Tuesday, May 4, 2010

Gold Gets Lift From Bailout Skepticism

The 110 billion Euro bailout agreement may have been inked, but there's still skepticism about it being a done deal. The German government agreed to pony up 20 billion Euros, but political pressures may cause it to pull back. Consequently, there's still skepticism about the deal that sunk the Euro. In the meantime, Grecian government workers are staging a 48-hour strike to protest the austerity requirements. The turmoil did help gold, which had been sinking earlier.

Initially, the metal got up to $1,184 yesterday evening before pulling back to $1,183. Then, starting just before 9:00 PM ET, the metal's price fell to $1,179. A relief rally was followed by a gentler decline to $1,178. Then, starting at just before 5 AM, the metal took off and rose almost twelve dollars an ounce to $1,190.20 before the rally ran out of steam. Pulling back, the metal hovered around the $1,187 level. As of 8:02, spot gold was at $1,187.30 for a gain of $5.00 on the day. The Kitco Gold Index attributed -$7.20 worth of change to a strengthening greenback and +$12.20 worth to predominant buying.

The U.S. Dollar Index sailed up to a new eleven-month high after plodding along last night. Hovering around the 82.35 level until 1:15, the Index took off and forded up in a rally interrupted at times by pullbacks. As of 8:09, it was at 82.86.

A Wall Street Journal report ascribes gold's performance to safe-haven buying, although the report was written before the metal peaked.

"It looks like fear is still in the market," said Michael Kempinski, a gold trader at Commerzbank in Luxembourg. Investors in Europe continue to buy gold coins and bars as they have for the past three weeks, said Mr. Kempinski. "It's quite impressive."

Safe-haven demand has temporarily ended gold's traditional inverse correlation with the dollar. Gold prices have rallied both when the euro is rising and when it is falling.

"Sovereign debt concerns by risk averse gold investors are clearly not over," said Swedish bank SEB in a report Tuesday. The bank said gold could consolidate Tuesday as investors take profits on gold's recent gains, but should quickly resume its uptrend.
The article also mentions that the Euro was driven lower in part because there are worries that the bailout package won't be big enough.

Sovereign risk fears was the cause mentioned by a Reuters report that covers the rally. More specifically, doubts about the bailout package caused the run-up.
Investors are concerned a 110 billion euro ($146.5 billion) bailout for debt-stricken Greece announced on Sunday may not be enough to resolve its financial crisis, and that other euro zone economies like Spain and Portugal may also be hit by debt problems....

"Gold's (varied) roles as a commodity, an alternative currency and a safe-haven asset are pulling more in the same direction than they have all year," said UBS analyst Edel Tully in a note.

"We would look for a test of December's record high of $1,226.44 so long as the threat of sovereign aftershocks in the euro zone persists."
The article also mentions that gold ended up ignoring the gains made by the greenback, as both are rallying due to the same cause.

An earlier Bloomberg report, webbed by Business Week, said that gold's earlier decline was due to strength in the greenback. Excerpted in the report is this bearish forecast:

Prices will be $1,100 an ounce in six months, down from a previous forecast of $1,250, and $1,050 in 12 months, down from $1,175 previously, Credit Agricole Corporate & Investment Bank London-based analyst Robin Bhar said in a report today.

With regular trading open, the metal spiked up higher after falling a little. Just beforehand, an earlier spike pulled it up above $1,191. After the pullback, which ended at 8:30, it leapt up again to $1,193.30 before tailing off a little. As of 8:54 AM, the metal was at $1,192.20 for a gain of $9.90 on the day. The Kitco Gold Index assigned -$8.25 to greenback strength and +$18.15 to predominant buying. The U.S. Dollar Index continued to ford upwards after slinking a little; as of 8:56, it was at 82.95.

It looks like another good day is in the offing for the metal; the Euromess is the crisis that keeps on giving. The question of the day is, will gold touch $1,200? The chances aren't great, but it might.

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