London, 13 September 2011

Sharps Pixley: It was always said of the platinum group metals that industrial clients could put up with high prices but NOT volatile prices - this was anathema to them. So, it appears, it is with gold and retail investors. In addition to buoyant prices, gold has had the added handicap of battling a prevailing strong US dollar. Of course the dollar is in itself not doing well, its simply a little less ugly than the Euro.

So two themes then - volatility and Europe. Volatility can best be measured by the VIX Index often referred to as the 'fear index'. This index measures the implied volatility in options underpinning the S&P traded on the CBOE. The index is  quoted in percentage points and has only ventured above 40 about 5 times in the last 30 years.

It went through 40 after the 1987 stock crash, after LTCM, after 9/11, after the dot com crash, after Lehman's and it has been there twice in August 2011 - and it is heading higher now; the VIX is currently trading at 38.52. A figure above 30 suggests that financial markets are at the equivalent of defcon 2 -  in other words in a state of extreme anxiety. The cause for this heightened market crisis has shifted  back from North America to Europe with Greece making headlines again and possibly leaving the Euro on the agenda.

At this weekends G7 meeting a deal was said to have been discussed which would  provide some funding to buy Greece some time (probably October) to decide what best to do.  It is apparent that Greece is struggling to avoid a default and the EU is keen to ring-fence the problem to prevent contagion. Meanwhile European stock markets are suffering from the uncertainty that this generates. Greek 10 year bonds are sharply higher today up 3.14% to 21.2% - while it is  said that a figure above 7% is quite unsustainable (this is the level at which Greece went to the IMF
for a bail-out)!

By rights gold should be a major beneficiary of that uncertainty but it has struggled since peaking at an  all time of $1920 last week. Two possible reasons for golds lacklustre performance are : selling of profitable gold positions by Funds to finance margin calls on loss-making positions in equities ;  a second possibility is simply that gold is responding to euro weakness and dollar strength (at a  six month low today) and gold has adopted it's traditional inverse relationship with the dollar as it does from time to time. A third possibility touted by some market watchers is that gold has fallen
victim to some official intervention (central bank selling) who may see a falling gold price as an  indication that financial markets are actually getting back on track. Yes, let's call it what it is,  'market manipulation'.

Meanwhile the gold price volatility will be a deterrent to physical gold buyers just as the season  kicks off. How much remains to be seen.

With many technical analysts saying gold is topping out and forecasting short term price weakness, we would be inclined to think gold may indeed edge lower from here. Gold bull's should not be  concerned by this retracement as it confers greater strength to higher prices longer term.

The two things to watch for to indicate a rapid reversal in the gold down-trend and back to mark fresh highs are a higher Greek 10 year bond coupled with political prevarication - and the VIX index back above 40.

Ends --

Ross Norman, CEO, Sharps Pixley, London
www.SharpsPixley.com