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Gold Breaks Out Against The Odds

Commodities | Apr 05 2007

By Greg Peel

Writing in his daily newsletter yesterday, US trading guru Dennis Gartman stated:

“Should spot gold trade upward through $665, the bears on gold will find themselves in a rather awkward position, for at that point gold will be coming up through the top of "The Box" that marked the 50-62% retracement of the previous break. The gold bears have pinned their hopes on making certain that spot gold does not trade upward through that resistance. We’ve no doubt but that they will try again, later in North American dealing, to push gold downward ; but if they fail this time, and if gold should move upward through this resistance, going into the long weekend the bears may find that it is easier to accept defeat than to try to press their case.”

Spot on. Gold broke through last night and subsequently rallied over US$10 to close at US$673.80/oz – a jump of 1.5%.

The breakout was achieved despite the news that Iran would provide Britain with a generous Easter present (in keeping with Islamic tradition after the recent marking of Mohammed’s birthday) in forgiving the 15 captured British sailors and marines and handing them over unharmed. An easing of tensions should otherwise have seen the gold price ease as well but this was not the case.

The crude price did not react too strongly either, falling only marginally due to news that inventories in the US were not as expected. But what really sparked gold’s rally were the latest US economic data, which this time were poor. It’s a bit of a day to day proposition, this good/bad data thing, but it appears the general trend is for a weaker US dollar.

Last night brought us the Institute of Supply Management’s index reading for March. Anything over 50% means the US economy is expanding, and below 50%, contracting. The result came in at 52.4%, down from 54.3% in February. Economist consensus was for a rise to 55%. The data suggests that while the US economy is still growing, its growth is slowing.

Backing up the ISM data was the release of factory orders for February. These rose by 1.0%, but this was considered a negative as economist consensus had been for a 1.9% rise.

Subsequent weakness in the US dollar was thus enough to fire up gold, and once the top of the trading range was breached the sellers evaporated. Buyers would have also been heartened by yesterday’s release of the annual Gold Fields Mineral Services report for 2007, which continues to predict a stronger gold price and likely breaching of the previous US$725/oz high some time soon. Despite a fall in the volume of gold investment and in jewellery off-take, demand is still strong in US dollar terms. Full coverage of the GFMS report appears in yesterday’s article “GFMS Survey Suggests Price Should Go Higher”.

Despite the positive report from GFMS, what is even more remarkable in gold’s capacity to break out once more is the fact that once again central banks have been hammering the metal.

Blanchard & Co report that last week again saw heavy selling from European banks – some 17.5 tonnes to be precise – bringing the three week total of sales to 45.5 tonnes. To put this in context, the previous three weeks saw total sales of only 7 tonnes.

When central banks sold 50 tonnes into the market in September 2006, the gold price fell nearly US$30/oz. When 75 tonnes were sold in May 2006, the price fell more than US$100/oz.

Blanchard suspects France is the major seller, given Germany has indicated it will not sell and Spain and Portugal have shut up shop following massive sales last year. If so, France will be coming close to fulfilling its sales allotment for the year (ending September) under the Washington Agreement. With that obstacle removed, market observers believe there will be little holding back the gold price given Washington Agreement sales are expected to fall well short of the total 2007 allotment as they did in 2006.

Blanchard further notes we are heading into another peak demand season for the metal.

Will we get there this time?

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