Gold is up in Asian and early trading in London this morning. Gold was down a further $33.30 to $882.90 per ounce in trading in New York yesterday while silver was down 31 cents to $16.85 per ounce. The London AM Gold Fix at 1030 GMT this morning was at $893.50, £450.47 €571.04 (from $897.00, £453.90 and €572.32 yesterday).
Markets saw a return in risk appetite yesterday in the mistaken belief that the worst of the credit and financial crisis is over. There was further dollar strength yesterday and the usual first day of quarter equity bounce saw further selling pressure on gold which fell as low as $870 prior to recovering later in the New York session. The close below $905 is negative from a technical point of view for gold’s short term prospects and may result in the need for some more consolidation.
Some of the economic data in the U.S. yesterday (ISM for March, construction spending ) was not as bad as expected but the car and truck sales were very bad (down 5.4% and 17.8% respectively and Ford and GM sales were down 10% and 19% respectively; the 10th loss in the past 12 months) and show that the U.S. is likely in recession.
Today markets will look for guidance from the March ADP Employment report which is expected to show a loss of 45,000 jobs in March. It could be a precursor for a poor non-farm payrolls report on Friday.
Bernanke’s testimony to the Joint Economic Committee will be monitored. He will likely reiterate that the housing and financial slump still pose some risks to growth while inflation remains a concern. Markets are pricing in that the Federal Reserve will cut rates by a further 0.50% at the April FOMC meeting which would put further pressure on the dollar and be supportive of gold.
Yesterday we used incorrect percentage figures with regards to the previous corrections in gold’s current secular bull market. Previous corrections include the one in 2003 ( from $382 to $319 – 19.7%), in 2005 (from $536 to $489 – 9.6%), in 2006 (from $725 to $567 – 28%), and in 2007 (from $841-$778 – 8%) (see chart below).
These corrections put the current correction in context. Gold is down some 15% in the current correction and yet remains up more than 35% in the last year thereby fulfilling its safe haven role in the credit crunch.
We pointed out yesterday that after all these corrections there were short sighted analysts who claimed the end of the bull market and the ‘bubble’ had burst. They will be proved wrong again. Commodities follow long term cycles which are normally of some 15 to 20 years. This would see gold peaking in price sometime between 2015 and 2020 which seems likely given the extremely favourable macroeconomic and geopolitical fundamentals and the very tight supply demand situation.
Interestingly, respected currency and gold expert, Jim Sinclair has issued a challenge to the gold bears. “Gold will trade at $1650 before the second week of January 2011. I am offering a $1,000,000 USD wager with a financially qualified party that this will occur. Any party on Bloomberg, CNBC or CNN stating an opposite opinion on the price of gold should be informed of this challenge. Please communicate to any vocal bearish gold expert that I challenge them to put their money on their views.”
With U.S. interest rates set to fall further and pressure the dollar and with the U.S. in the early stages of what could prove to be a serious recession it is unwise to say that the gold ‘bubble’ has burst. Besides it is very difficult to have a ‘bubble’ when an asset class has not even reached its inflation adjusted high from 28 years ago.
Asset Class Performance in Q1 ‘08
Support and Resistance
Support at $900 was breached yesterday with the close below $900. Support is now at previous resistance at the 1980 record nominal high of $860. Resistance is at $905 and then at previous resistance at $970.
Silver is trading at $17.10/17.15 at 1100 GMT.
Platinum is trading at $1962/1972 (1100 GMT).
Palladium is trading at $442/447 per ounce (1100 GMT).
Continuing pullbacks in all the precious metals are almost certainly short term healthy corrections as the supply demand fundamentals remain extremely favourable (particularly to silver and gold) and pullbacks should be used as buying opportunities in order to protect against the coming recessions in the UK and U.S. which are not priced into the market as some more sanguine commentators would have us believe.