The recent sell-off in gold could mean the correction is nearly complete
Sometimes markets seem to defy logic. Recently we have seen a "rush to safety" back into the U.S. dollar.
But, what is safe about the US dollar when the national debt of the US is approaching 12 trillion, unemployment is at 9.7% and the economy is not booming. Whether or not this makes any sense, the fact remains that we have seen a strong rally in the dollar since the beginning of December 2009 and this has put pressure on the price of gold.
The US job market contracted -20,000 in January versus expectation of 20,000 expansion.
December's figure was also revised down from -85,000 to -150,000. Unemployment rate dropped from 10.0% to 9.7%, which was the best number in five months. This combined with sovereign credit risks in European countries makes me wonder why investors are buying dollars.
Perhaps the answer lies in the current problem with countries such as Greece, Spain, and Portugal. Problems in Greece appear to be worse than originally expected and it seems that Spain's public debt will rise to 74% to GDP by 2011 from 54% last year while Portugal's will surge to 91% from 77%. Obviously this has triggered some panic selling in the euro which has boosted the dollar and in turn put pressure on gold.
In addition to the slide we have seen in the Euro, crude oil price tumbled to around US$71, the lowest level in more than a month. On Thursday crude dropped nearly 5% the biggest one-day drop since July last year. There was further selling on Friday and WTI March contract closed just above $71 per barrel.
Although the prices of gold and oil don't exactly mirror one another, there is no question that oil prices do affect gold prices. If oil prices rise or fall sharply, investors can expect a corresponding reaction in gold prices, so it is not surprising that gold was sold off. However, after hitting a low of US$1044, April gold ended up at USD1052.
As governments around the world continue to fund their operations largely with money created by issuing debt, they raise rates to attract investors to buy this debt. But, as this debt increases, so does the risk for investors. For this reason, I like gold. Even though we have seen a sell-off recently, in the long-term, the prospects for a higher gold price look very good indeed. And as the gold price approaches the $1000 level, we may see some renewed buying from some of the central banks.
During last week, the gold price broke the technical support level of USD1075, suggesting that there will be a test of the next support level of US$1025. While it is not possible to predict price levels exactly, I believe that gold will find support at prices around US$1025 and that this correction is almost complete.
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