Good Morning,

Gold's ascent continued for a second day on Tuesday, as the US dollar's rally ran into additional profit-taking selling and dragged the currency back down to near the 79.10 mark on the trade-weighted index. This morning's action in the spot metals markets saw a milder version of Monday's ISM reading-stimulated risk appetite-flavored gains, with gold adding $4.80 per ounce to start the day at $1110.40, silver gaining only 1 cent to open at $16.68 per ounce, and platinum rising $6 to $1555 the troy ounce. Palladium climbed $9 to $438 while rhodium remained unchanged for a second day at $2310.00 per ounce.

[Short-term] contrarian analysis tendered by Marketwatch's Mark Hulbert indicates that the latest spike in gold has been met with a chorus of cheers by the bulls - cheers which may not make for a very sustainable rally towards the lunar surface. Mr. Hulbert says that we should: Consider the jump just over the last couple of trading sessions in the average recommended gold exposure among the gold timers tracked by the Hulbert Financial Digest. From a low of 18% late last week, it stands now at 32.2%. This is not how sentiment typically behaves at market bottoms of more major significance, according to contrarian theory. The prevailing mood at such bottoms is one of skepticism, when any rise is treated as nothing more than a suckers' rally to seduce the unsuspecting into investing before the bear market resumes in earnest.

In contrast, it is a bad sign when, like now, gold timers are quick to declare that the worst is over. This is the source of the aphorism that bear markets like to descend a slope of hope. Another worrisome sign is that the gold timers, on balance, are taking longer to reduce their bullishness in the face of market declines -- and are cutting their exposure by less when they do. This suggests that gold bulls are becoming increasingly stubborn, which contrarians believe to be a telltale sign of trouble.

So, gold timers' positions are not losing too much ground despite the significant declines gold experienced in December and in January as well. The situation is not the same in the position balances of the gold ETFs out there. Overnight, we received confirmation from Belgium's GoldEssential.com that: Gold holdings in the fifteen by Goldessential.com monitored exchange-traded funds (ETF's) were seen dropping 1.25 pct in January 2010, the equivalent of 736,955 ounces or 22.92 tonnes.
Total monitored gold-backed ETF holdings stood at 1,816.71 tonnes.

By contrast, during the previous month, December 2009, monitored holdings had slipped 29,033 ounces or 0.90 tonnes (-0.05 pct). Earlier in December, gold holdings held on behalf of investors had peaked to an all time record high of 1,850 tonnes.

Despite the negative statistics cited above, The World Gold Council however remains of the opinion that gold's fundamentals remain strong. In a news release this morning, the WGC said that: Investor flows, specifically from western markets, have provided a key means of support during the course of the credit crisis as investors sought to diversify their exposures to other assets and protect their wealth against market shocks. [These} western investor flows have remained resilient even as the global economy has shown signs of recovery. Furthermore it said, evidence suggests that even the more tactical elements active in the gold market are being firmly driven by positive sentiment toward gold's fundamentals. Further price support was provided by a progressive recovery in jewellery demand after a pressured first quarter.

 

We will just have to await the release of the WGC's Q4 and full-year 2009 gold demand trends statistics and will try to glean from said reports exactly what the market's various fundamental supply/demand pillars were doing, before labeling the balance as 'strong.' Namely, we are most interested in the tonnage readings of mine supply, scrap flows, central bank reserve management, fabrication demand, and investment patterns. To the end of Q3 of 2009 such pillars were showing some serious cracks and revealed just how much of gold's price fate had been pinned on investment demand (a type of demand that is known to be cyclical, fickle, and subject to rapid shifts).

Not much ground was lost by the US dollar against the euro however, against which the greenback was still quoted at 1.394 at last check. The common currency's trials and tribulations are apparently not over, as Citigroup currency analysts envision it slipping to 1.36 in the not too distant future, on structural weakness and the on-going Greek debt issues.

NYU's Dr. Nouriel Roubini goes one step further and opines that: Economies including Greece, Portugal, Spain and Ireland are threatened by fiscal imbalances and declining competitiveness. But whereas Greece is a problem for the eurozone, Spain would be a disaster because it is the fourth-largest economy in the eurozone. Spain's unemployment rate stands at nearly 20%, and its domestic banking system is much weaker than that of Greece. The eurozone could drift essentially with a bifurcation, with a strong center and a weaker periphery and eventually some countries might exit the monetary union. This is the very first test of the single currency bloc.

Something else that could be tested in the near-term is the Chinese real estate bubble. Bloomberg reports that: China's property market bubble is set to burst as the government curbs credit growth and clamps down on speculation, according to independent economist Andy Xie. As bank lending slows, it's very difficult to see this demand continuing, Xie, formerly Morgan Stanley's chief Asian economist, told Bloomberg Television in Hong Kong today.

In other currency news, the Aussie dollar fell hard following the country's central bank's decision to stand pat on interest rates this morning. Meanwhile, the South African rand climbed to a two-week high, bolstered by advances in gold and platinum prices. Finally, analysts at JPMorgan do not see the Japanese yen's potential advance towards the 85 level as being hampered by the BoJ's plan to expand lending in order to try to climb out of the deflationary vortex the country has been caught in, for quite a while now. Speaking of deflation, inflation, and the dangers of tinkering with the monetary and fiscal machinery, read on.

As we have told you several times in these columns, there is a man worth watching within the ranks of the Obama administration. A man with the credentials and the wherewithal to do what it takes in order to right the hitherto listing dollar, regulatory, and economic ship in the US, and -for now- especially, the regulatory one.

Bloomberg now reports that: Paul Volcker is enjoying increased influence with the Federal Reserve as well as the Obama administration, central bank records show.  The former Fed chairman does have the backing of a number of Wall Street veterans. John Reed, 70, who helped engineer the merger that created Citigroup Inc. in 1998 and lobbied Congress to remove legal barriers between commercial and investment banking, said last year that he now thinks banks with insured deposits should be segregated from activities like trading bonds and stocks.

And, yes, you can very much read between the lines when Mr. V. says that: What seems to me beyond dispute, given recent events, is that monetary policy and the structure and conditions of the banking and financial system are irretrievably intertwined [as he told the NY Economic Club last month].

Something else we told you was inevitable and equally worth watching in the US Obama administration (aside from the Fed raising rates in the latter part of 2010) is its resolve to freeze or cut spending (heard last week -received with doubt by Republicans) and, now, its aim to hike taxes. Bloomberg reports that: The Obama administration seeks a $970 billion tax increase over the next decade on Americans earning more than $200,000 and wants to take in an additional $400 billion from businesses even as it retools a proposed crackdown on international tax-avoidance techniques.

The administration budget released yesterday would reinstate 10-year-old income tax rates of 36 percent and 39.6 percent for single Americans earning more than $200,000 and joint filers making more than $250,000 as part of a broad $1.9 trillion tax increase proposal. It proposes to eliminate preferences for oil and gas companies, life-insurance products, executives of investment partnerships and U.S.-based companies that operate overseas.

Back to dollar-watch and gold's ability to close above the $1117 level, or, perhaps its inability to maintain above $1100 per ounce. If you are in the short-term end of the spectrum of players, excitement will not be lacking, on an hourly basis, even. The bigger picture remains unconvincing on several levels for medium-term speculators.

 

Happy Trading.