Wednesday, May 26, 2010

Gold Continues To Rally

The OECD issued a report saying that global recovery is in place, although it expects growth to be relatively tepid, but the cost in terms of sovereign debt is going to dog the OECD economies unless stimulus is withdrawn. The Euro fell after Ben Bernanke said that Fed-provided dollar swap line won't last forever, and an issue of German bonds was received badly by the market. [Given how bunds have performed recently, that reception was a bit odd.] For most of the overnight session, gold rose.

The rally started slowly; for the night part of the overnight session, it might as well have been a trading range between $1,200 and $1,205. The latter level was scaled just after midnight ET, but the metal hung around it until just after London trading opened at 3:30 AM. The ensuing rally lasted for more than two hours; as of just before 6:00, the metal hit its high of $1,216.00. Pulling back below $1,215, it hovered around $1,213 as its approached the opening of the pit shift. As of 7:58 AM, the spot price was $1,212.80 for a rise of $11.60. The Kitco Gold Index attributed +$15.30 to predominant buying and -$3.70 to a strengthening greenback.

The U.S. Dollar Index did rally overnight, with most of the gain being made in the evening, but it didn't climb above 87. From the late-afternoon low of 86.34, the Index rallied to almost 86.9 by 10:00 PM. A pullback that lasted until 12:25 AM gave way to another rally that topped out at a little below 87. Afterwards, a larger pullback ensued; the Index didn't regain its old highs despite a subsequent rally that faded. As of 8:07, it was at 86.62.

A Wall Street Journal report ascribed gold's latest rise to continued qualms over the Eurozone's debt problems.
The renaissance of riskier assets seen since the global economic downturn has come to an abrupt end, putting assets like gold, Treasurys and the dollar firmly on the map in an increasingly risk-averse environment....

But the fact that gold hasn't soared to a record, as many had expected, reveals that investors are opting to choose the dollar, not gold, as a safer alternative during the current flight to safety, industry players said.

"The global flight for safety didn't spare gold prices...over the past week, investors have been choosing the dollar above all as euro-zone jitters continue to haunt markets," said Andrey Kryuchenkov of VTB Capital.

Gold has joined the list of assets investors have been reportedly selling to cover losses in equity markets, according to Mark Pervan, head of commodities research at ANZ. At the same time, Mr. Pervan noted investors are taking profits in gold as they seek cash to shore up losses on other positions, keeping a lid on the precious metal's gains, for now at least.
Also mentioned is rising fears that the European sovereign-debt meltdown is acquiring undertones of the subprime mortgage crisis. Demand for physical gold continues to be high.

A Reuters report also says safe-haven buying is behind the rise. Near the top, it mentions that the dip-buying through the SPDR Gold Shares Trust continues with the ETF adding 30.43 tonnes to its holdings yesterday. Those holdings are now at 1,267.32 tonnes, another new record.
Prices are recovering after falling 4.5 percent last week as concern over the euro zone's sovereign debt crisis sparked selling of assets seen as higher risk, like stocks and commodities.

"Same old story for gold -- initially lower on commodity liquidation as people need cash, and then up on (the view of) gold as a currency investment," said Simon Weeks, head of precious metals at the Bank of Nova Scotia.

"With strong ETF demand and the man on the street buying gold coins in northern Europe, it's not surprising that we are now higher."
Tensions between the two Koreas were also mentioned as supportive of gold.

A Bloomberg report, as webbed by Business Week, concurs with the above two about the cause.
“Markets fear that the crisis in the banking sector in Europe could re-emerge,” said Peter Fertig, owner of Quantitative Commodity Research Ltd. in Hainburg, Germany. Investors may be taking money out of assets such as Treasuries and buying equities and commodities like gold, he said....

“Gold is again benefiting from safe-haven flows as uncertainty and risk aversion across markets persist,” said Stefan Graber, a Singapore-based analyst with Credit Suisse AG. “We expect gold to continue to attract fresh flows in the near term. Even a test of the previous high is possible.”
Also mentioned is Bloomberg's tracking of ten gold ETFs; the total adds yesterday was 33.3 tonnes.

The April durable-goods data for the U.S. economy are out, and the raw number beat expectations: a 2.9% gain instead of the expected 2.5%. Ex-transportation goods, orders fell 1.0%. The release of the number had no immediate effect on gold, which fluctuated around $1,213 until 8:45. Then, it dipped quickly below $1,210 before stalling. As of 8:52, the spot price was $1,210.10 for a gain of $8.90 on the day. The Kitco Gold Index assigned +$16.10's worth of change to predominant buying and -$7.20's worth to greenback strength. The U.S. Dollar Index was the prime beneficiary of the release, to the extent it had any influence on either. From below 86.7, the Index rallied smoothly to almost 87; as of 8:55, it was at 86.95.

So far, gold has been performing better than I had expected it to. Physical demand is still strong, and the newfound trend of dip-buying through the ETFs is continuing. The quoted experts above range from sanguine to outright optimistic. Perhaps the dip is over this 'time round; if today's action follows recent patterns, then the sanguinity will be justified.

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