Special Note: Gold

Surprisingly strong correction due to technical market move. Price pressure exerted by derivatives markets and not the physical gold market. $1,500 level becomes strong resistance in coming months. Long term price target to be revised.

The most recent downward move in the gold price has surprised many investors in terms of its speed and extent. The move was moreover too strong to be solely explicable by fundamental reasons. Rather, sales on the 'paper gold' market have triggered a price correction, while there was no selling pressure on the physical market. Before the question of how things will develop from here can be answered, we want to discuss the reasons for the recent accelerated decline. We therefore list the in our opinion most important factors below:

(1) A technical break below the important support levels at $1,520 respectively $1,500 has taken place and as a result ETFs and futures contracts (derivatives) were sold amid high trading volume. In the course of this, the long term technical uptrend channel that has been in place since 2006 has been broken as well.

(2) The downside pressure takes place on the 'paper gold' market and not in the physical gold market. Due to the increase in volatility, margin requirements were subsequently raised by the COMEX as well as the Shanghai Gold Exchange, which has created additional selling pressure.

(3) Recent slightly weaker than expected economic data releases from China are pressuring sentiment. Furthermore economic growth in the major developed regions (e.g. US and euro area) is moderate and inflation expectations are low. Commodity and energy prices have weakened and this backdrop (weaker growth, low inflation) exerts pressure on the gold price as well. Thus China's GDP in Q1 2013 was reported slightly weaker than expected this week at 7.7% (consensus:8%). India, the world's most important importer of gold (approx. 27% of global demand) has increased import duties on gold in January. With a share of about 70% of global gold demand, emerging markets are a significant factor in gold's performance.

Outlook: in the short term we expect the weakness to continue. A bottoming process is as of yet not in sight. The previous important support level at $1,500 should prove to be strong resistance for the gold price in coming months and we don't expect that this level can be exceeded in Q2. We will have to continue to monitor the forces moving the market and will revise our long term price target after an extensive evaluation."

(Hans Engel, Stephan Lingnau - Erste Group)

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