News and Analysis

Gold Rose as Dollar Weakened and European Debt Crisis Worsened

11 Jan 2011	1st resistance	2nd resistance	3rd resistance
Today’s resistance US$	1379	1383	1390
	1st support	2nd support	3rd support
Today’s support US$	1368	1361	1357
Today’s pivot point US$	1372

The Day’s Story:

Gold finished its day with modest gains in light trading after 5 days of losses Monday as weaker U.S dollar and rising crude oil prices helped gold finish in positive territory. Gold also found safe haven support as ongoing European debt crisis made their way back into headlines yesterday. Market is worried about upcoming bond auction of some smaller European Nations regarding investor demand. Portugal in particular, is under strict pressure from EU and IMF to take bailout money. Bargain hunters also found an opportunity to buy the dip although they still remained cautious after last week’s 3.5% loss as yesterday’s price action suggested. Investors will not return to full fledged buying until recent correction is over and at the moment no one is certain how deep it is going to be. U.S economic calendar is fairly light today so expect no surprises at economic front. Market will take its direction from unfolding situation in Europe and any bad news will in fact be good news for gold as it loves economic uncertainty. Gold rose nearly 3 per cent in December, and was up 29.6 per cent last year.

Stocks in U.S ended modestly lower on Monday after paring most of their intraday losses in reaction to a sell-off in Europe as investors worry about a possible bailout package for Portugal. The Dow Jones closed down 37 points at 11637; S&P 500 finished 2 point lower at 1269 while NASDAQ bucked the trend and rose by 5 points to finish its day at 2708 after most of the day in red. All three main U.S indexes recorded double-digit gains in 2010 with DOW finishing 2010 up 11%, S&P 500 13% and NASDAQ 1%. In the absence of any significant economic data investors had a lot of merger news to digest and looked forward to earning season kickoff next week. Meanwhile Friday’s disappointing jobs numbers continued to trickle into this week’s trading, as investors remain cautious about labor market, which has been the major hurdle in the way to sustained economic recovery. Stocks in Europe ended lower as well with Britain’s FTSE 100 closing down 0.5% while DAX in Germany fell 1.2% and France's CAC 40 lost 1.5% of its value. Asian markets also ended in red. The Shanghai Composite fell 1.7% and the Hang Seng in Hong Kong slipped 0.7%. Japan's market was closed for a holiday.

U.S. dollar index, which measures the dollar against six major currencies ended its 4 days winning streak and fell marginally due to a corrective pullback. Euro managed to come off its 3 month low against its US counterpart but short-term outlook for European common currency remains bearish at the back of Euro zone debt crisis.  Gold price took a heart at dollar’s demise and recovered some lost ground now that both assets have strengthened their negative correlation relationship in recent sessions. In recent days, dollar strength weighed on bullion’s price because such gains typically affect the value of dollar-denominated commodities as holders of other currencies find it more expensive to make transactions. Friday, US dollar rose to its highest level in nearly four months against the euro on worries about use of euro zone peripheral country bonds as collateral. The dollar dropped 3.4 percent last year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. Euro however, was the biggest loser among major currencies losing 6.5% of its value in 2010. The greenback has risen 2.3 percent since the end of 2010.

Euro bounced back from its three months low against greenback ahead of Italian, Portuguese and Spanish bond sale this week. Portuguese government bond yields rose to 7.25% while Credit Default Swaps also surged to alarming levels. Portugal got little help from ECB and a private placement yesterday but not enough to narrow the spreads or CDS. Rising bond yields are early indication of a troubled economy, as Governments have to sweeten the pot for investors. Latest reports revealed EU is increasing pressure on Portugal to take a bailout package from EU and IMF to save its worsening debt situation. According to reports Portugal may need somewhere between $64 Billion to $129 Billion in aid money. Spain is the next in line and has been the main worry due to the size of its economy. Many analysts believe it will be impossible for IMF and EU to provide financial assistance to Europe’s fourth biggest economy.

Last year before Greece’s debt problems made headlines, bullion went into deep correction and fell to $1044 level from $1226. But as Greece went ahead with bailout package, gold rose to new highs. Similar scenario was seen late last year at times of Irish bailout package when gold retreated to 1320s from $1424 but soon after Ireland agreed to seek help from IMF and EU, precious metal made new highs once again. Whether gold reacts the same way this time around remains to be seen but early indications are pointing at similar scenario in progress.

What Next?

Gold price has been hovering below 50-day moving average and traders are now watching closely the next important 100-day moving average level of $1330. Gold prices need to hold above this level or else face an even deeper correction. Traders who sold positions this week will most likely keep cash on the sidelines until they are sure the deep correction is over. Meanwhile, demand for gold is seen as strong and likely to pick up as much of Asia celebrates the Lunar New Year next month. Gold purchase in China and other Asian nations rises to its peak during Chinese New Year period and that could provide much needed support for bullion prices in coming days.

Another important development is rising inflation in emerging economies and gold’s reaction to that has been muted so far. Brazil reported its inflation rising to 5.9% while India’s food inflation peaked to above 18%. China is also struggling with price pressure and latest data revealed inflation hitting above 5% level. China raised its key interest rate twice in last quarter of 2010 in order to keep inflation under control. Raising key interest rates is the common tool to curb inflation, which most countries are expected to do, but it would take a lot of hikes to move real interest rates from negative to positive. Negative real interest rates are always a green light to gold buyers as their currency is worth less and gold becomes a more profitable place to store their money.

Yesterday’s Price Action:

Gold price started its Asian session with minor gains and continued to rise throughout the session. Gold price peaked to its intraday high of $1376.3 an ounce just before European market open. Bullion gave away its intraday gains with the start of European session and remained under selling pressure during European trading hours. Gold price fell to its intraday low of $1365.2 an ounce in early hours of U.S market hours. Yellow metal however, found some support from bargain hunters and weakening U.S dollar and managed to finish its day in positive territory with modest gains of 0.4% at $1375.6 an ounce.

Other Metals:

Silver futures for March delivery closed up 19 cents to $28.86 an ounce on Monday.

Platinum futures for April delivery rose by $6.80 to $1,745.10 an ounce on NYMEX.

Palladium futures for March delivery fell $6.30 to $749.65 an ounce.

N.Y. Copper for March delivery closed down 2 cents $4.26 a pound on Monday.

Gold (News and Views):

1271.164 tons on January 07 down from 1272.40 a day earlier.

Factors Affecting Gold Price Yesterday:

Gold futures aim at consolidating around $1,360 an ounce after a runup in the last two weeks of December and the past week’s correction, said Carlos Sanchez, a director with CPM Group in New York.

Gold could get a more decisive push upward if the news out of Europe concerning sovereign debt worsens or economic conditions in the U.S. don’t improve, he said.

“Financial, economic and political concerns continue to be supportive of gold,” Sanchez said.

“Amid the continued uncertainty, gold should be in greater demand again,” analysts at Commerzbank said in a note to clients.

"When you look over your shoulder, the worries in Europe are still there," said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. "Another bailout means you'll be seeing a movement out of European currencies into metals."

Gold Future Outlook:

"For the immediate short term, gold is likely to be range bound. Today's support is $1,360," said Ong Yi Ling, an analyst at Phillip Futures.        

"If we see gold hold above that level, and if economic data such as this week's retail sales figure, turns out worse than expected, perhaps we could see the gold rally continue."        

"The overall trends are strong so the likely path ahead is that the dips will attract buying," says William Adams, head of research at fastmarkets.com. "The questions being how far will prices fall before the buyers return in force."

"What's going to happen I believe," says David Morgan, the founder of Silver-Investor.com, "is that you'll see enough pain in the market, enough of a pullback for a long enough time frame that ... those who were late to the market .... once they give in ... that's what it takes to hit the bottom and move up again."

Morgan thinks this move could take as long as June, but he thinks gold will find its bottom before then propped up by global uncertainty.

Spot gold may revisit Friday's low at $1,352.30 per ounce before developing a second round of rebound towards $1,388, said Wang Tao, a Reuters market analyst.

"From here things are mixed. For the short term, the range remains between $1,350 and $1,380. If the market goes beyond $1,390, we can see gold trend higher again," said a Hong Kong-based dealer.

Technical analysis (by Jim Wyckoff):

Technically, February Comex gold futures prices closed nearer the session high Monday. Some near-term chart damage occurred last week, including a bearish weekly low close on Friday, as the bulls have faded and need to show more power soon. Recent selling pressure has raised the specter of a bearish head-and-shoulders top pattern forming on the daily bar chart.

The gold market bulls do still have the overall near-term and longer-term technical advantage. Prices have been trading sideways at higher price levels for around three months.

Bulls' next near-term upside technical objective is to produce a close above psychological resistance at $1,400.00.

Bears' next near-term downside price objective is closing prices below solid technical support at $1,350.00. First resistance is seen at Monday's high of $1,376.40 and then at $1,380.00.

Support is seen at Monday's low of $1,365.00 and then at $1,360.00.

Wyckoff's Market Rating: 6.5.

Daily Gold and Silver Expected Range:

Gold: US$1360- $1398

Silver: US$28.25 - $29.80