News and gold strategy

Gold Finished Marginally Lower After Hitting Three Month Low

26 Jan 2011	1st resistance	2nd resistance	3rd resistance
Today’s resistance US$	1339	1347	1356
	1st support	2nd support	3rd support
Today’s support US$	1323	1315	1307
Today’s pivot point US$	1331

The Day’s Story:

Gold fell marginally down Tuesday after falling earlier to its lowest level in almost 3 months. UK's disappointing GDP data pressured commodities but a late recovery drove prices to near unchanged level as physical demand from Asia and some bargain hunting supported bullion prices during U.S session.  Dollar finished slightly lower after trading both sides of zero line helping reduce selling pressure in precious metal. Adding to the case against gold was strong demand at the euro zone rescue fund's first debt offer, which helped push the euro to two-month highs. Meanwhile, strong demand from Asian nations has been working in favor of gold prices reducing the chances of any deep correction ahead of Chinese New Year, a mega gold buying event. Options expiration Saturday forced many traders, who were short gold, to buy gold or the GLD to protect themselves against any losses. Now that options expiration is behind us, traders are abandoning their positions.

Gold has always been considered a hedge against inflation as people buy precious metal to protect their wealth against fiat currencies depreciation. World’s biggest gold consumer India followed China and Brazil and raised its key interest rate by 25 basis points yesterday in order to curb inflationary pressure, which has edged above 8% year over year basis. Such a hike would do little to change negative interest rate environment and move will not hurt gold’s safe haven appeal in the country. Recently, inflation worries have started to crawl into European economies as ECB’s Jean-Claude Trichet warned earlier this week that inflation pressures in the euro zone must be watched closely, and urged central bankers to guard against higher energy and food prices. In general, inflation is good for gold but it's hard to say how the inflation drama will play out for precious metals and gold in particular, as rising inflation could be double edge sword for gold prices. Central banks tend to hike their key interest rates to tame inflation and any such move by Western economies this year will be a major blow for bullion prices although chances of that are quite minimal especially after disappointing growth numbers from UK yesterday.

Bargain hunters who generally come to rescue bullion at price dips finally made their way in during U.S session when bullion fell near its three months low although response was not as great as it has been during previous price dips as they still want to see more price stability before they can utilize the latest price fall to its full potential. Gold, which rose 30 percent last year, has already fallen over 5 percent this month as investors took profits and put more cash into assets such as equities and industrial commodities. Gold lost 1.4% last week, marked by big dips the previous Monday and on Thursday and only modest gains in between and looks set to post its first monthly loss since July last year.

Stock markets in U.S ended mixed after making a late recovery from sharp losses earlier during the session as economic data from U.S and UK painted a rather bleak picture. U.S stocks reacted to worse than expected GDP numbers from UK and opened lower. Losses were deepened due to some disappointing corporate earnings during early part of the session. Before market open, the Case-Shiller index of home prices in 20 major U.S. markets revealed that slump in home prices has deepened; the index fell 1% in November compared with October. The day’s positive news came when the Conference Board said its index of consumer confidence rose to 60.6 in January, up from 53.3 in December. It was the highest level since May 2010 and came in stronger than expected. Stocks in Europe finished lower with Britain’s FTSE 100 closing down 0.44%, DAX in Germany skidded 0.12% and France's CAC 40 lost 0.34% of its value.

U.S. dollar index, which measures the dollar against six major currencies, finished marginally lower making it the sixth straight session of losses.  Dollar rose earlier against its counterparts but could not hold on to its minor intraday gains. The European Financial Stability Facility (EFSF) launched its first sale of bonds and market sources said demand, at 48 billion euros, dwarfed the 5 billion on offer. Bond sales did help Euro to cut its intraday losses late in the session. Concerns over Europe’s sovereign debt came to forefront when Spain said it needed $27 Billion to rescue its ailing banking structure although market did not buy that figure and believed lot more would be needed in this regard. Despite recent successful bond auctions of debt stricken nations and encouraging economic data, which dented the safe haven demand for both precious metal and dollar, stability in the region is not sustainable. Dollar’s near term technical outlook remains bearish and further decline in U.S currency could limit the losses in precious metal.

Gold's average hourly inverse correlation with the dollar weakened further as both ended in negative territory once again. Dollar denominated assets tend to move higher at dollar weakness as it makes them cheaper for holders of other currencies. But gold and dollar can break away from that norm at times of heightened economic uncertainty, which had been the case for most part of last year.

What Next?

Some important announcements will catch the interest of the market today when Bank of England meeting minutes are released. Later, Reserve Bank will announce its interest rate decision which does not hold any surprises but statement following the decision and wording used about economic outlook by FED will be scrutinized by market players and may affect dollar and gold prices consequently.

With latest developments in Europe and other possibilities of what can go wrong for global economic recovery, gold should recover some of its safe-haven characteristics. Over the short term, gold's selloff could bring traders into the market. Those waiting for gold to reach the $1,330-$1,315 support level could be tempted to put some money to work.

Gold purchase in China and other Asian nations celebrating Chinese New Year rises to its peak during this period; that buying has been providing floor for gold prices in recent days and will continue to do so until first week of February when Year of Rabbit kicks off.

Futures traders said February gold could remain under pressure this week as rolling of positions from the February contract to April will still continue ahead of first notice day on Jan. 31.

Yesterday’s Price Action:

Gold price started its first session of the week with minor gains and after peaking to its intraday high of $1338.6 very early in the session it spend most of Asian session in downward direction. Gold losses were deepened during early European session as UK GDP data put selling pressure on commodities. Gold fell to its intraday low of $1322.4 an ounce during early hours of European trade. Gold found support at this level and pared most of its losses during U.S session and closed its day with marginal losses at $1332.2 an ounce.

Other Metals:

Silver futures for March delivery closed down 54 cents to $26.81 an ounce on Tuesday.

Platinum futures for April delivery fell $32.30 to $1,787.30 an ounce on NYMEX.

Palladium futures for March delivery fell 31.80 to $784.75 an ounce.

N.Y. Copper for March delivery closed down 12 cents $4.23 a pound on Tuesday.

Gold (News and Views):

      February Comex gold closed down 12.20 at $1,332.30 an ounce on Tuesday.

      The London P.M. gold fixing was $1,324.00 on Tuesday compared to its previous P.M fixing $1,343.00.

      The world’s largest gold exchange-traded fund, New York’s SPDR Gold Trust, said its holdings fell to

1260.843 tons on January 24th after rising more than 20 tons in previous session.

      The dollar index, which measures the U.S. currency against a basket of six major currencies, fell 0.09 to 77.92 on Tuesday.

      Crude Oil for March delivery fell $1.68 to $86.19 on Tuesday on New York Mercantile Exchange.

      Gold hit its true peak on Jan. 21, 1980, when it rose to $825.50 an ounce. Adjusted for inflation in 1980 dollars, that translates to an all-time record of $2,184.08 an ounce, in 2010 dollars.

      Assets in gold-backed exchange-traded products, or ETPs, dropped 31.01 metric tons to 2,043.09 tons yesterday, the lowest level since Aug. 10, according to data compiled by Bloomberg from 10 providers. Holdings reached a record 2,114.6 tons on Dec. 20.

Factors Affecting Gold Price Yesterday (Analysts View):

“The improved economic outlook over the past weeks has dimmed gold’s appeal as safe-haven investment, but concerns about inflation may continue to support,” said analysts at Richcomm Global in Dubai.

Continued selling after Monday’s close “lowered prices and pressure continued all night so more assets in gold were reallocated to stocks as the State of the Union [Tuesday] and [Wednesday’s Federal Reserve statement] keep investors away from precious metals for now,” said George Gero, a vice president at RBC Wealth Management, in emailed comments.

George Gero, wrote that "81,000 open interest came out of gold." Gero believes this will help bargain hunters get back into the market but they must be patient and willing to endure this shakeout.

“Money is being put to work in the equity markets right now,” said Charles Nedoss, a senior market strategist at Olympus Futures in Chicago.

"Nothing fundamentally has changed at all. It's just that too many investors have gotten long (bullish)," said Dennis Gartman, publisher of the Gartman Letter.

"The weakness in the past week and a half has made those late to the party uncomfortable, forcing them to sell. In the process, it will make the market healthy again," he said.

Gold Future Outlook:

Phil Streible, senior market strategist at Lind-Waldock, is cautious on the gold market and is waiting for "critical levels of support like $1,320, $1,300 and $1,270. [I] might take a shot there. The key is you can't get overleveraged in this type of environment. If you are ... you definitely have to use those rallies to lighten up a little bit."

Today's selloff is more dramatic than just profit- taking, however, as gold is fumbling with its identity as a safe-haven asset. Ironically, the landscape is ripe for more crises which should prop up gold. "We believe the outlook for 2011 remains positive for gold as broader investment drivers remain intact," says Barclays Capital.

Long term, however, Charles Nedoss said he’s still positive about gold.

“The equity market is a little ahead of itself, jobs are still a big issue, the housing market is still very soft and vulnerable,” which would push gold back to its safe-haven status, he said.

“The Fed will likely stick with the current easing policy since it takes time for the U.S. economy to recover, given the high unemployment rate and falling house prices,” said Park Jong Beom, a trader at Tong Yang Futures Trading Co. in Seoul. “That means the dollar will remain bearish. Although many investors may stay wary during the Fed meeting, it’s likely that gold will get a boost once after the meeting is over.”

Analysts, however, expect gold's 10-year bull run to remain intact due to lingering economic uncertainty, a view confirmed by a comprehensive Reuters poll that called for an average price of $1,450 an ounce in 2011.

Technical Analysis (by Jim Wyckoff):

Technically, February Comex gold futures closed near mid-range and hit a fresh three-month low Tuesday. Serious near-term technical damage has been inflicted in gold recently. Prices are in a three-week-old downtrend on the daily bar chart. A bearish head-and-shoulders top reversal pattern is also playing out on the daily bar chart.

Bulls' next near-term upside technical objective is to produce a close above solid technical resistance at this week's high of $1,352.40.

Bears' next near-term downside price objective is closing prices below psychological support at $1,300.00. First resistance is seen at Tuesday's high of $1,338.00 and then at $1,345.00.

Support is seen at Tuesday's low of $1,321.90 and then at $1,317.40.

Wyckoff's Market Rating: 5.5.

Daily Gold and Silver Expected Range:

Gold: US$1317- $1356

Silver: US$26.40 - $27.80