Gold Healthy Correction After January Gains

By: Mark_OByrne

Gold was down $15.30 (or 1.7%) to $907.90 per ounce in trading in New York on Friday and silver was down 8 cents to $16.79 per ounce. Gold traded flat to slightly up in Asia and has sold off in early trading in Europe and is down 0.77% to $902. Silver has also fallen and is down to $16.70 (-0.7%) per ounce.

With the dollar slightly weaker and oil weaker (NYMEX March down by 0.56%) gold has continued to sell off today. Stock markets have recovered somewhat from their recent battering and markets in Asia and Europe were up overnight and today. The primary reason for gold's weakness remains that it had become overbought in the short term and was due a correction. In the same way the stock markets were oversold in the short term and due a correction.

However, the primary secular trend in both is likely to reassert as the financial and economic fundamentals have not changed. Stocks appear to have entered a bear market and gold is clearly in a bull market.

The popular Wall Street adage is "As January goes, so goes the year" and that seems very likely this year. Yale Hirsch, the founder of The Stock Trader's Almanac, first introduced this concept in the 1960s. Gold was up 10% in January and most stock markets were down between 5% and 10%.

The January effect is extremely likely to come to fruition this year, especially given the continuing and deteriorating credit crisis. The FT reports that “heavily indebted European and US companies are facing growing financial difficulties because they cannot refinance their borrowings due to the continuing closure of the credit markets. Companies' inability to borrow is raising the spectre of defaults, particularly among the most highly leveraged companies in sectors such as property that have been hardest hit by economic uncertainty.”

After gold's huge outperformance In January, profit taking was inevitable and gold was due a healthy correction and this is what we are seeing at the moment. Normally, there is follow through on gold's sell off and it can often fall by some 2 to 4 days in a row prior to bottoming and consolidation. The old Wall Street adage to “never catch a falling knife” is very wise and prudence is warranted in the coming days.

Platinum and palladium remain very strong (up 0.8% and 1.3% respectively) today with the serious supply issues in South Africa continuing to create demand. Uncertainty regarding future power supplies to the mining companies looks set to remain a medium term issue which will support the platinum group metals (PGMs) but also gold and silver.

The London AM Fix at 1030 GMT this morning was at $899.50 (down from $933 on Friday). Gold has also fallen from recent highs in British pounds and Euros. It fixed at £455.328 (down from £468.75 on Friday) and €607.196 (down from €627.06 on Friday).

Support and Resistance
Support is now at $895 to 900 but should we close below these levels, look for a retracement to strong support at $845 to $850 which was previous resistance and the 50 day moving average (DMA) which continues to move up and is now up to $847.65.

FX
Despite weaker than expected Employment numbers out of the US on Friday, after a quick sell-off, the dollar began to rally. Some commentators point to the aggressive rate cuts from the Fed as a proactive approach to stave off a recession and hence save the dollar from any further losses.  The Euro failed to break through resistance at 1.4970, managing only a high of 1.4955, post the employment numbers release, however the Euro has managed to consolidate above 1.4000 and a further assault on 1.5000 and above cannot be ruled out.

The fact that the Bank of England are meeting this week weighed on Sterling and as a result EUR/GBP managed to rally back over 0.7500. This looks like it could be the trigger for the next move up to 0.7700. A 25 basis point cut is expected from the Bank of England this week with a larger move still possible.

The Australian, New Zealand and Canadian dollars all continue to strengthen against the greenback.

Silver
Silver is trading at $16.70/75 at 1200GMT.

PGMs
Platinum has again rallied to new record highs and is trading at $1780/1789 (1200GMT).

Production problems in South Africa are not a short term anomaly and production in the world's largest producer of platinum, with some 80% of world supply,  is likely to be continually affected by huge infrastructural challenges facing the electrical system in South Africa.

Palladium has rallied in unison with platinum and was trading at $417/423 an ounce (1200GMT).

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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