Wednesday, Dec 10, 2008

By Allen Sykora

Of DOW JONES NEWSWIRES

Technically oriented buying helped push gold futures sharply higher Wednesday, with the impetus coming from improved risk appetite as stocks upticked during the early part of the day, a weaker dollar and higher crude oil, analysts said.

Most-active February gold rose $34.60 to settle at $808.80 an ounce on the Comex division of the New York Mercantile Exchange.

Initially, some of gold's strength appeared to be tied to an increased likelihood that U.S. automakers may get a congressional bailout, said Tom Pawlicki, analyst with MF Global. Thus, traders appeared willing to take on more risk, and this was also reflected in other markets, including equities and currencies, he explained.

"Stocks are up, so gold is up," says Dominick Cognata, broker with BCT Trading on the Comex floor.

"That's been the trend. Also, the euro is up and the dollar index is down."

Shortly after gold closed, the Dow Industrials were up by around 65 points but had been up by as many as 187.81. The euro rose as high as $1.3050, its strongest level against the greenback since Nov. 26 and well up from $1.2927 late Tuesday. Shortly after gold closed, the dollar index was down 0.556 point to 85.281.

Carlos Sanchez, analyst with CPM Group, cited other factors as well. There were reports of strong physical demand on the recent pullback to the area around $740 to $750, he said. And technical buying appeared to set in, especially as the futures accelerated above the $780 area. The market moved above the psychological $800 level for the first time since Dec. 1.

"You have the dollar retreating sharply," Sanchez said. "And you have an uptick in oil prices."

January crude oil was up $2.46 to $44.53 a barrel but was as muscular as $46.17.

Gold is also still seen as a safe haven, especially with yields on short-term Treasury markets around zero, said Sanchez and Gijsbert Groenewegen, managing partner of Silver Arrow Capital Management.

"That is indicating fear in the market," Groenewegen said.

In fact, amid the fears of recession, he pointed out that gold has held up far better than crude oil, one of the bellwethers for the commodities complex. Nymex nearby crude lost roughly two-thirds of its value from a record high of $147.27 a barrel this summer to around $45. Meanwhile, spot gold lost roughly one-fifth of its value from near $1,030 an ounce this spring to the $800 region.

Sanchez looks for a wide range in gold over the next several months.

The next upside resistance may lie around $820 to $830, he said. Some profit-taking could push prices lower again. There is also potential for losses on any further sell-offs in equities, such have occurred a number of times this fall, he said. "That's still a possibility, given that it happened in September, October and November," he said.

Yet, Sanchez said he looks for gold to eventually work higher over the next six months. There is likely to be further demand for safe havens such as gold and Treasury products amid the ongoing economic and financial uncertainty, he said.

But despite Wednesday's sharp run-up, Pawlicki looks for the metal to be held back in the next two quarters.

Pawlicki noted that many gold advocates have cited expansion of the money supply as a factor likely to lead to inflation. But at the moment, he pointed out, short-term yields are near zero. And, he said, Treasury Inflation Protected Securities are only factoring in annual inflation of roughly 75 basis points per year over the next decade.

"The only way to achieve that is to have a couple of quarters of negative inflation, or deflation," Pawlicki said.

He added in a research note that "inflation has yet to be seen in any government data and that the buzzword at the moment is deflation. In fact, money markets are currently exhibiting all the characteristics of a liquidity trap."

Meanwhile, March silver rose more modestly, gaining 35 cents to $10.20.

"Silver is following gold higher," Sanchez said. "But silver is weighed down as well by sluggish industrial demand across the world."

Whereas gold broke to the highest level since Dec. 1, silver did not get a technical breakout, with the peak of $10.28 remaining below Monday's $10.40 high.

Meanwhile, January platinum rose $27.50 to $840 an ounce, while March palladium gained $6.25 to $185.75.

The platinum group metals were pulled higher by the strength in gold, Sanchez said.

Nevertheless, he said, platinum remains in a range of roughly $800 to $850 due to offsetting factors, and palladium in a range of $170 to $190.

"The PGMs are still being weighed down by sluggish industrial demand, in particular from the auto sector, especially in the last couple of months," Sanchez said. "But support has been coming from some supply interruptions from South Africa."

These disruptions are from both output cuts in response to the price drop, as well as some operational issues, Sanchez said.

Whereas the auto sector has been a drag for the PGMs, a trader noted the increased prospect for an auto bailout has provided some support for now. 


 
Settlements (includes open-outcry and electronic trading): 
London PM Gold Fix: $785.75 versus $767.75 on Tuesday 
Spot gold at 1:32 p.m. ET: $809.55, up $32.45 from previous day; Range: $774.60-$813.55 
February gold:  $808.80, up $34.60; Range $774.20-$813.90 
March silver:  $10.20, up 35 cents; Range $9.815-$10.28 
January platinum:  $840, up $27.50; Range $811.40-$847.50 
March palladium:  $185.75, up $6.25; Range $177-$186.45

-By Allen Sykora, Dow Jones Newswires; 541-318-8765; allen.sykora@dowjones.com

(END) Dow Jones Newswires

10-12-08 1906GMT