Gold jumped to its highest in almost three months as debt concerns in Euro zone triggered safe haven buying in the yellow metal. Gold is regarded as the safest bet in times of financial instability. The yellow metal has also benefitted from low interest rate environment in the United States, though a firm dollar could still trigger some selling.
On one hand investors purchased gold in anticipation of economic growth leading to increasing demand for raw materials, but on the other the rally in yellow metal was capped due to a strong dollar which makes commodities denominated in dollar expensive for holders of other currencies. The dollar index which is the benchmark of dollar?s performance against the basket of currencies has been in continuous uptrend since late November. The biggest boost to the dollar index came from euro which carries the highest weight in the index, as it traded near 10-month low against the greenback. Fiscal health of some Eurozone economies has weighed heavily on the euro so far this year and will continue to pressurize the single European currency.
Bullion?s recent rally can be negatively impacted due to two reasons. First, the main contributor to gold’s rally towards $1,200 an ounce was Central banks buying of the yellow metal as a reserve. It was widely expected that China would buy the remaining IMF gold. But sentiments faded away after a Chinese official, said China, will not buy gold as a component of its official reserves. Secondly, the yellow metal registered record highs last year as a hedge against inflation on back of the huge stimulus spending by governments across the globe, but now with decline in inflation levels and gradual scale back of stimulus, gold may lose some momentum. The core personal consumption index indicated a low inflationary environment level in the US Gold becomes unattractive as a hedge during the period of low inflation.
On the investment demand front buying in ETF?s has registered a record as the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust holdings hit an all-time high of 1141.041tonne as of April 9.
The holdings had hit a record of 1,134.03 tonnes on June 1, 2009. A rise in ETF holdings to record reflected a steady investor?s interest in gold. Bullion?s fall below $1100 was regarded as a good value zone from physical buyers of the metal especially from India ahead of the wedding season in April.
As per April 9, 2010 CFTC data the net speculative long position in gold rose by 37,215 contracts to 2,44,906 contracts as compared to 2,07,691 contracts as of March 30, 2010.Looking at the continuously rising speculative positions we expect the yellow metal will be exposed to more volatility amid the ongoing uncertainty over the outlook for the global economy.
Technically, COMEX gold in March 2010 was been very volatile and consolidated in the range of $1094 to $1,144 an ounce as it failed to sustain below or above the crucial levels. But in the last week it broke the upward band of $1,144 and has consistently traded above those levels. Break of $1,144 has opened the doors for $1,174, the next upside target.