Gold Resists Strong U.S. Dollar

By: Adrian_Ash

THE PRICE OF GOLD in the wholesale bullion market slipped from an early 1-month high Monday morning, trading 2.1% above last week's start as strong gains in Japanese and Chinese stocks failed to carry over onto European bourses.

US crude oil contracts hit $80.00 per barrel, and the Euro gave back half-a-cent of Friday's 2¢ surge.

Ticking back towards last week's 9-month lows at $1.3450, the weakening Euro kept gold prices for German, French and Italian traders within 0.5% of Friday's new record high.

"Light physical selling was seen at the top," said one Hong Kong gold dealer in a note this morning, adding that "Chinese participants were still on the side-lines" on their first day back after last week's New Year celebrations.

Recording an AM Gold Fix in London today at $1119.75 an ounce – some $11.50 below the sharp peak hit at the start of Asian dealing – the price of gold hit its best level against the British Pound since early Dec.'s record high.

"Despite a flurry of news which should have caused the precious metals to decline, gold has resisted the firming of the US Dollar quite well," notes MKS Finance, a division of the Swiss refining group.

"That resistance levels in gold [at $1125] were tested last week – with both the IMF and Federal Reserve making bearish headlines – was an impressive display of strength," agrees a London gold dealer.

"It suggests gold is regaining some footing as an alternative asset."

"The tone [of gold investment] changed in 2009," writes Rhona O'Connell at MineWeb, commenting on the World Gold Council's analysis of data from her GFMS consultancy.

"Allocated bullion accounts advanced at the expense of unallocated accounts, while there was evidence of increased activity on the part of hedge funds and other 'non-traditional' institutions."

Allocated gold means physical bullion, owned by the customer. Unallocated accounts, in contrast, do not charge the client for storage, making them cheaper and more "commonly used" as the London Bullion Market Association explains on its website.

But "the client is an unsecured creditor" of the account provider, notes O'Connell, and so "while uncertainty persists over elements of the financial sector, allocated accounts are likely to continue to command interest."

New data released by US regulator the Commodity Futures Trading Commission after Friday's close showed speculative, non-industry traders slashing their bullish position in gold futures and options to the smallest level since Sept. 1st in the week to last Tuesday (16 Feb.).

The CFTC's Commitment of Traders report says that, as a group, hedge funds and other large speculators cut their "net long" betting (i.e. bull minus bear contracts) to the equivalent of 601 tonnes on the US derivatives market.

It peaked equal to 873 tonnes of gold in mid-Oct., and was 25% greater at 752 tonnes as recently as late Jan.

So-called "commercial traders" acting for bullion banks, miners and the refining industry meantime cut their naturally bearish position on gold last week to the lowest level since mid-July as a proportion of their total bets.

"World Gold Council analysis suggests that the longer-term views of allocated holders tend to reflect the [gold market's] fundamentals in terms of inflation, economic and exchange rate uncertainty," says O'Connell at MineWeb today.

Over on the forex market early Monday – where the "net short" position against the Euro held by speculators reached a new record last week – the Dollar weakened against the Japanese Yen, but ticked higher against all other major currencies.

Government bond prices were little changed, holding 10-year US Treasury yields at 3.79%.

Here in London, UK gilts traded near Friday's 15-month low, keeping 10-year yields up above 4.25%.

"$1,100 is a level being looked at" in gold, says Saxo Bank analyst Ole Hanson, speaking to Reuters.

"If we can hold it there could be further gains to be made as news from Greece unfolds."

Germany's Der Spiegel reports that the Berlin government has drafted plans for a Greek aid package of €20 billion, the cost to be split by Eurozone member states, with Germany's share – reckoned to cost up to €5bn – paid through its state-owned KFW bank.

Athens last week asked the European Union for specific details of how a rescue would work, following the failure of finance ministers to agree anything beyond a statement of "support".

The Netherlands' coalition government meantime fell apart on Saturday, split over the issue of Dutch troops in Afghanistan.

French oil refineries owned by Total remained closed for the fifth day running in a dispute over job losses. Union leaders called for the action to be "intensified and extended", warning that French fuel shortages could follow.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
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

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