Gold breaks resistance $650/ounce
31 January 2007
Gold extends gains in electronic trade after FOMC
Source: MarketWatch
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Gold futures extended their gains into the electronic session Wednesday following news that the Federal Reserved decided to keep overnight interest rates steady at 5.25%.
Futures prices for gold had ended the regular trading almost $8 higher – at their highest level in two months, finding support from strength in crude and some weakness in the U.S. dollar.
After regular futures trading ended, the Federal Open Market Committee on Wednesday kept its benchmark federal funds rate unchanged at 5.25% and made only modest changes to its policy statement.
"With the Fed keep rates steady and reiterating their concerns on inflation, this combination is providing some extension of today's earlier gold rally higher," said Peter Spina, chief investment strategist at GoldSeek.com.
"The market reaction is putting pressure on rates which is resulting in weaker bids for the U.S. dollar," he said, adding that "the announcement appears to be what the market was expecting out of the Fed, no real big surprises here."
After the announcement, gold for February delivery last traded at $653 an ounce in electronic trading. The contract had climbed $7.80 in the regular session to close at $652 an ounce on the New York Mercantile Exchange.
Prices only slightly pared gains by the close of the regular session, after trading as high as $655.50 – the contract's highest intraday level since Dec. 1.
February gold finished last month at $638 so it ended January with a gain of 2.2%.
Most of the trading volume has now moved to the April contract, which closed up 1.2%, or $7.70, at $657.90 an ounce. It's ended 2.1% above its Dec. 29 close.
In electronic trading April gold last traded at $658.20 an ounce.
"Inside the U.S., all is well and the economy is looking good, but this means that the trade deficit will not look good as a healthy U.S. means a constant and maybe bigger trade deficit, lower dollar, higher oil and a strong gold price," said Julian Phillips, an analyst at GoldForecaster.com.
"As to the big picture, this is like the man who fell off a 50 story building and as he passed the 12th story was heard to say, 'so far, so good'," he said. "This [Fed] news was negative to the dollar and gold positive."
Jon Nadler, an investment-products analyst at bullion dealers Kitco.com called the news "a bit of a yawn and perhaps not worth the several days of holding back for traders."
For now, gold can "go ahead and finish its second attempt to vault over $655, barring any unexpected dollar strength in coming sessions," he said.
"Then again, the previous profit-taking did take place from the same values, all the way down to the $640s," he said.
For the gold market, "the focus remains [on] $675/$676," said Spina.
"With oil nearing $60 again and a vulnerable U.S. dollar, we could be nearing another explosive leg higher," he said. "Until that time arrives, gold will be well supported on pullbacks."
The market believes that no raise in interest rates is bearish for the dollar and positive for gold, said Phillips. "But remember, it is the dollar and oil that the U.S. market follows as we can see again."
Crude-oil futures closed above $58 a barrel Wednesday as traders focused on the first decline in distillate inventories in seven weeks following the recent cold snap.
In currencies trading, the dollar moved lower against its major European rivals.
Gains in gold and weakness in the dollar Wednesday came despite conflicting U.S. economic news.
The U.S. economy shook off a summer slump and surged ahead at a faster-than-expected 3.5% annual growth rate in the fourth quarter, the Commerce Department estimated Wednesday.
But in January, the economy in the Chicago region contracted, according to a survey of purchasing managers of firms based in the region.
IMF proposes gold sales
The market also appeared to be mostly unfazed by report released Wednesday afternoon, in which the International Monetary Fund proposed the sale of about 400 metric tons of gold to help fund its activities. The current market value of the gold amounts to $6.6 billion, it said.
"Investment profits from its sale could yield a real return of some [$195 million] a year," the report said. But the "limited gold sales should ... be coordinated with current and future central-bank gold agreements so as not to add to the volume of sales from official sources," it said.
The proposal is "not a done deal," emphasized Kitco.com's Nadler.
But the news is significant "because 400 tonnes is about what all central banks can sell in a year (500T) – thus it would double official sector disposals in the marketplace," he said.
Then again, GoldSeek.com's Spina questioned whether such a proposal would work.
"The past attempts always came to the same argument that the IMF will never get support from the U.S. government to proceed with such an action," he said.
And "people should understand this point clearly: the IMF has no gold reserves," he said. "All IMF gold is owned by member countries and pledged to them. That is why the U.S. Congress must approve any sales of 'IMF gold', which really is the gold of the citizens of the U.S."
Indeed, "previously-floated proposals to sell gold for debt relief were met with resistance by numerous organizations, including the World Gold Council, who has warned that such sales would hit highly-indebted poor country nations hard and may well outweigh the very benefits of debt relief," said Nadler.
"In any event, there appears to be a growing trend toward mobilization of at least some of the gold that the IMF currently holds," he said.
And "aside from the initial psychological impact on prices the market could well digest the tonnage in an era when private investment around the world is willing and able to consume about 105 tonnes per month," he said.
Against this backdrop, other metals ended the regular session mainly higher, with March palladium as the lone loser, down 70 cents to close at $340.55 an ounce. It's fallen 0.6% from the end of December.
March silver closed up 19.5 cents to $13.57 an ounce, up 4.9% for the month, while March copper futures finished at $2.5945 a pound, up 3.3 cents for the day, but down 9.6% for the month. April platinum added $1.70 to close at $1,182.30 an ounce, gaining 3.3% for the month.
On the supply side, gold inventories were unchanged at 7.43 million troy ounces as of late Tuesday, according to Nymex data. Silver supplies were unchanged at 113.96 million troy ounces, while copper stockpiles declined 275 short tons to stand at 36,135 short tons.
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