GOLD AND SILVER REACT TO FIRMER DOLLAR
Gold and silver are down this morning in reaction to a firmer dollar. While the dollar is only up 31 basis points at 82.97, there is a growing expectation that the ECB is going to lower rates and that will weaken the euro against the dollar. Today, its all a euro versus dollar story and that pushed gold down $25 at the open and silver down $.31. Oil is also suffering, down $2.48 at $38.35 a barrel. Equities likewise are lower with the Dow down 31 points. In all likelihood some of the pressure on gold is not just due to the strength of the dollar versus the euro, but also to some early profit taking as gold pushed below the $850 level. The break of $850 may have been considered a technical sell signal, prompting some profit taking, sell stops, and liquidation by funds. Clearly, the weakness in oil prices and other commodities has also put some pressure on the gold market.
There are increasing fears of deflation accelerating to the downside. Some analysts said, "Profound weakness" in oil is spilling over into the metals market. Jim Steele with HSBC Bank said the deflationary environment is putting some pressure on gold and other commodities. With gold technically overbought, that had a particular impact on the precious metals. At the moment with gold trading at $830 on the February contract, it is in a range of support that should hold. Some analysts said there are bargain hunters waiting to acquire gold at these levels.
Standard Bank's analyst Walter deWet said he expected equity markets along with currencies to provide direction to gold in the short-term. In the next several months an inflation driven rally should occur given all of the large government bailouts and falling interest rates. One would have to conclude that gold does have vulnerability to the $800 support level. However, if that support is tested it is likely to hold.
On a more positive note Deutche Bank says gold is likely to re-test its 2008 highs in the first half of this year. They think there will be a move towards $1,000 an ounce in the first half of the year according to statements made to the Dow Jones Wire Service. Merrill Lynch is also bullish. They said today that gold is a buy, and expect $1,150 by June. Given the opinions that exist in the market and the likelihood that gold will find support at or near these levels, gold appears to be an excellent buying opportunity.
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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.
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