Gold Stays Strong - Pretty Much

Aug. 18, 2011 - PRLog -- After warnings from a Chinese foreign exchange official of the risks of holding too many dollars, gold remains generally well bid, supported by dollar weakness. Gold and silver ETFs notched another win Monday, starting out a new week near record territory. Gold prices hit a near-one-month high of $1548 per ounce in Asian trading on Monday – a 1.8% gain on last week's low – before dropping back when London opened, while stocks and commodities continued to fall after Friday's disappointing US jobs data. The US economy added just 54,000 jobs in May, according to non-farm payroll data published Friday by the Bureau of Labour statistics, compared to analysts' forecasts that ranged from 150,000 to 190,000. Speculations of a generous third quantitative easing (QE3) package will probably continue to grow if the negative tone of US economic news continues.

The U.S. currency has already struggled this year against expectations the Federal Reserve will keep rates low for a protracted period to safeguard economic growth. Gold tends to have an inverse relationship to the dollar, because it becomes cheaper for holders of other currencies when the U.S. unit weakens, and it is sometimes bought as an alternative asset. The showdown in Greece over its failure to achieve budget metrics attracted safe haven buying of the metal throughout the past two to three weeks, taking the Euro from the high of 1.49 in May to approximately 1.41 against the dollar as well as providing ammunition for firming gold prices above $1,520. Gold has been “persistently negatively correlated” with the euro since the start of the Greek crisis last year, and stabilization in the euro could be “a catalyst for it to decline. A weaker dollar provided some support for metals. Investors are also waiting to hear from Ben Bernanke. The Federal Reserve chairman is scheduled to speak about the economic outlook in Atlanta later on Tuesday.

However, short-term prospects for gold are still favourable. The metal has spent most of electronic trading in Asian hours in the black but fell as floor trading approached. Physical gold demand is also holding up strongly despite near-record prices, analysts say, particularly in the Asian markets, where appetite for gold has typically been sharpest.

There is another interesting market dynamic recently involving gold ETFs. Gold prices have “sharply diverged from equities and many commodities in the past two weeks. One explanation for this recent relationship could be low volatility in the stock market since gold-based ETFs would take enough of a hit in a margin-call driven sell-off to push it lower. Gold has rallied while most other financial assets have declined, pointing out a disconnect between stocks and the falling dollar, causing the unusual situation where the dollar is weakening and equities are in full-on retreat.

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