Look for gold at $1662 an ounce to continue its retreat tomorrow in the wake of last week’s rout and the coup de grace of another rise in margin on gold futures speculation at the commodity exchanges.
As gold began the year at $1400 an ounce and rose spectacularly to almost $1900 an ounce– a run-up of $500 or about 35%– there are evidently plenty of margin buyers who got in the game between $1400 and $1662 who are feeling edgy about getting margin calls just at the very moment Europe is in a swoon, and the stock markets everywhere are under great pressure. The next impact point is $1522- the 200 day moving average on gold prices. We’re in retreat for the time being.
Then, too, the dollar has rallied a bit, but is still below its high for 2011, suggesting that if the euro is under pressure, the offsetting trade will be to buy dollars. As I have written many times there is an inverse relationship between gold and the dollar. When the dollar is weak, gold as an alternative currency is strong. But, when the dollar is strong, gold appears to weaken– at least roughly 70% of the time. You should keep that in mind.
The bailout of Europe or parts of Europe is not set. Mr. Zhou, the governor of the People’s Bank of China said this weekend that it was too early to know fore certain if the $3 trillion PBOC would step in to buy sovereign bonds or bank debt. France, as well, declared it has no plans yet to recapitalize the French banks. It’s hard to tell if this uncertainty is good or bad for gold. It’s certainly bad for Europe, for European bank stocks, for European sovereign debt issues– and due to send mnore overseas cash into US Treasuries– drivng their yield down further.
The only good news for US equities is the slight decline in the cost of a gallon of gasoline to $3.54. Hope springs for a decline in West Texas Intermediate to the $60 a barrel level– which would help the price of gasoline ease to below $3.00. The lower the price of oil, the better for the US economy, as lower costs of fuel stock help the margins at every industrial producer, auto sales, airline travel and a host of other businesses. If food prices also decline, that would be beneficial to the American consumer just as the economy is headed into a soft patch that could last until well after 2012.
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