Gold Rallies to Seven-Month High on Buying Frenzy
By Jon A. Nones
21 Feb 2007 at 05:14 PM GMT-05:00
resourceinvestor.com
St. LOUIS (ResourceInvestor.com) -- Gold futures rallied almost 3.5% today to $684 an ounce, up $23 a day after losing nearly $12 on the New York Mercantile Exchange. This was the metal’s highest close since July 7 and very reminiscent of moves made when gold was hitting all-time highs of $850.
“Today’s gyrations not only hark back to last spring’s high-wire act, but bring to memory shades of 1979-1980 when daily moves of this type and magnitude were seen as more or less ‘routine’,” said Jon Nadler, analyst for Kitco.com.
Today, the U.S. Labor Department said inflation at the retail level increased 0.2% in January, while the core CPI, which excludes food and energy prices, rose 0.3%. Wall Street had been looking for increases of 0.1% and 0.2%, respectively.
In the geopolitical front, Iran vowed today to press on with its nuclear fuel program after a U.N. deadline to freeze uranium enrichment or face broader sanctions expired. This followed yesterday’s statements by President Mahmoud Ahmadinejad that he is open to resuming talks with western powers as long as no preconditions are imposed.
“Spot gold ignited on the heels of core CPI statistics and after Tehran's outright refusal to halt uranium enrichment and the pursuit of nuclear power,” said Nadler.
But he said earlier today that the CPI data was not enough to worry traders this much and it is too soon to really worry about Iran. He said buy stops were hit after a lot of people got short, but funds drove it up and squeezed them.
Nadler added that “the gold market's character now shifts to high volatility and possible de-coupling from conventional drivers.” Gold’s rise today was in spite of a rise in the value of the dollar.
The dollar rose to 121.05 yen in New York, from 120.02 yesterday, approaching the four-year high of 122.19 after Japan’s central bank upped its interest rates by a quarter percent to 0.5%. The U.S. currency also advanced to $1.3124 per euro from $1.3138 and traded at $1.9513 per pound from $1.9552.
“One thing remains fairly sure: the swiftness of electronic trading, the efficiency of order flows, and the impact of huge sums of fund-driven money cannot be understated in this bullion market,” he said.
James Turk, founder and chairman of GoldMoney.com, told RI there was some serious money waiting in the wings, “namely, everybody who missed the last $50 of this move by waiting on the sidelines instead of buying under $620.”
A lot of traders lost the opportunity to cover their shorts when gold began to rise, and they were forced to begin covering, said Turk.
“They haven't covered everything though, so gold should rocket over the next few days,” he said. “I've had a $715 target for month-end, and given the amount of shorts in the market that need covering, I expect that we will get there.”
In a market alert today, Peter Grandich, editor of the Grandich Letter, said he’s more bullish now than ever.
“I’m very impressed with its trading patterns, especially accounting for the occasional bear raids that are repelled within hours or days,” said Grandich. “The fact that the raids marked the lows, not the beginning of a more sustained downside move, is just one of the bullish factors.”
Recovering crude-oil prices also boosted gold today. Crude for April delivery closed up $1.25 at $60.12/bbl on Nymex after losing $1.32 yesterday.
Kevin Kerr, editor of Global Resources Trader, a newsletter published by MarketWatch, said traders are worried that with another U.S. carrier steaming toward the Straits of Hormuz, “anything could happen.”
“The tension in the Middle East is mounting and all signs are pointing toward attack,” he said.
Traders are awaiting weekly U.S. stockpiles data to see how the chilly weather of the past week has affected petroleum inventories. However, the U.S. National Weather Service is forecasting above-normal temperatures in the U.S. Northeast, which consumes 80% of the nation's heating oil, through March 5.
Grandich said he has taken off his “bearish hat” on oil but has yet to put on his “bullish hat.”
“I suspect we may work our way lower for the balance of 2006 barring a major negative geopolitical and/or weather event. Ideally, a retest of the $50 area after many months in an orderly decline would be the most preferred entry point,” he said.
In a morning update, Nadler noted that oil fell by about an equal percentage to gold on Tuesday. He said it appears that, at least for the near-term, the correlation between the two assets remains fairly valid.
Today’s gold-oil ratio comes to about 11.4 barrels per ounce. The 36-year average is about 17.5 bbl/oz, with last year coming in at 9.22 bbl/oz. Aside from a recent fall back, the ratio has been rising steadily this year, hitting a multi-year high of 12.5bbl/oz in mid-January.
Last week, Dennis Gartman, editor of the Gartman Letter, reiterated his belief that gold remains “cheap” relative to crude. He expects the ratio to move ultimately toward 20 barrels to one gold ounce. At current prices, this would put gold at about $1200/oz.
“As we've said countless numbers of times over the past two years or more, were we the counsellors to an Arab oil ministry we would have been arguing strongly in favour of selling crude oil as aggressively as possible while pricing it in gold,” he said.
“Of course no one has taken us up on that strong recommendation, but we are content to be long of gold and short of crude as the trade works rather relentlessly in our favour,” he concluded. |
