Gold Slips as Dollar Rallies

From Adrian Ash

BullionVault

Correlation with Euro Holds at Record Level

THE PRICE OF PHYSICAL gold fell in Asian and early London trade on Monday, dropping to a 3-session low of $1354 an ounce as the US Dollar rallied and Asian stock markets ended the day lower.

Only New Zealand and Bombay equities avoided a drop in Asia-Pacific trade, while US crude oil contracts slid to a 1-week low of $80.35 per barrel.

Copper also fell 1%. Silver prices fell below $24 an ounce for the first time since Wednesday before bouncing as European stock markets crept higher.

“This bubble will likely be pricked only when economic outlooks improve and unemployment figures in countries like the US drop below 8%,” reckons Mark Williams – a lecturer in finance at Boston University School of Management, and author of a new book on Lehman’s collapse – in today’s Financial Times.

But while “Gold in times of financial stability is hazardous to investor health…[and] this might come in 2011…it could take much longer.”

“Risk was sold” in Asia today, says one London dealer, as the Japanese Yen rose vs. all currencies and the US Dollar Index rallied from a new low for 2010.

The Euro briefly neared a 1-week low beneath $1.3850, down more than 3¢ from Friday morning’s 9-month high.

The correlation of Dollar gold prices with the Euro/Dollar exchange rate ended last week at a near-perfect +0.964, meaning they’ve been moving very nearly in lockstep vs. the US currency over the last four weeks.

That connection has only been stronger on 90 trading days since Jan. 1979.

“Gold has accelerated away from its uptrend line,” notes Phil Smith at Reuters Market Technical Analysis in Beijing.

“Turnover [in gold futures] is still huge, and the MACD on the daily chart [a measure of momentum] is still well bullish.

“But the market is hugely overbought and ripe for correction. The turnover drive is taking the market to levels of overbought not seen since the peak in 2009.”

Latest data from US regulators the Commodity Futures Trading Commission, released Friday evening, showed a new outstanding record in the number of US gold futures and options contracts now open.

Overall, the “net long” position in gold futures held by speculative, non-industry players rose to a near-record high of 1,015 tonnes equivalent, as a steep fall in the number of bearish bets held by private investors more than outweighed a drop in the bullishness of hedge funds and other “large” speculators.

New York’s SPDR Gold Trust – the world’s largest exchange-traded gold fund – ended last week holding 1301 tonnes of gold at HSBC’s bank vaults in London.

More than 2 tonnes down from Thursday’s two-week peak – and some 1.5% smaller than June’s record top – that still showed a rise of nearly 15% from the start of the year.

“The weekly chart remains bullish but the daily chart is actually confirming a bearish turn,” wrote Russell Browne in his technical analysis for bullion bank Scotia Mocatta late Friday, as the Dollar gold price “closed lower after [Thursday’s] Inverted Hammer” – a chart pattern more usually seen at the end of a downtrend, where prices shoot higher during the day, but close back where they started.

“For short-term traders the sell signal has been confirmed.”

But although the performance of spot gold “was lackluster [on Friday] due to profit-taking,” counters Ong Yi Ling, an analyst at Phillip Futures in Singapore, speaking to Reuters, “I’ll still look at a bullish [short term] bias for gold so long as it’s able to stay above the $1350 level.”

Adrian Ash

BullionVault

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Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the mining-sector’s World Gold Council research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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