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Standard Bank Says Gold is Undervalued at Current Levels

Release Date: 
Wednesday, March 13, 2013

Gold moved slightly higher today as yesterday’s concerns over the euro zone economy and disappointing economic data continued to support the yellow metal.  Gold traded $2.40 higher at 6:57 a.m. Pacific Time on the New York Spot Market, at $1,596.10 per ounce.  Spot silver was $0.06 higher at $29.31 per ounce.  (Click here for the most current spot prices.)

Investors will be watching the Federal Reserve policy meeting on March 19-20, to gauge the central bank's attitude towards monetary stimulus.

Walter de Wet, head of commodity strategy at Standard Bank, told clients that gold is undervalued at current price levels.  “We pin our fair value at $1760 for gold and, while it may struggle to reach these levels in the short term, we look for limited downside in gold below $1,580 this week,” he said.

There's a net flow of gold from western countries to China, Russia and Southeast Asia which are generally buying on the dip, Singapore-based BullionStar wrote in a research note on Tuesday.  "We believe that the Chinese are buying as a long-term strategy to diversify and become less reliant on U.S. (and Europe/Japanese) debt instruments," it said.  India's spring wedding season, an auspicious time to buy gold, may also lend gold prices some support.

Technical analysis shows that large speculators in gold including hedge funds and commodity trading advisers may be priming the market for a surge higher after recent price action.  On Tuesday, the market saw “mild short-side covering” above the $1,585 to $1,587 per ouce level and also fresh buying after prices failed to hold below the $1,565 support level for a third straight week on Friday, said Fawad Razaqzada, technical analyst at GFT Markets.  “This indicated that the sellers had enough, leading to the bulls coming back into bullion.”

“If the funds are convinced gold’s correction is done, that means they have a much larger short position this time to cover,” he said. “That’s high-octane buying pressure.” 

“Locals and smaller traders will want to front run the specs too, adding to the violence of the short-covering rally,” he said. “That could cause quite a surge in the futures price for gold short term, and it’s how the gold pullback last year ended.”

(Sources: “PRECIOUS-Gold holds near two-week high on euro zone concerns,” Reuters, March 13, 2013; “Gold Slightly Higher in Asia; Europe in Focus,” Wall Street Journal, March 13, 2013; “Commodities Daily,” Standard Bank, March 12, 2013; “Gold futures settle near two-week high,” Marketwatch, March 12, 2013)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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