Tuesday, July 13, 2010

Gold Rebounds Above $1,200

After dawdling below $1,200 until early morning, gold jumped up to $1,203 right around the time the London market opened. The renminbi fell a little against the U.S. dollar as the latest pegging, which was below Monday's, indicated to traders that its appreciation will be slower than expected. The Grecian government successfully sold a new tranche of six-month bonds at a 4.65% annual rate; the issue was oversubscribed by 2.88 to 1. The auction's success, at a rate below the IMF loans, didn't impede the early-morning rise of gold. Helping the metal was a fall in German investor expectations, to a level not seen since April of 2009.

After that London-opening jump, the metal kept rising albeit slowly. $1,205 was breached around 5:30 AM ET, and gold continued climbing. Moody's downgrading Portugese sovereign debt by two notches, from Aa2 to A1, added to the metal's upward movement. As of 8:12 AM ET, the spot price was $1,207.90 for a gain of $9.70 on the day. The Kitco Gold Index split the gain into +$8.70 for predominant buying and +$1.00 for weakening in the greenback.

The U.S. Dollar Index, after slumping to 84.1 last evening, recovered to the 84.2-.25 level. Starting at 2:00, it went on a nice run that pulled it up to 84.56 in the next hour and a half. But, the Index lost all of that rally in the next two and a half hours. The Moody's announcement helped cushion the downslide, but the Index remained below 84.2. As of 8:20, it was at 84.16.

A Bloomberg report, as webbed by Business Week, ascribed the rise to the downgrade of Portugese sovereign debt and buying at below $1,200.
“The downgrade is a signal to the market that the situation is not over,” Bernard Sin, head of currency and metal trading at bullion refiner MKS Finance SA in Geneva, said by phone. “There is still long-term fear because of uncertainty. There is also very good physical demand from Asia” and some Middle East countries, he said.
Also mentioned in the report was a rise in holdings of the SPDR Gold Shares Trust yesterday by 0.3 tonnes to 1,314.82 tonnes. Bloomberg's survey of ten gold ETFs showed total additions of 2.7 tonnes.

An earlier Reuters report is also headed up by the Portugal downgrade.
Concern over euro zone sovereign debt drove gold to a record $1,264.90 an ounce in June, but prices receded after a successful Spanish bond auction and after a one-year European Central Bank liquidity scheme expired uneventfully.

The market remains sensitive to such concerns, however.

"What we see from our clients is that there is a lot of interest in protecting portfolios, and exposure to gold at least dampens down some of the worst effects of currency volatility," said Daniel Smith, an analyst at Standard Chartered.

"There is a continued focus in Asia as well on worries about inflation," he added. "It still very much remains a tale of two worlds, which is that the West is still very worried about currency values, and Asia is worried about potential inflation. Both of those things are supportive for gold."
The article also notes that Indian gold demand remained soft.

A Wall Street Journal report starts off with the Portugal downgrade as well, but notes that it wasn't much of a booster to gold.
The rally was relatively modest, suggesting gold lacks the drivers and momentum to break out of its recent range, traders said....

Analysts and traders said they expected gold to consolidate this week while the market digests the heavy inflow of economic data releases and second-quarter results.

Physical demand and investor bargain hunting is likely to hold gold prices above $1,185 an ounce and profit-taking will cap prices around $1,215 an ounce, they said.

"With physical demand helping to provide a floor around $1,200, we believe gold will remain on investors' radar," UBS analyst Edel Tully said in a report Tuesday.

The U.S. trade deficit unexpectedly widened by 4.8% to $42.3 billion; it was expected to narrow slightly. Although the price didn't move at the time of the release, it bookended two jumps that pushed the metal well above $1,215. The first jump started right when regular trading began; the second, at 8:50. As of 8:54, the spot price was $1,216.70 for a gain of $19.60 on the day. The Kitco Gold Index divided the overall gain into +$17.05 for predominant buying and +$2.55 for greenback weakness. The U.S. Dollar Index, after a short-lived rise above 84.2, slumped in the same timeframe. As of 8:56, it was at 84.05.

Yesterday's pullback, as it turned out, was aberrational; the vim is back in the gold market. The most likely reason is reaction to the Portugal debt downgrade, which did not have that much of an impact on pre-regular trading. Leave it to the pit session to rev up the rally.

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