Gold Strong Despite US Dollar Strength

By: Mark_OByrne

Gold's recent sell off ended yesterday and gold was up $13.90  to $900.50 per ounce in trading in New York yesterday and silver was up 20 cents to $16.51 per ounce. Gold has continued to rally in Asia and early trading in Europe and is up to $908. Silver has also risen and is up to $16.68 per ounce.

Gold also rose in the other major currencies and rose to new near record highs in euros and sterling. The London AM Fix at 1030 GMT this morning was at $908.25  (up from $892 yesterday). Gold fixed at £465.53 (up from £455.61 yesterday) and €620.516 (up from €610.88  yesterday).

Gold has strengthened materially despite the dollar also being strong which again shows that gold's bull market is not simply a function of dollar weakness. Increasing risk aversion is the order of the day and this can be seen in gold being well bid in the high $890's and in movements in currency markets (see FX).

The extent of the huge infrastructural challenges facing the South African mining industry is beginning to be realized by the marketplace. Development in South Africa are extremely important and will result in lower production of gold and particularly platinum in the coming weeks and months.

Markets await the U.S. jobless claims and home sales later today in order to gauge how sharply the U.S. economy has slowed down. Increasing volatility in international equity markets is leading to safe haven demand for gold.

FX
All eyes will be fixed on Central Banks today, with both the Bank of England and ECB due to announce on interest rates today. With the BOE expected to cut by 25 basis point and no change expected from the ECB, any deviation from this will be cause for a volatile afternoon in the FX markets. The ECB will hold a press conference after its announcement and the tone of this will be more important than the rate announcement itself. The BOE will issue a brief comment only if they move on rates, with the minutes of the meeting published two weeks from today.

Risk aversion continued to be a theme in the market and yet again the Japanese Yen was the main beneficiary. While it held steady against the US dollar, it fell heavily against the Euro, Sterling and high yielding currencies. Technically if the Euro finishes the week below 155.50 against the Yen, this will prove to be the lowest weekly close since September 2007, and confirm the bearish trend for this currency pair.

The South African Rand continues to be weak against the major currencies, as a result of power outages and more importantly, political and economic concerns. While the Rand can be seen as a commodity currency, it is still also an Emerging Market currency. Weakness here could be a sign of weakness unfolding in other Emerging Markets, we will watch these developments closely.

Support and Resistance
Strong support is at $850 to $860. Just because strong support is here does not mean that gold will reach these levels. Indeed there appears to be strong physical demand internationally for gold in the $890's.

Silver
Silver is trading at $16.65/70 at 1230GMT.

PGMs
Platinum has sold off from new record highs and is trading at $1847/1857 (1230GMT).

Palladium has also sold off and was trading at $423/429 an ounce (1230GMT).

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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