kazakhstan expanded its gold reserves for a 13th consecutive month in August to the highest since at least 1993 at a time when investors’ bullion holdings are at a record.

Kazakhstan’s assets rose 1.4 metric tons to 104.4 tons last month, data on the International Monetary Fund’s website showed. Turkey’s gold reserves expanded 6.6 tons to 295.5 tons, Ukraine’s rose 1.9 tons to 34.8 tons and the Czech Republic’s bullion assets fell 0.4 ton to 11.8 tons, the data show.

Central banks have been expanding reserves after the metal climbed the past 11 years and investors held a record 2,548.5 tons in bullion-backed exchange-traded products by yesterday, data compiled by Bloomberg show. Nations bought 254.2 tons in the first half of 2012 and may add close to 500 tons for the year as a whole, the London-based World Gold Council said earlier this month.

Russia’s gold holdings increased by 0.1 ton last month to 936.7 tons, the smallest increase since

April, the data show. The Kyrgyz Republic and Mongolia also expanded reserves by 0.1 ton and Mexico reduced them by that amount, the data show. Turkey’s bullion holdings have increased due to it accepting gold in its reserve requirements from commercial banks.

Gold accounts for about 19 percent of Kazakhstan’s total reserves and about 5.7 percent of Ukraine’s, according to the World Gold Council. That compares with more than 70 percent for the U.S. and Germany, the biggest bullion holders, the data show.

(Bloomberg) -- Precious, Base Metals to Outperform Bulks Over Next 6 Mos.: Citi
Excess liquidity from stimulus is likely to be absorbed into commodities that can be held as investments, collateral or under warehousing deals, Citigroup says in note.

?Citigroup: 2013 gold price forecast increased to $1,749/oz vs $1,695/oz, platinum and palladium forecasts are raised by >5% from 2013 onwards

?Base metal price forecasts are lowered, with copper down 2.9% to $7,965/t for 2013, coking, thermal coal also reduced

?Iron ore price forecasts remain unchanged, though upside in price is now capped and with rising $A, margins will continue to be compressed

?Rio Tinto cut to neutral vs buy on lower margins, increased uncertainty over outlook for Chinese steel consumption

?BHP favored on higher returns on capital historically and co. is more prudent about their cash flows by cutting future capex; PT raised to 2,200p vs prior 2,100p

?Aquarius Platinum raised to buy vs neutral, Hochschild, Gem Diamonds upgraded to neutral vs sell

?African Rainbow Minerals, Anglo American, Exxaro all cut to neutral in a separate note by Citigroup due to lower commodity price forecasts; Anglo’s return on equity in 1H was the worst since the 1930s

[22]Cross Currency Table – (Bloomberg)