GOLD TESTS $1,100

Gold is up $6 and silver is up $.11 in early trading, in spite of the fact that the dollar is up 8 basis points. Oil is also recovering, up $.50 and the Dow is up 70 points. A stronger tone in the euro overnight and a recent increase in the demand for physical gold bolstered the gold market this morning. A trader linked the early gains to strength in stock index futures overnight.

One trader told the Dow Jones Wire Service that the equity market as well as metals may be reassessing whether a recent sell-off on worries about President Obama's proposed banking rules may have been over done. There are also indications that Fed Chairman Bernanke will be reconfirmed. In addition, the latest bond auction in Greece was well bid. That suggests that there is less concern over Greece defaulting on these debt obligations.

Gold reached a high overnight at $1,104. While it is trading below that level at the moment, it has the potential to rally back above $1,100, which would be a bullish signal. Standard Bank commented that the sell-off last week brought out the bargain hunters, which also has been supportive of the gold market. Managed money accounts seem to be accumulating gold as well. The same is true for silver. On balance, precious metals have been doing solid work to build a new base around the $1,100 level. Once this period of consolidation and base building is completed, it will likely lead to another move to the upside within the next few months.

The Dow Jones Wire Service reported, "The Thursday and Friday correction was about the uncertainty over U.S. banking reforms and China's move toward tightening monetary policy. Fed Chairman Bernanke's reconfirmation hearings, investigation into U.S. Treasury Secretary Geithner's conduct during AIG bailout also adding to the event risk, making it difficult to decide direction in the short term with dollar direction also uncertain. However says structurally market still bullish, strong physical demand ahead of lunar New Year supportive and growth outlook for key gold importers China and India still intact. GDP growth prospects in both China and India are good. There is a likelihood that they will be able to absorb more gold this year (than in 2009)."

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