Wednesday, April 6, 2011

Gold Reaches New Record, Helped By Rising Euro

Although the Ivory Coast turmoil is coming to a head, the gold market didn't care that much because it's not a country with sizable gold production or oil reserves. Instead, gold gained strength from the slumping greenback and emerging inflation expectations. The metal managed to make another record high early this morning, albeit one not much higher than the last.

Last night, it slumped after exhausting itself with its run-up yesterday. Sinking to a little above $1,350, it marked the change from night to morning by puddling around in the low 1450s. Bumping up against $1,455 a few times, it managed to surmount that level in a two-stage rise that took it up to its new record of $1,462.10 at 7 AM ET. Its momentum lost, as a slump in the U.S. Dollar Index ended, it descended to the high 1450s but still remained in the gains column. Oil rose as the greenback slumped, but mildly. As of 8:08, the spot price was $1,458.80 for a gain of $2.00 on the day. The Kitco Gold Index attributed -$3.70 to predominant selling and +$5.70 to a weakening greenback.

The U.S. Dollar Index spent most of the overnight session descending, but not that seriously. Stuck a little above 75.9 in early evening, its slump was initially slow and interrupted but later accelerated. By 3:50 AM, it bottomed at 75.52. Rather than mounting a relief rally, the Index settled into a range between 75.55 and 75.65. As of 8:15, it was still marking time at 75.61.

A Bloomberg report cast the impending Eurohawkishness as good for gold, crediting it for pushing down the dollar and boosting gold out of fears of slowing economic growth.
“Investors are certainly hopeful, but confidence is lagging” that the global economic recovery can remain on track, Chris Weafer, Moscow-based chief strategist at UralSib Financial Corp., said in an e-mail. Economic data yesterday was “marginally disappointing and China’s latest interest rate rise did nothing to calm nerves,” Weafer said, after U.S. service industries grew less than forecast in March.
Another analyst is quoted as saying gold is feeding off the greenback's fall, and Edel Tully highlights rising mainland Chinese inflation as giving a boost. A Bloomberg survey of ten gold ETFs showed a rise of 1.51 tonnes yesterday to 2,030.27 tonnes.

A Reuters report said gold hit its record on the slumping greenback and safe-haven demand in general. Like the Bloomberg report, the Reuters one mentions silver's new multi-decade high. Some analysts, however, expressed caution.
"Six months from here, we think (the strength) is sustainable for both gold and silver, but I wouldn't be surprised if we see a short-term pullback because a lot of this is driven by the euro, which is pretty strong against the dollar," said Standard Bank analyst Walter de Wet....

"With gold close to its highs, there could be some reluctance to buy at these elevated levels, especially given the uncertainty surrounding U.S. monetary policy and the expected ECB rate hike tomorrow," said UBS strategist Edel Tully.

"While a move to monetary policy tightening is not necessarily gold-positive, the inflation risks spurring the euro zone tightening are supportive of gold," she said.
The reason why some analysts are seeing rate hikes as positive, or at least un-negative, for gold is because the hikes will be too small to change real short-term rates from negative to positive. Holdings of the SPDR Gold Shares Trust rose for the first time since March 17th, by 1.52 tonnes to 1,212.75 tonnes.

A Wall Street Journal article ascribed gold's rise to a stronger Euro and firm oil prices. High oil prices have been good for gold becuuse they indicate coming inflation. As for the ETFs:
While flows into exchange-traded funds have risen, a London-based trader said physical demand still remains light. He said the market's break above $1,450 an ounce on Tuesday was a psychological hurdle that means the broader trend is likely to mean more gains, even if there is some pullback in the days ahead.

With no U.S. economic data scheduled for today, gold eked out another new high before the start of the pit session engendered a pullback. The new record high is only ten cents above the previous one made earlier this morning. Failing to hold above $1,460, the metal slid to mark time in the high 1450s. As of 8:42, the spot price was again $1,458.80 for a gain of $2.00 on the day. The Kitco Gold Index assigned -$3.10's worth of change to predominant buying and +$5.10's worth to greenback weakening. The U.S. Dollar Index climbed back to the top of its range, edging towards a possible breakout. As of 8:44, it was inching upwards at 75.65.

A new record so soon after the last one is confirmatory evidence that gold's breakout yesterday is for real. A former negative, a rate hike, is beign cast by some as a positive. Yesterday's breakout may continue today if the greenback co-operates by turning down again.

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