by Alasdair Macleod, Gold Money:
On Monday, gold rallied to test the $1300 level, and silver $18.00.
Given the sharpness of the move up in the last week of April, it was hardly surprising that some consolidation was in order. Underlying this performance was the recent weakness of the dollar, which had a mini-bounce aided by a weaker yen, the yen having been rising strongly against the dollar this year so far.
Bearing in mind that a lower rate quoted in the foreign exchange markets means a weak dollar and strong yen, the yen has risen from 121 to the dollar to 105.6 last Tuesday since 30th January, an increase of over 10%. Therefore, a technical correction for the dollar is due, which can be expected to put some pressure on the gold price.
On the six trading days from the previous Wednesday to last Wednesday, open interest jumped 70,338 contracts. This represents 7,033,800 ounces, 218.77 tonnes, or about $9bn in paper money. Over the same time-scale gold jumped from $1240 to test $1300. This tells us that paper supply of $9bn were not sufficient to absorb buying demand without a $60 rise in the price.
As markets grasp these dangers, it is likely that the gold price will rise further. Market analysts will almost certainly attribute such a move to a receding fear of interest rate rises. If so, they will miss the probability that it is the dollar weakening, rather than gold rising. At least for European traders, this will clear the way for them to buy physical gold, with negative to zero cost of carry. It’s rather like being paid by the insurance company to insure yourself against financial disaster.
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