Gold Consolidates Strong Gains Above $900

By: Mark_OByrne

Gold has consolidated on the strong gains seen last week of 6.43% rise in the week (silver +6.6%). Gold fell initially in Asia to $890/oz before rising sharply in early trading in Europe to over $907/oz. Much of the technical damage done in recent weeks has been overcome and gold is again looking bullish from a technical and fundamental viewpoint. But gold needs a daily or better a weekly close above the recent October high of $925/oz if it is to again surpass last year’s record high of over $1,000/oz.

Gold rose 4.3% on Friday alone (silver up 5.1%) as deepening concerns regarding the global financial system and economy led to continuing flight to quality and a desire for wealth preservation rather than wealth accumulation. Most stock markets were down by at least 2% on the week and also of note was the fact that US bonds and many government bonds internationally fell quite sharply for the week (bond prices fell sharply with a corresponding increase in yield). The US 10-Year bond saw a 4.5% fall in price (bond was down -0.328125 to 129.609375) (see more on important bond market concerns below).

Gold has surged by even more in other major currencies in recent days and has risen to new record highs in British pounds and Euros – the London AM fix this morning is £656.65 and €699.68 and gold has now risen to new record highs (over £657/oz) and EUR (over €700/oz) this morning. Dollar strength in recent weeks is more a function of the weakness of sterling, Euros and other currencies versus the dollar rather than a strengthening of the dollar due to safe haven demand or strong fundamentals of the dollar itself.

The surge in gold seen in these currencies will likely be seen in the dollar price of gold in the coming weeks after the lengthy period of correction and consolidation we have had since reaching $1,030/oz in March 2008.

This is especially the case as the open interest levels in futures markets has fallen to extremely low levels. It was important to keep in mind that open interest levels are some 43% lower than they were exactly this last year prior to gold’s rally to $1,000/oz. Today open interest is only at just over 342,000 contracts whereas then it was at just under 594,000 contracts. Clearly the speculative froth has been taken out of the market and should the momentum players re enter the market as is their habit of doing open interest levels will rise substantially and this should see gold rally much higher in the coming months.

Bond markets have risen to all time record highs in recent weeks and there is a concern that there may be a bubble in some government debt markets. Especially as governments are engaged in an unprecedented bailout of much of the western financial system and there are increasing fears that much of the western banking system will be partially nationalized.

Bernanke’s and others proposals to print money to buy their own bonds shows they believe that government bonds are overvalued and will likely come under serious selling pressure at some stage in the coming months. It shows how most government bonds (particularly long dated bonds) are not a safe haven. As this realization sinks in, gold’s safe haven qualities will be more greatly appreciated in the coming months and should see gold rise above $1,000/oz sooner than most expect in 2009.

Fears of a sharp selloff in bond markets is what has led to Ben Bernanke and others to suggest printing money to buy their own government bonds as it is hoped that this intervention or market manipulation would artificially keep bond prices high and yields low. Most astute observers see it as another shortsighted panacea that may be effective in the short term but is likely to lead to a far more serious problem down the road – the likely downgrading of the US government debt, a possible default and likely double digit inflation and interest rates. Stagflation or virulent 1970’s style macroeconomic conditions would again see gold’s safe haven qualities come centre stage.

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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