Decent increase of long positions, and a much smaller increase of short positions in gold

Standard and Poor’s has downgraded five Spanish Banks, but Santander and BBVA have been left unchanged. Spanish Bank Bankia has asked for a capital injection of 19 billion Euros. The Spanish region of Catalonia needs to refinance 13 billion Euros maturing debts in 2012, and that is in addition to a potential funding gap in 2012. The Official Credit Institute (ICO) of Spain has to give special credit facilities by the end of June at the latest. The Spanish Government is planning spending cuts and savings of 45 billion Euros for 2012.

In other developments across the world, the Michigan Consumer confidence index rose to 79.3 – the highest since October 2007; the Eurozone Purchasing Managers Index (PMI) fell to 45.9 – its lowest reading in 35 months; the German IFO fell to 106.9, a minus of three and the Indian Rupee traded down to the 56 level against the US Dollar, and finished the week at 55.40.

Gold: US$1572.00 – down US$20 from last week.
The Commitment of Traders Report (COTR) shows a decent increase of long positions, and a much smaller increase of short positions. Another roller coaster week for gold.

Gold was sold from the word go on Monday morning, but there was always the view that it would not move that much, because of Comex option expiry last Thursday evening. Our perception was that the most dominant strike price was the US$1600 and an outside chance existed for the US$1500 strike price. Gold plunged down to US$1533 level, before recovering to US$1560 the same evening. The option expiry turned out to be a non-event as prices hovered nicely in the mid US$1550s. The Central Bank purchases for the month of April revealed some interesting facts. Mexico, Kazakhstan and the Ukraine bought just under seven tons in total during April.

The Central Bank of the Philippines (Bangko Sentral ng Pilipinas) bought 32 tons of Gold over the course of the month. This brings the monthly total to just under 39 tons, which is a significant number and amplifies our view that buying from Central Banks is here to stay. These purchases might even intensify, depending on the overall uncertainties in the banking sector and on Sovereign debt issues.

The record depreciation of the Indian Rupee against the US Dollar dampens the gold imports of India in a big way. First, the market lost buying from India, because of the strike over the implementation of excise duty and now the Foreign Exchange situation is causing further concern about the potential off-take of physical gold in India. Some analysts are expecting that these issues will lead to a reduction of imports, somewhere
between 250 to 350 tons over the full year in2012.

It is difficult to assess if the losses of physical demand in India can be off-set through enlarged Central Bank buying, or through raised imports from China. Furthermore, it is also important to note that it is very unsure which immediate direction the gold price will take, should it come to a Greek exit out of the Eurozone. It seems likely that gold could come under immediate pressure in order to create more liquidity for investors, which enables them to pay margin calls for other investments, before a major sharp rally could occur. It is only fair to expect more institutional buying in this scenario.

Option volatilities midrates: Gold atm (at the money)

1 month 18.00% down 1.00%
3 month 19.50% down 0.50%
6 month 21.50% unchanged
1 year 23.00% unchanged

Premium 1kg Gold bars loco Dubai (DGD 995 fine) against loco London: US$0.50
EFP Spot Gold to August Comex: US$1.45
ETF: Holdings are at 2484 tons
Support: 1525 and 1480 Resistance: 1600 and 1626

Silver: US$28.50 – down US$0.23 from last week.
A small amount of new long positions in silver have been added, whilst significantly more new short positions, have been established, according to the Commitment of Traders Report (COTR). Silver trading has been choppy, and the overall view has been dominated by the negative outlook and uncertainties for the world economy. Platinum, Palladium and Silver have equally lost ground, in line with the base metal segment (Copper, Aluminium Nickel, etc.) based on the lower growth expectations from China and also from India. A positive development has been the activities on the Shanghai Exchange, with volumes in silver trading picking up nicely, without any worries about increasing the over ground stock holdings.

Option volatilities midrates: Silver atm (at the money)

1 month 33.00% down 0.50%
3 month 33.00% down 0.50%
6 month 33.00% down 0.50%
1 year 34.00% up 1.00%

EFP Spot Silver to July Comex: US $ minus 4.50 cents
ETF: Holdings are at 15080 tons
Support: 26.77 and 26.05 Resistance: 29.00 and 29.56

Platinum: US$1425 – down US$30 from last week. The discount to Gold has increased to US$145. According to the Commitment of Traders Report (COTR), long positions have increased slightly, while a sizeable increase of short positions have been monitored. It seems to become clearer that the case for significant production cuts might find it increasingly difficult to gain political acceptance in South Africa. The margins for the mining houses are, at these current levels, close to zero or in some instances already
negative. It is worth noting that the further and on-going establishing of short positions at these levels bear massive risks to the upside, if a spark to initiate a short-covering rally can be found. Option volatilities midrates: Platinum atm (at the money)

1 month 18.50% up 0.50%
3 month 20.50% up 0.50%
6 month 22.00% up 0.50%
1 year 24.50% unchanged

EFP Spot Platinum loco Zurich to July NYMEX: US$0.35
ETF: Holdings are at 45 tons.
Support: 1410 and 1385 Resistance: 1480 and 1510

Palladium: US$588 – down US$14 from last week. The latest COTR report shows that 6new long positions, as well as new short positions have been established. The total amount of outstanding contracts has hardly changed at all. The gloomy world economic outlook has led to further losses for palladium, based on the uncertainty experienced all over the world. The Chinese economic data are confirming a slowdown and a lesser need for commodities at this moment in time. The fundamentals, as in supply and demand, suggesting that the bottom is not far away but systemic risk to the whole banking system and world economy still persists.

Option volatilities midrates: Palladium atm (at the money)

1 month 24.50% up 1.00%
3 month 26.00% up 0.50%
6 month 27.50% unchanged
1 year 30.00% unchanged

EFP Spot Palladium loco Zurich to September NYMEX: US$1.25
ETF: Holdings are at 64 tons
Support: 580 and 560 Resistance: 627 and 650