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Gold Heads for Monthly Close above $900 as US Economy Heads for Stagflation

Commodities / Gold & Silver Jan 31, 2008 - 11:25 AM GMT

By: Gold_Investments

Commodities Prior to the Federal Reserve's 50 basis point interest cut to 3%, gold was down $3.60 to $921.20 per ounce in trading in New York yesterday and silver was down 4 cents to $16.74 per ounce. Gold surged (from $920 to $934.25) to new record highs after the interest rate decision at 2:30 p.m (1930 GMT) in after-hours trading on the Comex division of the New York Mercantile Exchange (NYMEX). Silver surged to new highs at $16.87.


Both have seen profit taking and have since sold off in Asian and European trading. A monthly close above $900 tomorrow, the first ever, would obviously be very bullish from a technical point of view.

Negative real interest rates (with the key discount rate less than the rate of inflation) in the world's largest economy is very inflationary and could lead to gold reaching $1,000 in the coming weeks, as the dollar comes under further pressure. The moniker ‘Helicopter Bernanke' is looking more and more apposite as the Federal Reserve chairman again drops copious amounts of liquidity onto the increasingly troubled financial and economic waters.

The risk is that by attempting to prevent deflation in asset classes, the Federal Reserve ends up creating stagflation and a mild form of hyperinflation. Or even worse by endeavoring to protect the banks, stock and property markets they end up putting the dollar's position as the global reserve currency at risk.

The London AM Fix at 1030 GMT this morning was at $923.75 (same price as yesterday). Gold fell marginally from its recent new record highs in British pounds and euro. It fixed at £463.85 (down marginally from £463.94 yesterday) and €621.59 (down from €623.90 yesterday).

That the London AM and PM fixes are remaining strong shows that physical demand remains robust at these levels and that this is not a speculative bubble driven by hedge funds and institutions with short term trading horizons.

As expected the dollar weakened after the 50 basis point cut (75.12 on the USD Index and 1.487 and 1.9925 versus sterling and the euro) but not as badly as some had expected. Oil (NYMEX February) is down 1.1% to $91.26 this morning. Should the dollar break below support at its recent lows at 74.484 there may very sharp sell off.

Support and Resistance
Support is now at $900 to $915 and strong support remains at $840 to $850 which was previous resistance and interestingly the 50 day moving average (DMA) continues to move up and is now up to $844.43. A monthly close above $900, the first ever, would be extremely bullish and would likely lead to $1,000 gold in very short order.

Silver
Silver is trading near new 27 year record highs at $16.72/$16.78 at 1145 GMT.

PGMs
Platinum is consolidating at higher levels and trading at $1707/1717 (1145 GMT.
Palladium was trading at $380/386 an ounce (1145 GMT).

Gold Investments
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Gold Investments
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