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U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Gold Surges on Prospects of US Interest Rate Cut

Commodities / Gold & Silver Jan 29, 2008 - 09:18 AM GMT

By: Gold_Investments

Commodities Gold was up $16.40 to $926.90 per ounce in trading in New York on Friday and silver was up 27 cents to $16.68 per ounce. Both rose to new highs in the early hours of Asian trading overnight and gold surged to new highs at $932.95 in early European trading.


The Federal Reserve's expected 50 basis point interest rate cut tomorrow, the credit and property bubble implosion and the supply problems in South Africa are helping gold consolidate again near record levels. There is an unprecedented competing huge long and huge short position and the bulls are clearly winning with the shorts having lost billions in recent weeks. There could soon be a massive short squeeze where those holding the huge short position (some of the largest short positions in commodity history) are forced to buy back their positions in a panic which leads to a quantum jump in the gold price to thousands of dollars per ounce.

It is very significant that despite a decline in demand from the Indian subcontinent, demand from Asia and the Middle East remains robust. In Dubai, the gold trade increased 29% to $19.03bn in 2007. A total of 559 tonnes of gold was imported into Dubai in 2007, up by 14% from 489 tonnes in 2006. Even more significant is news that the Qatari Central Bank has diversified out of their huge hoard of petrodollars into gold. Qatar's gold reserves surpassed the QR1bn level in October last year, representing a more than 27-fold jump year-on-year and indicating a shift in the country's asset portfolio as a result of the weak dollar. The energy-rich country's gold assets with the Qatar Central Bank amounted to QR1.13bn in October 2007, a 20% jump from September 2007.

Qatar's faster accretion of gold reserves started in May-June 2007, the period that saw the beginning of serious subprime mortgage crisis when two Bear Stearns hedge funds collapsed. As was pointed out yesterday, central banks remain the largest holders of gold (although ETFs are becoming significant holders) and will again likely become net buyers of gold, especially in Asia and the Middle East as they seek to hedge themselves from macroeconomic and currency risk posed by the U.S. economy and currency.

The London AM Fix at 1030 GMT this morning was at $916.50 (down from $921.25 on Friday). Gold fell marginally from new record highs in British pounds and euro. It fixed at £466.55 (up from £465.28 yesterday) and €627.75(up from €623.22 yesterday).
http://www.lbma.org.uk/statisti cs_current.htm

The dollar is slightly weaker (75.53 on the USD Index and 1.4783 and 1.9876 versus sterling and the euro – see FX below) and oil (NYMEX February) has fallen 0.15% to $90.85 after yesterday's rally.

Support and Resistance
Strong support now remains at $840 to $850 which was previous resistance and interestingly the 50 day moving average (DMA) is at $839.61 and Fibonacci support is at $840. With the weekly close above $900, it now becomes technical support. A monthly close above $900, the first ever, would be extremely bullish and lead to $1,000 gold as early as the first quarter.

FX
The foreign exchange markets would appear to be marking time ahead of the critical announcement out of the Federal Reserve. Most economists and commentators expect “Helicopter Ben” to reduce U.S. interest rates by a further 50 basis points, following quickly in the wake of his 75 basis point cut last week. The Non-Farm Payroll numbers are also due for release this week and a 50 basis point cut followed by a week NFP should power the next assault on the Greenback. The euro is still hovering near its all time high and less than 2% from the psychological 1.5000.

Commodity currencies are still remaining well bid as both soft and hard commodities continue to trend higher. One notable exception is the weakness seen in the South African Rand caused in no small part by the current power issues, no pun intended.

Finally, sterling traders are still awaiting the Bank of England's interest rate decision next week. This could set the tone for further sterling weakness against the euro, something which is becoming clear as being necessary for a rapidly weakening economy. To paraphrase Jim Rogers, currency strength should not been seen as a measure of the virility of an economy but a vital tool of monetary policy.

Silver
Silver surged to new 27 year record highs at $16.72/$16.575 and is trading at $16.63/$16.68 at 1100 GMT.

PGMs
Platinum is consolidating at higher levels and trading at $1716/1720 as per above (1100 GMT). The continuing power outages shutting the gold and platinum mines in South Africa (the world's largest producer of platinum) will result in platinum continuing to be well bid.
Palladium was trading at $384/390 an ounce (1100 GMT).

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