Bears Around The Corner

The bears appear to be moving in. Eager to retain their stranglehold on bullion, the bears are placing gold in a very vulnerable position at this point.

Though gold posted its biggest rally since October on Monday, with spot gold trading at $1,105.13, up 2.25 per cent, traders maintained that prices continued to trade sideways above support near $1080.00. Gold bugs have been advised to keep a close eye on $1,075.

On Monday, the Canadian stock market also received a lift from upbeat economic reports fron the United States, China and Europe.

Shares of Barrick Gold Corp (CA:ABX) gained 4.5 per cent, shares of Gold Corp Inc (CA:G) increased 4.3 per cent and shares of Yamana Gold Inc (CA:YRI) rose 5.4 per cent.

Analysts maintained that upbeat manufacturing data for the euro zone helped lift the euro and pressure the dollar. And a strong report from China failed to fuel recent fears that Beijing might further tighten lending to cool its growth.

Traders pointed out that as long as global interest rates stay near historic lows and boost the available supply of money in the financial system, gold would continue to receive support.

According to a study by the World Gold Council, “roughly 29 per cent of the movement in the price of gold is attributable to money supply.”

But in Tokyo, gold prices softened a touch on Tuesday morning, still hovering near $1,105 per ounce after posting their biggest daily gain in three months in the previous session boosted by an oil rally and dollar weakness.

Much remains uncertain as the market continues to digest the many economic parameters tracking global demand.

Had it not been for the healthy appetite from physical buyers on Monday, gold would have slid below its solid support.

Gold futures rose Monday as some participants re-entered the market in search of bargains after the metal lost ground for the past two months.

Global commodity markets continue to experience some turbulence, what with renewed caution over macroeconomic outlook and concerns over the impact of monetary tightening in China, considered the world’s mover and shaker of commodity markets.

Even though gold is traditionally seen as a safe haven in times of turmoil, it has been behaving much like other assets recently. It stumbles even with a slight sell-off in financial markets.

Oil high

On Monday, crude initiated its biggest rally in a month.

A bounce in capital markets and subsequent slip for the US dollar helped leverage a significant rally from the oil sector.

This substantive rally, from the floor of a long-term rising trend, would punch in as the largest single day advance since December 23rd. While there was plenty of fundamental fuel to support the session’s strength; the real source of optimism would come through underlying investor sentiment itself, analysts maintained.

A positive divergence on the RSI oscillator also suggests that a near-term bullish upswing may be ahead for crude.

The funding currency eased back from six-month highs against the euro on Monday morning as data impressed and traders looked to recover some of the losses the capital markets have incurred this past month.

Analysts warned the currency’s influence over the metal would actually go a little deeper. Moreover, the shift in investor sentiment would further have repercussions for gold through its connections to the safe-haven US dollar.

Gold prices have already fallen below $1,100 an ounce with continued long liquidation and less-committed speculators quick to exit. Base metals complex too is under pressure because of uncertainties over the effect of Chinese policy measures.

Bear in mind - We are not disputing that in recent months, the value of gold has skyrocketed. As a price per ounce, the latest price was $1,104.30.00 per troy oz. According to Goldprice.org, in the past year, the price per oz has risen from $852.70 to the current close, an increase of roughly 30 per cent. That sounds like a great deal, but one wonders for how long this trend will continue?

Moreover, the world’s largest gold backed exchange-traded fund, New York’s SPDR Gold Trust (GLD), said its holdings fell 21.7 tonnes or 1.9 per cent in January, against a rise of 63.36 tonnes or 8.1 per cent in the same month of 2009.

Analysts insist that sustained outflows from gold ETFs and sustained selling may undermine gold price.

Gold miners

Given that world gold mine production will continue to decline for at least another five years, an interesting report by Edison Investment Research reiterates that the valuation benchmarks on gold are obsolete.

“It is apparent that costs are much lower than the US$35/oz historically quoted as being the average cost of discovering an ounce of gold,” the report states.

An important note in the report suggests that Canada offers the greatest uplift in value for ‘indicated’ ounces (US$243.76/oz versus a maximum cost of discovery of US$13.70/oz).

In considering an average ounce, however, Australia offers investors the greatest uplift in value upon listing (US$191.75/oz versuss a cost of discovery of US$5.86/oz) - albeit only just ahead of Canada (US$196.90/oz versus a cost of discovery of US$12.26/oz).