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Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Bull Resliant As US Dollar Falls to Record Lows

Commodities / Gold & Silver Oct 31, 2007 - 10:14 AM GMT

By: Gold_Investments

Commodities Gold
Gold was down $4.20 to $784.40 in New York on Tuesday. Since closing in New York it traded sideways in the New York Access market, in Asia and early in Europe rose slightly to trade at $785.90 at 1100 GMT.

Gold is trading at £379.16 (GBP) and €543.86 (EUR). It is thus near record nominal highs in terms of GBP and EUR respectively.



Gold has stayed resilient with the dollar again falling to record lows and despite a sharp sell off in the oil market. Resistance is now at gold's record high price on Monday at $794.40 and psychological resistance at $800, while support is at the 10 day moving average at $771 and at $750. The fundamental tenet of technical analysis of all markets is to make the trend your friend. While there may a period of profit taking and consolidation the trend in gold remains firmly up.

Another sign that the gold market may not be overbought is the latest readings of the Hulbert Gold Newsletter Sentiment Index (HGNSI) which shows the majority of gold newsletters remain cautious on the gold price which is a good contrarian indicator. When the majority become bullish it may, and often does, signify an intermediate top in the price.

• While gold may be overbought in the short term, it may remain overbought for long periods of time as it did in the mid and late 1970s. For many months analysts predicted a sharp correction and they were proved wrong. In the course of the decade gold rose by some 3000% from $35 to $850 in less than 10 years. Were the 1970s experience to repeat itself the gold price would have to rise from its 2001 lows of $260 to over $6,000 per ounce by 2011. While this is unlikely unless there is a dollar crisis, it is more than likely that gold will at least reach its 1980 high of some $2,200 per ounce in the next 4 to 5 years.

• It is interesting that many analysts say that oil at some $90 per barrel is not high as it is only now reaching its 1980 adjusted for inflation high. Some of these same analysts forget this logic when applied to the gold market and say it is overbought or overvalued. Gold is some 1/3rd of its all time record inflation adjusted high and thus is historically undervalued and remains an extremely attractive investment for value investors looking to the long term.

• Goldman Sachs concur with this. Their analysts have said that while gold may be overbought in the short term it remains a good long term investment. "It is important to emphasize that we remain longer-term positive on oil, agriculture and gold and would view price dips as opportunities to re-establish long positions," it said.

• Britain's Gordon Brown received further negative press coverage from his imprudent decision to sell a large part of Britain's gold reserve at the very bottom of the market. The Daily Express said that Brown had cost the taxpayer more than £3billion by selling off half of Britain's bullion reserves just before the price of gold rocketed. As Chancellor, he sold 400 tons of gold between 1999 and 2001, raising £2.3billion to fund his lavish spending plans. This week, as bullion drew near a 28-year high price, experts calculated the loss to the Treasury resulting from his decision at £3.1billion. The massive shortfall is only £2million less than £3.3billion lost under John Major during Black Wednesday in 1992. With analysts forecasting that the price of gold will continue to rise until at least the end of the decade, Mr Brown's decision could turn out to be one of the most costly failed gambles in Treasury history.

With sterling likely to come under serious pressure in the coming years this dreadful, and some have suggested politically motivated decision, will be seen as very short sighted. Brown is likely to receive further criticism of the decison in the coming years. Other politicians and central bankers may pay heed and will be reluctant to make similar imprudent gold sales.

Forex and Gold
Expectations of a Fed rate cut sent the U.S. dollar to new record lows against many currencies (EUR 1.4467 and GBP 2.0741) and this is underpinning gold's appeal as a monetary hedge and safe haven asset.

Today is a busy day in terms of market data but the most important is this evening's FOMC statement. Expectations are that the Fed will cut rates by 0.25%. An decrease of 50 basis points could lead to intense dollar selling and is thus unlikely despite the U.S . housing market meltdown. The tone and content of the accompanying policy statement may be as important as the rate decision itself and could leave the door open for further rate cuts.

Today also sees some key U.S. data, notably the Q3 GDP report, the ADP employment report and Chicago PMI.

Data released this morning showed a surge in euro zone inflation in October beat all expectations, raising the odds for a rise in European Central Bank interest rates despite weakening sentiment. European Union statistics office Eurostat estimated consumer prices in the 13 countries using the euro rose 2.6 percent year-on-year, up from 2.1 percent in September and well above the ECB's target of just below 2 percent. The estimate, containing no detailed breakdown or month-on-month data, was higher than all 47 forecasts in a Reuters poll of economists, which gave a range of 2.2-2.5 percent. The jump was likely to have stemmed from food prices, whose sharp increases came on top of energy-related base effects.

Silver
Spot silver was trading at $14.30/14.32 (1130 GMT).

PGMs
Platinum was trading at $1438/1443 (1130 GMT).
Spot palladium was trading at $368/373 an ounce (1130 GMT).

Oil
Oil fell from recent record highs and was down by over $1 to nearly $89 a barrel. Proft taking, recovering Mexican oil output and an expected rise in weekly U.S. crude stocks were cited for the sell off.
U.S. oil futures dropped $1.34 to $89.04. Prices fell by 3.4% yesterday after hitting a record high of $93.80 on Monday. London Brent dropped $1.01 to $86.43.

Finfacts reported that oil industry experts predict a supply crunch in coming years due to underinvestment, skill shortages and difficult-to-access reserves. This is likely to keep oil above $100 a barrel for sustained period according to analysts at the annual Oil & Money Conference in London.

Gold Investments
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Gold Investments
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Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
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