Friday, March 18, 2011

Gold Climbs As Greenback Falls Against Euro

The Japanese yen tumbled yesterday evening, giving a large boost to the U.S. Dollar Index and masking a continuing decline of the greenback against the Euro. That fall was caused by a flood of yen by the Bank of Japan and, primarily, a pledge of yen-dropping exchange aid by the G-7. The People's Bank of China (PBoC) tightened reserve requirments again, this time to 20% for the country's largest banks. It caused nary a blip to gold's climb. There's speculation that the PBoC will refrain from further tightening measures until the March inflation data come in next month.

Gold climbed irregularly last night, but steadily. It reached $1,410 around 11 PM ET and crawled up above before sinking back shortly after midnight. Resuming its climb, the metal bumped up against $1,415 but managed to surmount that level too. The climb wasn't smooth, but there was little backtracking as gold forded up to a double-digit gain since yesterday's close. As of 8:10, the spot price was $1,419.70 for a gain of $15.70 on the day. The Kitco Gold Index split the gain into +$13.45 for predominant buying and +$2.25 for a weakening greenback.

The U.S. Dollar Index got quite a boost from the relief plummet of the yen, but the gains were temporary. That plummet induced a shoot-up to 76.5 for the Index, but the leap didn't last and it settled back to 76.2. Then crawling upwards, it failed to make 76.25 when a Euro rise pushed the Index back down below 76.0. As of 8:20, it was recovering from its Euro-induced slide by maundering at 75.86.

A Bloomberg report said gold rose due to returning safe-haven demand related to the unrest in Libya and the Middle East. The U.N. Security Council authorized the use of force against the Gadaffi government.
“The volatile situation in the Middle East and North Africa region, which has led the UN Security Council to agree a no-fly zone, is likely to underpin gold and silver on safe-haven demand,” James Moore, an analyst at in London, said in a report....

“Tensions in the Middle East have boosted safe-haven flows,” Dan Smith, an analyst at Standard Chartered Plc in London, said today in a report. “High oil prices are threatening to set off an inflationary spiral. We expect gold to trend higher in the year ahead.”
That resolution emphasized protecting civilians, authorizing "any necessary measures" to do so, but excluded any land occupation.

An earlier Reuters report said gold gained strength from a rebound in Asian equities. It also mentioned oil climbing back, commodities shooting upwards as part of the recovery rally in assets, and Japan premiums for 1 kg gold bars rising to $2/oz.

A Wall Street Journal report said gold climbed with oil on news of the U.N. Security Council resolution passed last night.
"Uncertainty over what will happen in the Middle East is again proving some support" to the perceived refuge asset, a London-based trader said.

The resolution pushed crude futures higher, rekindling fears of spiraling inflation. Around two-thirds of Libyan crude production is offline as fighting between rebel forces and military loyal to Col. Gadhafi intensifies in the country's east.
The link to oil is through oil-aggravated inflation dogging economies. The article also mentioned the weakening greenback as a driver.

With yesterday's clot of data on the U.S. economy done with, the gold market had no new items from that source to influence its progress. Drawing strength from the momentum established in overnight trading, the pit session broke a block just below $1,420 to rally comfortably above that level when it got rolling. Unfortunately, a wave of selling pressure just after 8:30 got the metal sliding well below $1,420. The item behind the drop, in oil as well as gold, was a ceasefire announced by the Libyan foreign minister. As of 8:42, the metal had recovered a bit from its low to reach $1,417.20 for a gain of $13.20 on the day. The Kitco Gold Index divided the gain into +$10.10 for predominant buying and +$3.10 for a weakening greenback. The U.S. Dollar Index continued losing its footing; as of 8:45, it was at 75.84.

Gold's recovery comes from the hidden strength it had shown after Tuesday's plummet. Unlikely as it seems, that plummet is taking on the characteristic of a serious fall out of bed. The metal isn't out of the bushes yet; it'll take some more fording before it durably climbs above $1,425 again. Still, its recent strength bodes well for its near-term prospects .

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