Monday, May 24, 2010

Gold Rises As Week Begins

The troubles in Euroland continue as Spanish bank CajaSur's assets were seized by the Bank of Spain. It foundered because of distressed real-estate exposure, and its failure ignited the now-familiar fears. Earlier, President Hu Jintao announced that the PRC government will revalue the renminbi on its own time and at its own speed; Hong Kong shares were up in part becuase there's hope that the People's Bank of China will put an end to its current tightening measures.

Both developments were good for gold, as the bank closure was announced over the weekend. After reaching $1,192.10, just before 4 AM ET, the metal pulled back when London trading opened. Within two hours, it was below $1,185. Pulling back up to the $1,185 level, it slumped back to around $1,183 before recovering a little. As of 8:05, the spot price was $1,184.80 for a gain of $7.80 since Friday's close. The Kitco Gold Index attributed +$21.10 to predominant buying and -$13.30 to a strengthening U.S. dollar.

The U.S. Dollar Index was the prime beneficiary of the Spanish troubles; it advanced not only last night but also this morning. Rising in the evening, it marked time until just before 4 AM. Within three hours, it rallied from the 85.7 level to the 86.45 level before marking time once again. As of 8:15, it was at 86.46.

A Reuters report attributed last night's overall rise in gold to bargain-hunting.

"The nervousness of currency markets is clearly visible in the gold market," said Pradeep Unni, senior analyst at Richcomm Global Services in Dubai. "The extreme fear of potential unannounced ECB intervention or a fresh development in the euro bloc is keeping investors on the edge."...

A stronger dollar usually weighs on gold, but the traditional strong inverse link between the two assets has weakened as both are benefitting from risk aversion. In the longer term, this link may well be re-established, Unni said.

"Now more than ever, arguments of the dollar and gold decoupling from (their) inverse correlation are emerging and this is because investors are hedging recent euro zone and UK crises equally in gold and US dollar," he said.

"The key point is that gold never actually decouples from the U.S. currency on a longer time duration."
The article also mentions that high prices have impacted jewelry demand in Italy. Holdings of the SPDR Gold Shares Trust were unchanged last Friday, and still at a record high.

A Bloomberg report, as webbed by Business Week, said that uncertainties in the Euro zone and a consequent weaker Euro helped reverse the decline.
“The ongoing uncertainties created by the euro-zone debt situation will continue to draw investors towards safe-haven assets such as gold and the dollar,” James Moore, an analyst at TheBullionDesk.com in London, wrote in a report. “Bargain- hunting interest” is also supporting gold prices, he said....

After the “sell-off there’s some revived appetite for precious metals, including gold, as a decline in the euro reminds the market of risks linked to the region,” said Hwang Il Doo, a Seoul-based trader with KEB Futures Co. “The price declines are no more than a mere correction.”
The morning Wall Street Journal report ascribed the rise to an improvement in investor sentiment.
"As a new week begins, gold looks like it wants to reverse its previous five-day losing streak," said UBS analyst Edel Tully.

"We remain bullish on the gold price; although we acknowledge that increasing share of investment consumption in the global gold demand will continue to increase volatility in the gold price," investment bank Fairfax said.
Regualr trading began without much fluctuation in the gold price, but that changed with a quick rally up above $1,189. As of 8:55 AM, the spot price was $1,188.00 for a gain of $11.00 since last Friday's close. The Kitco Gold Index assigned +$23.80's worth of change to predominant buying and -$12.80 to strength in the U.S. dollar. Unlike gold, the U.S. Dollar Index marked time in the period after falling back below 86.4; as of 8:57, it was at 86.35.

The rise in gold could be a relief rally, but it comes at a time when the metal wasn't that oversold. It suggests that the intermediate-term rise since last month hasn't been impugned.

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