Gold traders are in for a rough ride -
Tuesday, November 9, 2004 9:45:44 PM
afxpress.com
SAN FRANCISCO (AFX) -- Gold futures have climbed to their highest levels in 16 years and are unlikely to stop there. But traders face a very bumpy ride ahead
Tensions in the Middle East, a downtrend in the U.S. dollar, and high oil prices have helped drive gold futures near $438 an ounce in New York -- their highest level since December of 1988
"In this since-long-unexplored trading area, gold could move in a very volatile and erratic way and play yo-yo," said Frederic Panizzutti, an analyst at MKS Finance in Geneva
Developments in the Middle East, with the U.S. offensive against insurgents in the Iraqi city of Fallujah and Palestinian leader Yasser Arafat reportedly near death, have provided hefty support for gold. "You've got a lot of fear out there that things are going to get worse in Iraq," said Charlie Nedoss, an analyst at Peak Trading Group. "Once you start talking about urban warfare, I think that gets people on edge," he said. Overall, the biggest factor in the gold market has been the perception that the dollar will weaken further, analysts said. "With the [U.S.] policy of benign neglect as to the value of the dollar, the market is now convinced in a continuing devaluation of the currency," Leonard Kaplan, president of Prospector Asset Management said in a note to clients Tuesday
He said the rally in gold is due "strictly and solely" to the decline in the dollar and as long as U.S. interest rates stay below the rate of inflation, the dollar will suffer and gold will shine
[This makes sense to me. Comments anyone? mish]
The dollar also needs to fall to keep the economic recovery on track, and it seems the Bush administration is content to let the greenback "softly fall," said Brien Lundin, editor of Gold Newsletter. Still, Kaplan urges caution among traders. "Watch the dollar as this will determine all," he said. Kaplan is in the "bull camp" for now, but recommends placement of some carefully crafted stop-losses, given the "massive" long positions held by large traders, which makes the gold vulnerable to sharp declines
Downside risk The risks for a price decline don't stop there. "There is a risk now that falling oil prices will help reduce the trade deficit, as well as undermine any inflation component to gold's strength," said Tim Evans, a senior analyst at IFR Markets
The recent strength in the stock market also represents a "competing investment, with potential that smaller investors might choose the stock market over owning gold," he said
For now, general economic growth and the decline in the value of the dollar could add another $10 to gold's price over the next two to three weeks, he said
But the market may also just as easily see a repeat of a move seen earlier this year, Evans said, when prices dropped from the $432 level in April to a low of $375 in May. "In other words, there may be a $10 of further upside potential, against perhaps a $57 downside risk," he said
[I doubt the comment on upside potential but the idea actually makes sense. Gold tops in Dec 04/Jan 05 when the FED overdoes hikes? mish]
Wagering on strength Given the odds of a continued downtrend in the dollar and Middle East uncertainty, however, traders aren't very hesitant in wagering on higher prices for gold
In the very short term, prices could climb toward $440 an ounce, said Panizzutti. Nedoss expects to see prices climb to $475 by July of next year, and also says "it looks like I might hit my target sooner rather than later." In the very least, this is a gold rally that is likely to continue through at least the first quarter of next year, said Gold Newsletter's Lundin, adding that the market has probably seen "intermediate-term bottom" for prices at around $430
Still, gold is prone to some pretty serious corrections along the way as the big funds move in and out of the market, said Lundin. He warns that gold's moves over the next several months will volatile
Instead, he recommends keeping a close watch on the "long-term prospects for the dollar and inflation in general."
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