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Gold Prices Likely Weaker Next Week as Fears For Global Economy Recede

30 July 2010, 2:00 p.m.
By Debbie Carlson
Of Kitco News

Chicago -- (Kitco News) --Complacency in the global economic outlook should spell a weaker price-bias for gold next week, while copper could continue to rise if equities hold their footing.

With worries about Europe on the backburner and currency markets generally quiet, gold prices have little reason to rally, analysts said.

“People bought gold because they thought Europe was going to fall into the ocean and the euro would disappear. Now, the question is, what’s the reason to be in gold?” said Shawn Hackett, president of Hackett Global Advisers.

That seems to be the question speculators are asking themselves in the short-term, especially with the outflows this week from the various gold exchange-traded funds. The break of key support for gold in the $1,180-$1,170 area this week pushed prices under 2010 levels and prompted selling. Barclays Capital noted Friday that holdings in the main ETFs they follow declined again, by 0.6 metric tons Thursday. Delayed data showed the outflows for ETFs on Wednesday actually reached 20.7 tons. Gold ETF holdings in total now stand at 2068.7 tons and have fallen 22.1 tons for the month thus far.

Will this trend continue next week? “Probably,” said Frank Lesh, futures analyst at FuturePath Trading.

With the panic out of the markets and signs of global economic recovery and stable foreign exchange rates, the lure of gold is less bright. Combine that with the seasonally slow period and many Europeans being out of the picture because of August vacations, the path of least resistance is down. “Further net redemptions are likely to weigh upon gold prices, while physical buying in the seasonally slow summer months is likely to provide a soft floor,” Barclays said Friday.

Roughly, Lesh said, downside support for gold is in the $1,140s, with resistance just above the former support area, from $1,190 to $1,180.

Hackett also pointed out while other commodity markets have had a good week of rallies - grain, softs and base markets were stronger - gold couldn’t join in, which is a disappointing sign for bulls. If gold tries to trade a bit higher next week, he said, the upside is limited. Hackett believes gold might be a better buy in September or October than now.

While ETFs are seeing outflows, volume on the Comex division of the New York Mercantile Exchange is setting records as the prices decay. “You don’t like to see record volume when prices are going down,” Lesh said.

It’s a sign of new short positions being established he said, as these investors “ride the near-term wave lower. They’re trading the correction.”

Gold received only a modest bump after the second-quarter U.S. gross domestic product data showed a 2.4% rise on Friday. That was just under consensus estimates, but Lesh said its about as expected. “We knew we were slowing down, but really, 2.5% is about what we’re projecting for the year,” he said.

U.S. data for next week includes construction spending, factory orders and the all-important July unemployment situation.

While gold prices will likely stumble around, copper should continue to hold its gains if the equity markets rally. Lesh points out that copper also has good fundamentals as metal usage picks up because of growth – albeit slow – in manufacturing. As long as global equity markets are up, copper should see strength.


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