When I submitted my muse on Friday morning, I believed the $1,527 level would hold, but indicated a breach, if it came, would occur before 11:30 EST. The breach occurred in dramatic fashion at approximately 10:40 EST. with gold being slammed to $1,492, before re-covering. Why? With the European close at 11:30, traders were assessing the extent of the margin calls, they would be required to meet, subject to a $1,527 close. Then Draghi’s not so subtle suggestion that although the EU had no power to force Cyprus to sell its gold reserves, such an event may be appropriate. This again became “not” a Cyprus story, but an EU story. What if Italy, Spain, Portugal, Greece et al were to find themselves in a similar position. Selling gold reserves may be a necessary option . With the Cyprus news “timed ?” ahead of the close, traders took no chances on a rebound and liquidated on mass to avoid the inevitable margin calls.

Once that selling ran its course, the market re-bounded back over the $1,500 level where it stayed until the NY settlement close at 1:30 EST. by around 3:00 p.m. the longs knew what their margin calls would be for Monday morning and did not have the stomach to hope for a bargain hunter rally out of Asia. Then, in a thin market, they headed for the door, which created the additional drop of $22 by the close at 5:15 p.m.

Is the capitulation over? Probably not. I suspect holders of ETF’s will be aggressive in their redemption demands, unless we get a surprise (serious) rally over $1,510 on Monday. These redemptions will force the funds to continue to add bullion to a weak demand picture.

By Peter Hug
Global Trading Director
Kitco Metals Inc.