By Allen Sykora
NEW YORK: Many analysts are still looking for gold to make a break of $700 an ounce, even though some apparent caution has emerged while the market works it way toward that price.
“Right now, the market is gingerly testing resistance around $685,” said John Person, president of National Futures Advisory Service. “Traders are cautious here. But it’s going to take one catalyst and this market on thin air can rally $20 or $30 and we’ll be over $700.”
Such an impetus could include further weakness in the dollar, any increasing of tensions in the Middle East, or any signs of a pick-up in global inflation, analysts said.
Funds have not been as active in gold lately as in the past, said Larry Young, senior trader with Infinity Brokerage Services.
“Because right now gold isn’t that active, a lot of the fast or fund money is not involved, so you’re not seeing the movement that you do when they’re going,” he said. “You can tell the difference when the funds are in play. Right now, they’re hands off, unless they’re doing options plays.”
Gold futures for June delivery rose $10.20, or 1.5%, to $689.90 an ounce on the Comex division of the New York Mercantile Exchange, the highest closing price for the most-active contract since May 17. June futures were on the verge of breaking through $700 back in late February, when they put in three straight daily highs between $698 and $699. But then came a tumble in Chinese equities, which in turn triggered stock selling around the globe, causing many investors to liquidate their gold holdings in order to have access to cash.
June gold put in a double bottom with lows of $641.20 and $641.10 on March 5 and 6. It has been gradually working its way higher since. However, it has now topped $680 five days in a row but has not reached $690.
Young looks for gold to not only eventually take out $700 but to climb much higher – “$800 at the minimum” – before the end of 2007.
“I like the slow, methodic pace that it has taken,” he said. “It really helps people who want to buy gold and traders who are building positions to get in at fair value.”
Young looks for investors generally to want to add gold to their portfolios.
“There is a growing contingent of people who believe the value of the dollar is going to continue to decrease,” he said. “Then there are geopolitical threats.”
Tensions in the Middle East are the most obvious political concern, he said. This not only prompts safe-haven buying, but can boost crude oil, which in turn tends to support gold. Other global worries include weather threats and ongoing concerns about possible terrorist attacks, Young said.
Ralph Preston, senior market analyst with Heritage West Financial, doubts whether gold will break $700 yet this week, but figures it will do so sometime in the next month or so.
“It looks like we’re having a failed breakout here around the $686 level,” he said. “It looks like it’s running out of steam. If we don’t see a break here to the topside in the coming days, I would think we’re going to back off and look for some support.”
The market appears to need some impetus to trigger heavier buying, he said. This could occur if the recently softer dollar were to “take it on the chin” further or if a military escalation should occur in the Middle East, he said.
Preston anticipates a break of $700 “in the next four weeks, at the most.”
“If you put everything in perspective, in 2001 we were at $250 in the price of gold,” he said. “We have marched steadily higher since then. So the overall trend in the metals is to the upside. But in the short term, we are running into a little bit of an obstacle. But I would think within the next three weeks, we will finally get a reason to run.”
Person said a generally strong global economy and concerns about inflation are underpinning the metal.
“A real threat of inflation exists, especially after last Friday’s (US) employment numbers,” he said. The jobless rate fell to 4.4% in March. “Corporations are facing a squeeze in finding employees,” said Person.
The data reduced expectations for another Federal Reserve rate cut, he said. Meanwhile, interest rates are working higher in other nations.
All of this has contributed to a market slowly attracting buyers rather than a “hyperbolic buying frenzy,” Person said.
Demand for commodities in countries such as China and India is closely watched by the market, said Person. But, he said, economies are also expanding in other parts of the world, including some of the smaller European nations that may not yet be part of the euro-currency system.
“These are countries warming to capitalistic ways and people are starting to appreciate their net worth,” Person said.
For a while, some traders were looking for the market to break lower into the $620 area, he said.
“It just doesn’t seem to be coming. So investors are being attracted back into the market because of these issues.”
Blanchard & Co, a large retailer of rare coins and precious metals in the US, put out a report on Wednesday saying that it looks for investors to remain buyers of gold and other precious metals.
Mixed signals on the US economy and inflation have resulted in some comparisons to the economic environment in the late 1970s, and gold should benefit from any “stagflation,” said Donald W Doyle Jr, Blanchard chairman and chief executive. But even without this, there are other factors that could help gold continue a five-year trend of 19% annualised growth, said Doyle.
“Geopolitical tensions in the Middle East, spiking oil prices, dollar weakness, global interest-rate uncertainty, creeping inflation, and flagging US economic expansion were the order of the day in 1978,” Doyle said. “At first blush, today doesn’t seem to be much different than almost 30 years ago.”
A Comex monthly spot continuation chart shows gold rose from $105 an ounce in 1976 to a record $875 in January 1980.
Now, Doyle, he said, a shift in the supply/demand picture may allow price increases to become sustained moves rather than price spikes. He cited reduced central-bank sales, slumping mine production and the liberalisation of gold ownership for Chinese citizens.
“Most investors haven’t joined the party and benefited from the annualised growth the market has seen over the past few years,” Doyle said. “When they do, the precious metals markets should surpass the old 1980 highs and set new records over the long term.” – Dow Jones Newswires |
