Tuesday, June 8, 2010

After Sagging, Gold Makes New Record High Overnight

The jitters continue as the Eurocrisis continues to weigh. Fitch has warned the U.K. government about getting down its deficit, noting that the deficit has increased faster than any other AAA-credit government. Fitch is the same rating agency that recently downgraded the debt of the Portugese government. In response, CDSs for U.K. sovereign debt crept up from 94 basis points to 98. Since the new government has started to put deficit-reduction measures in place, Fitch's warning comes off more as an encourager than a stop sign. The agency is concerned that the planned cuts only affect the short term deficit, not the medium term.

With that news as the backdrop, and with the greenback also moving up, gold reversed a late-night slump to spike above $1,250 and make a new record high. The earlier sag carried the price down to $1,236.50, reached around 2 AM ET. $1,240 was climbed above an hour later; a two-stage rally followed. It was the second stage, climaxing just before 6:00, that put gold at its new record high of $1,253.30. After its higher low made on May 21st, gold has now made a higher high. Subsequent to making that record, the metal slumped back but stayed above $1,245. As of 8:02, the spot price was $1,246.50 for a gain of $6.20 on the day. The Kitco Gold Index split the gain into +$4.20 due to predominant buying and +$2.00 due to weakening of the greenback.

The U.S. Dollar Index spent the night slumping, getting down close to 88.1 before halting and fluctuating between that level and 88.3. An early-morning rally, beginning a little before 4 AM, carried the Index up to 88.58 before it ended at 5:25. The subsequent slump dragged it down to just above 88.3. As of 8:13, it was at 88.33.

A Wall Street Journal report characterizes the record high as being generated by refuge buying. The metal hit another record high in Euros.
"The persistence of EU sovereign risk, which appears to be spreading to non-EU nations, combined with heightened investor risk aversion and a steadily sinking euro, makes gold attractive," said HSBC analyst James Steel.

Investor demand is the driving force right now, traders and investors said, noting a quiet physical market from jewelry buyers in India, the Middle East and China....

"Given the momentum this morning in Europe, gold just wants to follow one path and that path leads north," said UBS analyst Edel Tully.
As the article also suggests, Hungary's troubles, turmoil in Spain, expected difficulties in Germany as the German government prepares cuts of its own, and double-dip fears for the U.S. economy all contributed to a positive climate for the metal.

The above-noted Fitch warning serves as the focal point of this morning's Reuters article, which ascribes the new record high to worries over the Eurocrisis.
The precious metal is benefiting from fears the euro zone's sovereign debt crisis may spread, weighing on global economic recovery, analysts said.

"It is mainly the fear of another slide into recession which is seeing demand for gold as a safe haven," said Commerzbank analyst Daniel Briesemann.

"Gold is currently rising in dollars and in euros," he added. "There is a lack of confidence, given the uncoordinated measures against the sovereign debt crisis, which is obviously (affecting) both currencies."

Core euro zone debt futures hit a contract high and the premium investors demand to hold 10-year French, Italian and Spanish government bonds rather than German benchmarks rose on Tuesday in risk-averse trading.

With the fear factor still dominating the financial markets, gold is set for further gains, analysts said. "Right now it's too difficult to stand in front of a moving train," said UBS analyst Edel Tully in a note.
The article also notes that holdings in the SPDR Gold Shares Trust were unchanged yesterday, but physical demand in India slowed to dormancy.

Essentially the same reason was at the head of the morning Bloomberg report, as webbed by Business Week.
“It shows low confidence in the euro zone,” said Bernard Sin, head of currency and metals trading at bullion refiner MKS Finance SA in Geneva. “There’s no confidence in euros, dollars and no confidence in other currencies. The only solution is to be on the safer side, which is gold.”...

The euro steadied against the dollar as Federal Reserve Chairman Ben S. Bernanke said Europe’s leaders are committed to avoiding a default and their bailout plan covers the obligations of Greece, Portugal and Spain “for a number of years.” The U.S. recovery is moving at a “moderate” pace, Bernanke said....

“The gold price continues to be supported by safe-haven inflows, linked to Europe’s debt crisis and uncertainty about returns from alternative investment assets,” David Moore, a commodity strategist at Commonwealth Bank of Australia, wrote in an e-mail today.

The metal may trade at $1,050 to $1,300 an ounce for the rest of this year and may climb as high as $2,000 if the debt crisis spreads beyond Europe, possibly to the U.S., GFMS Chief Executive Officer Paul Walker said in an interview.
Ms. Tully was also quoted as noting that scrap sales have likely picked up given the rise.

With regular trading open, the metal continued its slump by sinking below $1,245. The decline started at 8:00, halting at $1,243 when the pit shift opened. A further slump below $1,242 was reversed. As of 8:50 AM, the spot price was $1,242.80 for a gain of $2.50 on the day. The Kitco Gold Index divided the gain into +$0.70 for predominant buying and +$1.80 for greenback weakness. The U.S. Dollar Index, after sinking below 88.3 on the way to 88.25, reversed course and began climbing at 8:20. As of 8:54, it was at 88.43.

Forging a new record did call forth some selling and a consequent downturn, but the record was still made. So far, gold is still sporting a gain on the day. There isn't any sign that the metal is going to break through the $1,250 level and surge higher, but it also hasn't fallen below $1,240. Today's action, if it parallels yesterday's, would see another record made.

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