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Gold Edges Back as U.S. Dollar Bounces

Commodities / Gold and Silver 2010 Oct 11, 2010 - 07:56 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleTHE PRICE OF WHOLESALE gold bullion slipped 1% in London on Monday morning, falling to $1342 per ounce as the start of what traders expected to be a quiet New York session approached.

Following heated discussion – but no resolution – of the "global currency war" at this weekend's annual meeting of the International Monetary Fund's members in Washington, the US Dollar rallied from yet another 15-year low to the Japanese Yen beneath ¥81.50, and also bounced from worse than $1.40 to the Euro.


World stock markets were little changed, with both Tokyo and Toronto closed for national holidays.

German and UK bonds slipped back, nudging interest rates higher. The US bond market stayed shut for Columbus Day.

"[That was] the 9th up week in the past 10 sessions," says bullion bank Scotia Mocatta in its technical analysis of the gold price.

"There are no reversal signals on the weekly chart, so the bias remains for another push higher."

The gold price in Dollars ended last week with its strongest 1-month correlation to the Euro/Dollar exchange rate since June 2009 at +0.97.

That correlation would read +1.0 if gold and the Euro moved perfectly in lock-step, or minus 1.0 if they were perfectly opposed.

Gold had diverged dramatically from the Euro during this spring's Greek deficit crisis, with the correlation sinking to –0.92 in May as both gold and the Dollar leapt vs. the single European currency.

Over the last 10 years, daily gold and Euro prices have displayed a strong, positive correlation of +0.50 vs. the Dollar.

Latest data from the IMM currency market shows the "net short" position of speculative traders vs. the Dollar swelled by one-third last week to $30 billion.

"Euro/Dollar won't keep on rising like this," says currency strategist Steven Barrow at Standard Bank today. "There will be a correction.

"It might be small...before the Euro pushes on to $1.50-plus. [Or] it might be a very significant correction that sees the Euro back to the sub-$1.20 levels last seen in June, or even lower.

"At the moment our money is on the latter."

Meantime however, "The path should be free for higher gold prices [because] the Dollar weakness seems to be continuing," reckons bullion trader Michael Kempinski at Commerzbank in Frankfurt, speaking to Reuters earlier.

"Bids [to buy gold] are quite strong," he added to Dow Jones Newswire, "so I'm quite confident we won't see a big correction."

"The usual negative correlation with the Dollar is back in place," agrees Phil Smith in Beijing for Reuters Technical, "and the Dollar is moving steadily to the downside.

"[But] watch the turnover [in Gold Futures] very carefully," he adds, noting "the huge spike" in trading volumes so far this month.

"When the turnover in the market falls there is likely a lot of 'air' under this price."

Latest data from US regulators shows that, overall, the outstanding number of Comex gold futures and options contracts continues to track changes in the gold price very closely, with a week-to-week correlation of +0.97.

Within those figures, however, the bullish position held by "speculative" traders actually shrank last week – net of their bearish bets – down by 0.8% from late Sept.'s near-record level to the equivalent of 1006 tonnes.

Smaller traders cut their bullish contracts and raised their bearish bets, but so-called "large speculators" (meaning hedge funds and other institutional players) raised their net-long position to a new record, some 1.1% larger for the week at 882 tonnes equivalent.

On the other side of the trade, the gold's industry's "commercial" players (meaning miners, refineries and bullion banks) grew the number of bullish bets they hold faster than their bearish bets. That knocked their "bearish ratio" back from 38.1% to 37.0% of the Comex derivative contracts they currently hold on gold – a seven-week low that compares with the five-year average of 35.5%.

In a week free from major economic data reports, "We do not doubt that the Fed really would like inflation to trend around 2%," says a note looking ahead to Tuesday's Federal Reserve policy minutes from Barclays Capital today. But "clearly it is willing to tolerate 3% rather than 1%."

Forecasting $1 trillion or more of new quantitative easing from the US central bank, "investors should expect the Fed to overshoot its inflation objective over time," it concludes.

Fresh "asset purchases" totaling $2 trillion would add 0.3% to the United States' GDP growth in 2011 and some 0.4% in 2012, according to modeling by Macroeconomic Advisers, cited today by Bloomberg News.

By Adrian Ash

BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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