UNITED STATES November 11 2014 9:18 AMTweet 
NEW YORK (Scrap Register): The precious metals complex has started to stabilise and rebound after gold prices have suffered a sharp decline and tumbled to levels last seen in April 2010.

The rest of the complex has also been unable to escape unscathed. Platinum prices have breached $1200 an ounce again, testing levels last seen in July 2009 while silver prices have closed in on $15 an ounce and levels last seen in February 2010.

As Barclays has highlighted previously, the strength of the dollar is an insurmountable hurdle for gold and indeed, combined with the last FOMC meeting, the dollar strengthening to levels last seen just over a year ago has placed significant pressure on gold.

In line with Barclays expectations, the EURUSD and gold correlation has strengthened and the three-month rolling correlation is hovering just under 60%, the highest level since December 2013. Indeed, the one-month correlation has risen above 80% in recent sessions.

Barclays house view is for the dollar to strengthen further and the Fed to start its tightening cycle in June next year. Barclays FX strategists expect the EUR/USD to trade to 1.1 on a 12-month basis. The last time the EUR/USD was at these levels, gold prices were trading just under $400 an ounce.

When the EUR/USD dipped below 1.20 in June 2010, gold prices were trading above $1200 an ounce (at which point the correlation had turned negative). The gold environment has of course evolved, and the yellow metal is fickle, chopping and changing its lead drivers, which can centre on currency movements or ignore them entirely. Currently the external environment is pivotal.

Gold is likely to continue to take its cue from the macro environment suggesting further downside is likely. But outside of technical support levels, which suggest support around the $1090 an ounce level, Barclays can look to the cost curve for an indication of support levels as well as the demand picture. The marginal cash cost of production is $988 an ounce but the marginal all-in sustainable cost of production is well above the current price of $1285 an ounce (Gold cash costs – an all in perspective).

In Barclays view, the sustaining cost of production is a clearer measure of the cost pressures gold producers' face. Any cuts in production in the current environment are unlikely to tighten the gold market immediately, given weak demand. But cost pressures are mounting, as prices have fallen faster than costs. Indeed, should producers hedge, prices are likely to come under further pressure.

On the demand side, physical demand has picked up, but not aggressively enough to stem the downside yet. While appetite in China tends to accelerate amid falling prices, in India, consumers tend to take a step back and wait for prices to stabilise before purchasing. With the onset of the wedding season Barclays would expect some support to materialise in the near term.

Lower prices have certainly stimulated retail interest in gold, with the US Mint reporting October was the strongest month for gold coin sales since January, and a strong start to November. While speculative positioning suggests gold positioning has been divided, the recent decline is likely to have flushed out weak longs and the breach of the key technical support is likely to have been a sufficient trigger for indecisive shorts to enter the market. ETP outflows have accelerated with outflows in early November already reaching 6 tons.

Metal held in trust is now less than 1750 tons, but is the equivalent of the fifth largest national gold reserves. So how vulnerable is additional liquidation? Looking at the price points for when holdings were accumulated, 2910 tons have been redeemed, with 1100 tons being redeemed between $1200 and $1400 an ounce. Of the 4656 tons of gross inflows, just over half, 2600 tons, was accumulated at price levels below $1100 an ounce. Assuming all of the gold that was bought first was sold first suggests current holdings are not under pressure, ie, the bestcase scenario for holders. The total 2900 tons that has been redeemed could have been bought at $1200 an ounce or less.

The worst-case scenario for ETP holders suggests those who bought last (ie, at the highest prices) sold first, suggesting $1000 an ounce is the next level where holdings become vulnerable. Turning to silver ETPs, holdings look much more vulnerable. Over 25kt has been bought at prices $15 an ounce and above with almost 10kt being bought at prices above $25 an ounce; however, gross inflows are around 18kt, suggesting at least 7kt is cash negative and loss making. Indeed, between $15-17 an ounce another 1kt becomes vulnerable.