Wednesday, April 20, 2011

Gold Climbs Above $1,500 As Greenback Caves

Gold got some unexpected help in the overnight session from an unexpected source, given its strength two and three days ago. The U.S. Dollar Index caved in, thanks to the Euro shooting up to slightly above US$1.45, and the price of WTI crude oil adjusted upwards as a result. A barrel is now almost $109.50. The renminbi has hit a new peak against the greenback, interestingly at a time when the greenback itself is diving. Although mainland Chinese forex officials might have let their currency rise to compensate for the greenback's weakness, their move is consistent with using appreciation as a means of taming inflation. The release of the Bank of England's Monetary Policy Committee minutes from its meeting earlier this month shows the same 6-3 split prevailed, with the majority temporizing about a rate hike. The Bank of England's rate is still 0.5%.

After an initial dip last evening, gold climbed up to the high 1490s last night. Its break above $1,500 didn't come until 2 AM ET, after it hesitated a couple of hours just below. After moving above, it sunk back to $1,500 on its way to surmounting $1,505. It double-topped at $1,506, but its pullback left it well above $1,500. Gold's new record high is $1,506.50. As of 8:12, the spot price was $1,502.80 for a gain of $8.10 on the day. The Kitco Gold Index attributed -$3.85 to predominant selling and +$11.95 to a weakening of the greenback.

The U.S. Dollar Index, as mentioned above, spent virtually all of the overnight session falling. At first stuck around 75.05 during evening trading, it slumped to 74.9 last night and stayed stuck there while night turned into morning. Its tumble began at 2 AM. Despite a relief climb, the downward pressure it faced drove it down to a new fifteen-month low of 74.3. Another relief climb brought it some respite. As of 8:22, it was sinking again at 74.37.

A Bloomberg report said gold climbed above $1,500 on a combination of a weaker greenback and concerns about sovereign debt and inflation. The differential between 10-year TIPS and 10-year T-bonds, a gauge of inflation expectations on the bond market, widened to 2.66% - just below a three-year record of 2.67% reached nine days ago. To watchers of the bond market, that differential is a proxy for the expected inflation rate over the next ten years. It ties in with the inflation fears that gold is benefitting from.
“The dollar has lost ground to its major counterparts,” James Moore, an analyst at in London, said in a report to clients. “The mix of inflation, currency debasement, euro zone debt and Middle East and North African unrest continues to fuel investment demand.”
The main reason for the Euro's recovery was a few members of the European Central Bank's Board of Governors expressing a willingness to hike the ECB's rate again. Also helping gold was trouble at Freeport-McMoRan Copper & Gold Inc.’s huge Grasberg mine in Indonesia, which led to a production interruption.

A Reuters report said that gold made its new record on safe-haven demand prompted by worries about the global economy.
"There is still going to be a lot of uncertainty over the strength of growth, in the United States in particular," said Macquarie analyst Hayden Atkins.

"It looks like that is going to be quite weak in the first quarter, so that may rattle a few people. Then we have a critical policy point coming up with the expected end of (the second round of) quantitative easing."

"There is enough uncertainty floating around heading into the middle of the year for people to stick with gold," he said.
Particularly in mainland China, where there are already hints of runaway inflation. Despite gold touching $1,500 yesterday, holdings of the SPDR Gold Shares Trust dropped a little to 1230.25 tonnes. Yesterday's drop was 0.91 tonnes.

A Wall Street Journal report said that gold climbed above $1,500 on sovereign-debt worries. Despite its run, there is still some skepticism about its fate in the near term.
Gold may now come against some resistance, said traders and analysts.

"Usually we get a bit of volatility on [gold] at a key psychological mark, so take care today," warned Clive Lambert, director technical analysis firm FuturesTechs. "We might see a shakeout trade lower as people pile in at $1,500/oz and then get hosed."
Also, option activity like selling calls could dampen the advance.

With no news of the U.S. economy at 8:30, gold muddled around just above $1,500. A climb to $1,503 just before the pit session started was erased with a drop to $1,501 just before 8:30; subsequently, the metal bounced between that level and $1,502. As of 8:45, the spot price was $1,501.70 for a gain of $7.00 on the day. The Kitco Gold Index assigned -$7.05 to predominant selling and +$14.05 to greenback weakness. The U.S. Dollar Index switched from falling to hovering; as of 8:48, it was drifting at 74.36.

I have to admit that gold's rise above $1,500 went more smoothly than I had thought. A near-collapse of the greenback to a fresh 15-month low did the trick. If the Euro gathers enough strength to push well above the US$1.45 resistance level that's been confounding it, the greenback will sink more and gold will presumably benefit more. So far, the start of the pit session indicates that the rest of the day won't be that exciting. If its recent record as a predictor holds, then gold will stay above $1,500 but not by much. The metal is still overbought, but a kicker in the form of the greenback tumbling again would give it another boost today. It's up to the Euro.

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