November 9. 2010
European Debt, Currency Concerns Push Gold Past $1,400/Oz
Worries about European debt have picked up again, and combined with the recently soft U.S. dollar, have provided a boost to send gold above the $1,400-an-ounce level that many analysts had listed as their year-end target not that many weeks ago.
Still more support has come from signs that jewelry demand has held up despite higher prices, along with early-week comments from World Bank President Robert Zoellick calling for some type of role for gold in the global monetary system.
Analysts say gold’s uptrend is likely to remain intact until either the dollar strengthens or U.S. interest rates rise. Some say the market may be ripe for a temporary correction, but others point out the recent history has been for such pullbacks to be quickly met by bargain hunting.
December gold futures peaked early Tuesday at $1,424 per ounce on the Comex division of the New York Mercantile Exchange, a record for a most-active contract.
Last week’s announcement of U.S. quantitative easing has been bullish for all of the commodities, including gold, analysts said. This is a plan by the Federal Reserve to buy Treasury securities in a move to push down longer-term interest rates.
“The U.S. dollar is weakening against a broad range of currencies,” said Anne-Laure Tremblay, precious-metals strategist with BNP Paribas. “And at the same time, there are increasing concerns about euro-zone periphery countries, especially Ireland.”
European debt issues might be limiting euro gains against the dollar, but they are supportive of safe-haven flows into gold, she said.
The concerns about European debt are reflected in a widening of credit-default-swap spreads for nations such as Ireland and Greece, others said. This may have been the biggest catalyst for gold over the last 24 hours, with the market worried about the potential for sovereign defaults, said Bart Melek, global commodity strategist with BMO Capital Markets. “People are looking to gold as a safe haven to protect against Western world fiat currencies,” Melek said.
Meanwhile, oil has hit two-year highs since last week’s news of Fed quantitative easing, Melek added. Against this backdrop, some investors are worried about inflation down the road.
In India, the fourth quarter is the strongest period in terms of jewelry demand. The depreciation of the U.S. dollar against currencies such as the Indian rupee or the Turkish lira further supports demand in this sector, as it means the rise in dollar prices is not fully reflected in these local currencies, Tremblay said.
Gold specialist Mike Daly added that Zoellick’s opinion on having gold play a role in the monetary system, published in Monday’s Financial Times, added psychological support for the metal. Daly expressed doubt that a gold standard would be adopted any time soon. Still, Zoellick’s remarks called attention to concerns about fiat currencies, plus “just the mention of it has people saying there is a possibility of going down that road,” Daly said.
Tremblay suggested that there is scope for further investment demand. There were net outflows from gold exchange-traded funds in October, plus the net long futures position of large investors on Comex is below its record high. In fact, the net length for non-commercial accounts has fallen from 283,462 lots for futures and options combined, as of Oct. 5, to 253,538 as of the most recent data through Nov. 2.
“This suggests that investment flows still have room to go,” she said. “The gold market does not look overcrowded, even at these price levels.”
Analysts Expect Further Gains For Gold
The Fed’s move to undertake quantitative easing suggested no rate hikes will occur for some time, said Daly, who looks for $1,500 gold by year-end. “That (a rate hike) is about the only thing at this point that is going to slow down this bull,” he said.”
Melek said he looks for more inflows into gold as protection against currency and inflation concerns. And whenever the global economy recovers, jewelry demand should pick up, he added. He looks for gold to move past $1,500 and toward $1,600 in the first half of 2011. “I think the risks are certainly on the upside at this point,” he said.
Gold at $1,600 in 2011 is not out of the question, Tremblay suggested. “For 2011, we have a bullish view,” she said.
At the moment, there appears to be light chart resistance around $1,420 to $1,425, said Afshin Nabavi, head of trading at MKS Finance. Still, traders are buying on any dips and he put good chart support around $1,400. Nabavi suggested gold could run toward $1,450 before running into stronger resistance.
“We haven’t really seen a correction,” Nabavi said. “The market has been a one-way street. Any kind of correction would be nice at least for the bargain hunters.”
Technically, gold is probably overbought in the short term, Daly said.
“This market is in need of a correction,” he said. But lately when there have been sudden pullbacks during the North American trading day, Asian buyers often return overnight on bargain hunting, he added.
“They’ve been supporting this market. The physical demand is still there.
http://www.kitco.com/reports/KitcoNews20101109AS_eurodebt.html
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