When The Truth Is Found...

The US dollar backed away slightly from the 79.50 level on the trade-weighted index and gold prices enjoyed a bit of an overnight respite from their two week-long fall as a result. Local buying ahead of the Chinese Lunar New Year added to bullion's ability to orbit near and maintain itself just above the $1080 price zone, but trading sentiment remained apprehensive following the second month of losses in value. Gold futures ended lower on Friday, after having touched a one-month low, due to the dollar-boosting effects of strong US economic data and jitters surrounding the US President's proposal to limit bank risk-taking, and trading operations, that include commodities.  

Questions surrounding the yellow metals' price prospects continue to surface, now that the ebb of physical demand in seasonal terms is nearly here, and given the continued outflows from exchange-traded vehicles. GoldEssential.com analysts summed up the current conditions in the market as follows, this morning:

Unless a more significant bout of dollar-consolidation heads our way, there is little belief that gold will head materially higher. So far, physical demand has prevented deeper losses, but Chinese Lunar New Year nears and may see active demand recede thereafter. Should speculative or investment demand fail to pick up from there, prices may come under extensive pressure.

Physical demand (aside from Year Of The Tiger-related offtake) shows signs that all is not well in places that matter. Reuters reports that: Gold retail volumes in Dubai fell in January as consumers remained sceptical about the yellow metal's fluctuating price level.  Branded as the city of gold, jewellery sales in Dubai have seen a run of declines since the end of 2008 due to the economic crisis coupled with record high gold prices.

Now we are seeing the price settle down a bit, but our sales are still down because consumers believe that the price will fall even further in the coming months, said Raiju K.R, showroom manager at BRR Jewellery, a gold retailer in Dubai's old gold souk.

GoldEsssential then goes on to observe that- as regards COT data: Speculative long liquidations have continued as prices declined. So far the description of a classic bear trend. The strong decline in open interest we see as a warning sign, certainly as it points to significant money being pulled out of the market at a time when sentiment seems fragile after the recent bull run. In our eyes, it makes the term cyclical high much more relevant, reflecting on the $1,227.50 December 2009 record high.

Goldessential continues to estimates the chances very real for a drop to the $1,000 an ounce support mark to take place later in the year, although remains unsure on whether additional downside below this level would be fundamentally justified.

On the technical side of things, as was expected, the break below the $1,015 price marker elicited a fairly heavy subsequent decline in values. At this time, near-term support has held up at the $1,073-1,075 levels, despite such support being fairly moderate in terms of bargain hunting. Thus, a deeper decline towards the $1,055 and ultimately the $980 level now appears more plausible, even if we can expect a bounce from current levels in upcoming sessions. Overhead resistance appears to be in the $1,095-1,097 area, and the metal needs to rise to above the $1,117 mark to get the bulls excited again.

New York spot dealings started February off with some decent gains this morning, as some attempts to recover from oversold conditions became manifest given the US dollar's apparent lack of energy for further progress to the upside. The greenback was off 0.15 at 79.32 on the index, and was last seen trading at 1.3922 against the euro. Gold opened with a $6.60 per ounce gain, and was quoted at $1086.80, while silver added 16 cents to start at $16.35 per ounce.

Platinum rose $18 to touch $1519 per ounce, while palladium gained $9 to the $423 level. Carmaker Toyota is expected to commence repairing millions of sold and unsold vehicles this week, to address unintended acceleration issues. The hope among traders is that such swift action will result in the resumption of sales by the auto giant. As things stand now, Toyota could lose nearly $2.5 billion per month in revenues. Rhodium continued at $2310 after having declined last week.

On the ETF front, the largest of the gold-backed exchange-traded funds, the SPDR Gold Trust (GLD), said its holdings fell 21.7 tonnes in January. This should be measured against a gain of 63.36 tonnes in January of 2009, when the fund experienced record gold inflows that covered the entire first quarter, over the fears surrounding the global financial sector. Reuters reports that: Analysts fear sustained outflows from gold ETFs if investors' attitude towards bullion sours, which could prove a drag on prices. Gold and silver investment demand has waned since the end of 2009, particularly as the U.S. dollar rebounded versus the euro, said BNP Paribas analyst Anne-Laure Tremblay.

In this context, most ETFs saw net outflows in January. Going forward, we expect gold to trend lower until the third quarter of 2010, and as a result, net investment demand generally for precious metals -- and therefore inflows into ETFs and exchange traded futures -- should be more subdued than at the same time last year, Ms. Tremblay told Reuters.

The story is somewhat similar over in the silver-backed ETF niche, where the largest such fund, the iShares Silver Trust (SLV), experienced a 107.99-tonne outflow from its holdings in January, as against additions of more than 660 tonnes in January one year ago. These declines in bullion balances took place concurrently with massive inflows into the two new platinum and palladium funds, where the tally showed platinum balances having risen to 244,941 ounces while palladium holdings climbed to 399,925 ounces.

Apparently, these days, history is being written much faster than it once was. Enquiring minds, evidently, want to know...sooner rather than later. Internet syndrome. Now, the summaries are coming our way about what exactly took place while the sky fell in 2008. Make no mistake, it did fall (up to a point) back then. As has been repeatedly posited in these columns during 2009, the clarion calls for TEOTWAWKI were basically one year too late when they were being issued and were being used to scare the pants off of investors. But, hey, it (headlines containing words like Armageddon followed by exclamation marks and five-digit gold prices) sells newsletters. The truth of TEOTWAWKI for 2009 was found to be...a lie. But, oh how close we came in 2008...

With barely a year and a half having passed since the dark days of late 2008, the findings are that they were very dark, indeed. Darker than anticipated, and closer to The End of Days than the most pessimistic of forecasts. Only, something strange happened. The firmament stopped falling. All of us survived to tell the tale. Including John Paulson, former Treasury chief. Bloomberg reports that Mr. P. had his hands full with the one fear that so often makes newsletter headlines: a potential run on the dollar. Didn't happen. And, if it did not happen during the most perfect of planetary alignments and storm conditions..., well, you know the rest...

Hank Paulson feared there would be a run on the dollar during the early phase of the financial crisis when global concerns were focused on the US, the former Treasury secretary has told the Financial Times. It was a real concern, Mr. Paulson said in an interview ahead of the release on Monday of his memoir On the Brink. A dollar collapse would have been catastrophic, he said. Everything that could go bad did not go bad. We never had the big dislocation of the dollar.

On September 15 2008, and on the Columbus Day weekend in early October, the global financial system was on the verge of meltdown.

Banks were going down like flies, Mr. Paulson told the FT. As his book details, he was scrambling to secure Tarp bail-out funds from Congress. The timing could not have been worse since we were months or weeks from the election so you had the collision of markets and politics. Mr. Paulson said that the turning point in the crisis came when - armed at last with Tarp equity - the US joined other Group of Seven nations to announce comprehensive interventions to guarantee bank funding and access to capital on October 10. Looking back, Mr. Paulson is confident that - notwithstanding criticism - the big calls were the right ones.  [This] Monday morning quarter-backing misses the point - that guess what, we did take the important actions that it took to stop the system from collapsing.

As for real currency trouble, go see the euro for a moment. Bloomberg reports that Investors are pulling cash out of Europe at a record pace as central banks slow euro purchases, jeopardizing its status as a substitute to the dollar as the world's reserve currency. Which, leaves what in the driver's seat by default? You already know.

A day of repairs appears to be on tap. Let's see how robust, and how sustainable.

 Happy Trading.