From Goldman Sachs Trading

The gold market has been in a fairly aggressive trading range for the last two weeks. Having traded from 1690 up to highs of 1755 last week we have since slipped back to 1680 with an overnight move of nearly 40 dollars. Liquidity is steadily decreasing into year end and we saw initial selling in Asia followed by a series of stops as we broke through 1700. Most of the flow has come from a variety of discretionary macro funds and its fair to say that price action looks poor. The rallies last week were driven by headlines over Europe with an expectation that QE from the ECB would be forthcoming. The multiple rebuffs from Draghi and now Weidmann from the Bundesbank are testing this view.

Another potentially more disturbing element is the deterioration in the Indian economy which is the single most important market for gold consuming around 35% of the entire global mine supply this year. The rupee price of gold has recently hit all time highs as the currency came under pressure and although there is an argument that the Indian investor may turn to gold to protect his wealth there is also the impact of high prices curbing jewellery demand and also spurring scrap and a rundown of inventories from the dealers. We have also passed the peak seasonal demand for Indian gold which was in September/October. The gold chart in rupee terms attatched looks slightly ominous…

The developments in this region could be very important for the gold price outlook which only adds to the confusion with the overlay of the European sovereign debt situation. Because of the latter, private wealth demand should continue to be robust. The official sector has also been much quieter on the buy side of late. Indeed we have even seen some small selling from one entity.

Overall its been another strong year for gold in all currency terms registering dollar gains so far of +18% which is one of the best performing assets in the commodities and macro space. However, we are still 13% off the $1930 highs of September.

For me this process of consolidation and correction should allow gold to perform well again in 2012 where I expect new highs to be easily exceeded and a 12th successive year of gain. We will be starting the year with much lighter levered positions. The challenges to the macro markets are such that investor and central bank demand for gold should still be the defining influence. It will be interesting to see if the role of the institutional investor will be more relevant than the physical (retail) investor who dominated to 2011.

Gold Options (Lars Ahlgreen)

1m 19.75/21.25

2m 21.25/22.75

3m 23.00/24.50

6m 25.25/26.75

1yr 27.00/28.25

Gold vols broadly unchanged, despite Gold trading well through the 55day MA at 1702.50. We have seen short term liquidation from a few macro accounts this am, as we traded through 1700 and one thing is for sure, spot liquidity is pretty poor !

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