While many commodities overnight seem to be benefiting from favorable Chinese economic data, gold prices closed lower in Hong Kong in a sign that Chinese gold traders are not focusing on classic physical demand forces. However gold prices around the world are tracking higher perhaps off a reversal in the dollar which at times overnight fell below the Tuesday low.

We suspect that part of the higher price action in gold to start today is classic technical short covering given the magnitude of the aggressive washout yesterday. On the other hand volume on the washout yesterday jumped up and that might suggest the potential for some form of value around the $1275.50 level.

While the June gold contract might have a temporary pause above the $1,275 level, ongoing ETF liquidation, more rotation out of gold to other investments and reports of soft Japanese retail gold sales in the 1st quarter should generally leave the bear camp in control.

Gold ETF's saw a reduction of 64,008 ounces of gold from their holdings yesterday but on the year ETF's have still made net purchases of 724,254 ounces.

Silver ETF's reducing their holdings by 821,453 ounces which brings this year's sales to 6.9 million ounces.

Even the supply-side of the equation has its foot on the neck of the gold market with an S&P Global Market Intelligence analyst yesterday projecting gold production to be another record this year. Apparently declining South African gold production continues to be more than offset by new production sources. Unless something changes in the headlines from a fundamental perspective, the technical action looks to dominate and more declines are likely.

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