News

Gold’s Safe Have Demand Faded as European Crisis Eased But Ended in Green

13 Jan 2011	1st resistance	2nd resistance	3rd resistance
Today’s resistance US$	1392	1396	1404
	1st support	2nd support	3rd support
Today’s support US$	1380	1372	1368
Today’s pivot point US$	1384

The Day’s Story:

Gold rose moderately on Wednesday after trading both sides of its previous close in a rather thin trading. Gold gains came as U.S dollar fell sharply and crude oil extended its gains. Investors also reacted favorably to earlier news that Europe’s bailout fund could be increased. Industrial metals also got a boost in after-hours trading at Federal Reserve's beige book report painting brighter economic outlook. Improved risk appetite among investors as a result of successful bond auctions in Europe kept investors away from precious metal thus limiting its gains. If things go quiet in Europe in terms of debt crisis then gold's safe haven appeal will fade which has helped gold recover some of its previous week's losses in recent days. Gold price will mainly take its cue from Dollar's movement in such a scenario although physical demand in India and China will also play a key role in near term future now that we are approaching towards Chinese New Year, a mega event for gold purchase in many Asian nations. Some important economic data from Europe and USA is also on the economic calendar to watch for. Gold has recovered 1.4% of its previous week’s losses but is still $45 away from its all time high set late last year. Gold advanced 29.5% in 2010 but despite those decent gains, in commodity world it didn’t even place in the top half and came 8th in terms of annual gains.

Stocks in U.S rose sharply to their multi year highs as financial sector sparked a broad rally after Wells Fargo upgraded the outlook for the sector. The Dow Jones closed up 83 points at 11755; S&P 500 finished 11 point higher at 1285 while NASDAQ rose by 20 points to finish its day at 2737. 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%. U.S stocks took their earlier cues from a rally in European stocks at the back of successful auction of Portuguese bonds suggesting a near term default risk for debt ridden nation had faded. Further optimism came from Federal Reserve’s Beige book report, which revealed that economy continued to grow moderately in January. Stocks in Europe ended higher as well with Britain’s FTSE 100 closing up 0.6% while DAX in Germany gained 1.8% and France's CAC 40 rose by 2.2%. Asian markets also finished stronger as Shanghai Composite closed up 0.6% and the Hang Seng in Hong Kong gained 1.5% while Japan’s Nikkei finished its day near unchanged levels.

U.S. dollar index, which measures the dollar against six major currencies ended sharply lower as ease in European debt crisis dimmed its safe haven appeal. Euro rose sharply against it US counterpart as it found much needed support from successful bond auction. Gold price gained some strength due to dollar’s weakness but any upside in precious metal was limited as developments in Europe dampened investors’ sentiments to buy yellow metal for safe haven purposes. Dollar and gold’s inverse correlation has strengthened since start of this year after an erratic relationship last year. 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. 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.

Euro bounced back from its three months low against greenback earlier this week ahead of Italian, Portuguese and Spanish bond auctions. Concerns about Europe eased somewhat as Portugal sold 1.25 billion euros of government bonds Wednesday, proving it can still access the markets, at least for now. Investors will be watching the result of Spanish bond auctions Thursday although impact will not be as great as it was in the case of Portugal. The country continues to be closely watched amid investors’ doubts about its ability to meet financing needs in the longer term.

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?

Spot gold has managed to hold well as compared to gold Futures, which suggest strong physical demand mainly in India and China. Both countries are the biggest gold consumers in the world and recent dip in prices has sparked the love trade among bullion investors. Demand for gold is likely to pick up as much of Asia celebrates the Lunar New Year early 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.

Yesterday’s Price Action:

Gold price started its Asian session in a quiet mode and traded in a narrow range throughout the session. Gold price started to make its way down in late Asian trading and losses were accelerated as European markets started their trading day. Bullion remained under pressure in early U.S trading hours and fell to its intraday low of $1376.5 an ounce in morning U.S session. Gold however, found its support at these levels and pared its intraday losses as it went deep into U.S session. Gold peaked to its intraday high of $1388.4 an ounce in after hour trading and closed just below its session high at $1386 an ounce.

Other Metals:

Silver futures for March delivery closed up 5 cents to $29.55 an ounce on Wednesday.

Platinum futures for April delivery rose by $30.80 to $1,801.10 an ounce on NYMEX.

Palladium futures for March delivery rose by $23.00 to $806.75 an ounce.

N.Y. Copper for March delivery closed up 6 cents $4.41 a pound on Wednesday.

Gold (News and Views):

      February Comex gold closed up 1.50 at $1,385.80 an ounce on Wednesday.

      The London P.M. gold fixing was $1,378.75 on Wednesday compared to its previous P.M fixing $1,374.00.

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

1272.186 tons on January 10th up from 1271.164.

      The dollar index, which measures the U.S. currency against a basket of six major currencies, fell 0.81 to 80.03 on Wednesday.

      Crude Oil for January delivery rose by $0.75 to $91.86 on Wednesday 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.

      Reuters reported Tuesday that premiums for gold bars skyrocketed to their highest level in two years. China's new year kicks off Feb. 3 and people were buying ahead of the festival at prices $50 off their highs in U.S. dollar terms.

Factors Affecting Gold Price Yesterday (Analysts View):

The gold spot price is holding up better than the gold price in the futures market which indicates more physical buying. O'Byrne says what will hold up the price is strong physical demand from Asia as consumers buy gold below $1,400 in U.S. dollar terms.

"There are increasing reports of shortages of gold bars and premiums have risen to two-year highs. This is leading to consolidation close to record nominal highs in all fiat currencies," he says.

“Market participants have put the euro-zone problems on the backburner and are willing to take on more risk,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “People are optimistic about a global recovery and commodities are green across the board.”

The metal spent most of the day under pressure after concerns about Europe eased. Portugal’s successful bond auction and other developments in Europe had dampened traders’ sentiment to buy the metal for safe-haven purposes.

But investors then likely snapped up gold at the day’s lower prices after two days of gains, said Michael K. Smith, president of T&K Futures and Options Inc. in Florida.

Typically Asian markets are very price sensitive but analysts see this constraint mattering only when gold hits a high. On any correction, buyers come back into the market. Frank Holmes, CEO of U.S. Global Investors, calls this pattern the "love trade."

Holmes says that 60% of demand for gold is driven by the love trade, despite the fact that investor demand -- the "fear trade" -- has outpaced jewelry demand over the last two quarters.

When there is a huge spike in the price of gold, the love trade falls off and that's when investment demand tends to take over, but the reverse is also true. When there is a deep enough correction, physical buyers jump in offsetting weak investment inflows.

Gold Future Outlook:

Traders like Jeb Handwerger, editor of GoldStockTrades.com is actually betting on mining stocks to cash in on high gold prices. "Gold may move laterally or sideways or correct for the next few weeks but mining stocks could significantly outperform," he says.

Short-term prospects for gold are bleaker, however, as the metal “went a little too far ahead of itself in this latest rally,” Michael K. Smith, president of T&K Futures and Options Inc. in Florida said.

Gold’s advance will be limited, as a haven demand for the metal diminishes with an improving outlook on the European economy, Zeman said.

“You won’t see people piling into gold until the situation in Europe flares up again,” Zeman said.

"With the euro still deep (in the) debt crisis and physicals using every dip to buy the metal on anticipation of an extended rise, there is little downside possibility for gold, at least in this quarter," said Pradeep Unni, senior analyst at Richcomm Global Services.

"Weakness in the dollar and rising oil will add to the...reasons to hoard gold."

On charts, gold on Wednesday largely traded below its 50-day average, which has tended to define the metal's bull move since mid-September of last year, independent investor Dennis Gartman said.

"For the first time in a very long while, we shall inject a note of caution to owning gold in any form...We shall recommend 'shoring up' stops to protect what we have gained over the past many months," Gartman said.

Technical analysis (by Jim Wyckoff):

Technically, February gold futures closed nearer the session high again Wednesday. The tepid gains in gold compared to larger gains in many other commodity markets Wednesday is disappointing and worrisome to the gold market bulls. The bulls this week are working to repair some near-term chart damage that occurred last week. Better follow-through buying on Thursday would provide the bulls with some upside near-term technical momentum.

A potentially bearish head-and-shoulders top reversal pattern is still in place on the daily bar chart. The gold market bulls 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 last week's low of $1,352.70.

First resistance is seen at Wednesday's high of $1,387.00 and then at $1,393.00.

Support is seen at Wednesday's low of $1,376.30 and then at this week's low of $1,365.00.

Wyckoff's Market Rating: 7.0.

Daily Gold and Silver Expected Range:

Gold: US$1372- $1403

Silver: US$28.86 - $30.55