As the currency crisis continues in the European Union, gold trades sideways with an upward bias.
Even though the development in the European Union's (EU), to help Greece's solve its fiscal problem remained the center of attention last week, there were several other developments in the markets that went practically un-noticed. The price of gold remained off the lows of the previous week continued to trade in a mixed to sideways trend with some bias towards the upside.
While the European Union pledged their support for debt-stricken Greece, there was no mention of an immediate injection of hard cash. The markets were dissatisfied with the lack of a solid plan from EU and the Euro was sent broadly lower even though a deal was brokered between German Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou. Van Rompuy, the president of the European Union said that coming through with hard cash "is not necessary today." Greece has promised to do "whatever is necessary, including additional measures" to meet its targets, Van Rompuy said. The German Chancellor Angela Merkel said that the bloc was "not going to leave Greece on its own," but warned: "Rules are rules and the rules must also be respected." While the European Union indicated that it would take measures to protect the Eurozone, the markets hardly reacted to all this news.
There also remains some concern in the markets about the debt contagion that could spread to Portugal, Ireland, Italy and Spain. However, as the prospects of a default from Greece begin to fade, the Euro may well rebound from it's current oversold position, and that would benefit gold.
On Friday, China raised bank reserve requirement for the second time in a month in an attempt to slow lending. The central bank of China, the People's Bank of China (PB0C), announced that it is going to increase bank's reserve ratio by 50 bps effective February 25. This is the second time this year the central bank raised banks' reserve ratios as a means to curb lending. On January 12, PBOC increased banks' reserve ratio for the first time since June 2008 as new loans reached a record of RMB 9.59 trillion in 2009.
US retail sales rose more than expected by 0.5% in January with ex-auto sales up 0.6%. Japan households confidence improved to 39.0 in January. The Dollar index rallied to 80.75 and traders are looking for it to test the 82 level.
US crude oil inventories surged +2.42 million barrels, higher than market expectation of +1.56 million barrels. The market reacted initially with a sell-off but it soon rebounded.
In the meantime while currencies and equity markets tried to find some direction, and in the midst of all this news, the yellow metal traded higher in the week and almost breached the $1100 level. While it appears that the general sentiment towards gold is somewhat bearish in the short-term, the outlook for the long-term remains very good. What was most interesting in this battle for currency direction was the fact that while the dollar traded higher as per the Dollar index, the price of gold remained firm and edged up higher.
Investors tend to ignore gold as an asset class despite the fact that it has proven to be an effective preserver of wealth for centuries. And, with all this turmoil in the financial and currency markets, now is the time to allocate some funds to gold as well as silver. And, the first step is to accumulate a core holding of the physical metals. This can be done by buying bullion bars and coins. Then one can consider an exchange traded fund (ETF), and gold shares.
During the most part of last week, gold exhibited good support and upward momentum. I believe that the price of gold will soon test USD1100 followed by a move to the upside to USD1120. The medium outlook for gold looks as if it is going to trade between USD1050 and USD1150. For those who follow candlesticks, it appears that there were two bullish engulfing patterns in the week which normally indicate a reversal in a downtrend or good support.
About the author
David Levenstein is a leading expert on investing in precious metals .He brings over 29 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He is also a regular commentator on www.kitco.com and www.mineweb.com David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.