Strong support seen at $1,605 an ounce

Volatility is expected to remain in the precious metals markets next week, as traders continue to watch the headlines out of Europe for direction. The most active December gold contract on the Comex division of the New York Mercantile Exchange settled at $1,622.30 an ounce, down 1.07 per cent on the week. The December futures, however, rebounded sharply from a low of $1,535 on Monday to a high of 1,679.20 on Tuesday. We had indicted a weak outlook and price level of $1,550 for December futures in this column last week.

The trading pattern on Friday in the most-active December gold contract on the Comex division of the New York Mercantile Exchange suggested a price range of $1,643-1,662 an ounce next week. On a weekly market picture chart, gold is expected to move in the range of $1,697-1,717. The lower-end support for December futures is expected to come at $1,602-1,577, the market picture chart (MKTP) suggested. TPO counts above (43 per cent) and below (45 per cent) the point of control (PoC-1,625) are more or less evenly matched, indicating buyers/sellers equilibrium at that level.

The MKTP chart showed strong buying below 1,625 and selling above $1,632. The value area (1,616-1,632) accounted for 80 per cent volume and TPOs indicated strong support levels for gold. Trading in call and put options remained sluggish on account of volatility. Selling was witnessed in the $1,650-strike December series call options at a premium of $96, but only 128 lots changed hands during the week. The $1,600-strike put saw buy-side bias at $70 premium, but 878 lots changed hands during the week.

After the big sell-off in nearly all markets in the past several days, gold prices have come off of their lows, but confidence that the market is ready to resume its solidly higher uptrend is not firm. Several market watchers said it will take days, maybe weeks for the volatility caused by the sharp price drop to even out. Nevertheless, the December futures consolidated at $1,625-1,630 last week, after steep fall and almost 10 per cent thereafter. In the Kitco news gold survey, participants hinted at a consolidation around $1,600 an ounce next week.

The recent volatility in gold prices is historically high, based on nearly 40 years of data, said HSBC. The drop last week was 8.54 per cent and represented a three standard deviation move. Based on data, this has occurred only seven times since gold became freely traded in 1972, making last week’s drop the seventh-worst week in percentage terms since then. The last time volatility was this high was the week ended March 21, 2008, when Bear Stearns fell. The last time weekly volatility levels were higher than this was the first week of March 1983, when gold prices fell more than 11 per cent.