Oct. 27 (MF Global) -- Price Outlook

Precious metals prices are expected to maintain their recent gains in today’s trade, as focus remains on support from technicals and developments in Europe. Other support could come from growing speculation over rate cuts in China, dividend hikes by Barrick Gold and Newmont Mining, and from Tuesday’s increase in gold ETF holdings. We think that gold prices can advance toward $1,765 over the next few weeks which should help pull silver toward $36.00/oz. Opposing pressure could be offered by the potential for “risk-off” or from the lack of significant enthusiasm from investors. We favor trading gold as a positive affair to $1,765. We recommended in our IB presentation to buy GCM2 at $1,625. The trade went to the printers on Oct 17th when gold was $1,681, was recommended on Saturday when gold was $1,642, but was able to be first traded on Monday when gold bottomed near $1,657. It bottomed at $1,612 during that week, but we’ll consider ourselves unable at this point.

Gold prices rose $23.10 yesterday alongside stocks and the euro on news that the German Bundestag had passed the resolution to hike the EFSF to €440B. That gave Chancellor Merkel the mandate needed to discuss the size of the EFSF during upcoming meetings in Belgium. Gold was later left immune to a decline in stocks and the euro as the expectation of disappointment built in to those markets that no EFSF limits would be announced at the meeting later in the day. The action was interesting because in all likelihood, gold would have fallen alongside those markets on that kind of news in the last few weeks, but this week’s upside breakout has put gold on a much stronger footing. It’s possible that the words “gold” and “safe-haven” could soon be used in the same sentence once again when describing Europe, and suggests that technicals can be of valuable assistance to fundamentals in the near-term.

Tuesday’s trade broke out above key resistance from the Oct 17th high at $1,696.80, which initiated a new shortterm uptrend. Yesterday’s trade followed-through to the upside and broke out above the Aug 25th low at $1,705.40 on a closing basis. Amid these positive chart developments, open interest has increased by 7,072 contracts since Oct 20th while prices have advanced $87.50/oz. The non-commercial net long took a setback last week by falling 7,524 contracts, however, the net long is down only 823 contracts over the last three weeks and suggests that fund liquidation has ceased. Support may also come from higher dividends announced yesterday by Barrick Gold and Newmont Mining. Barrick cited stronger earnings and a positive outlook on gold prices for the increase.