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All Eyes On Gold


All eyes are on the gold market as we approach the $700 resistance area.

The metals sector was strong last week despite the Asian holiday, a stronger dollar and weaker oil.

Copper jumped 7.2% and surged through key resistance while nickel (+10.6%) and lead (+4.3%) made new highs. This time of year is traditionally supportive to the metals as Chinese demand tends to recover following its New Year celebration and construction typically picks up in Europe and North America as the weather turns warm.

All eyes are on the gold market as we approach the $700 resistance area. Currently there is talk of a Peruvian gold mine going on strike which would threaten supply and overnight AngloGold Ashanti (AU) posted a $97 million profit for the last quarter ending in March. In a bigger picture there are other supportive factors occurring.

More and more gold mining companies are limiting their hedging practices and last week the Granddaddy of them all, Barrick (ABX) unwound a large hedge and took a loss on the position. Prior to this Barrick had been active in hedging - selling much of its production at pre-determined prices. Now, however, it spent $557 million to get out of its hedging contracts and this allows the company to take full advantage of rising gold prices.

The Yen continues its slide and reached a record low in Europe and this, combined with a weaker US dollar, continues to support gold. In Tokyo gold is challenging 26-year highs and traders are buying gold as a hedge against the weaker yen. What I find interesting is that while many investors/traders look at the stock market in terms of value relative to gold or euros, the "public" traditionally does not. However, recently the media is highlighting these dynamics and people are starting to see that "value" is not necessarily what it appears to be. In the New York Times last Saturday an article titled, "A Comeback for the S&P (If the Yardstick is Dollars)" speaks volumes.

These articles are raising the awareness of gold as a way to measure value and more importantly, that it is rising relative to stocks, bonds and other asset classes.

China and India continue to be buyers of the yellow metal and even with tightening measures in China this does not seem to put a damper on demand. Money supplies are surging and while inflation numbers appear under control we cannot ignore the fact that 18 of the top 20 central banks have double-digit increases in their money supplies.

One inhibiting factor to the price of gold has been persistent legacy central bank selling. This has been a consistent theme where the legacy banks agree on an amount to be sold within a given year. As of the end of April 2007 the tonnage remaining of the announced sales will be down to 617.5 tonnes. Julian Philips of the Gold Forecaster writes that this may be ending soon. He emphasizes, "If sales continue at the rate we have seen over the last two months at around an average of 10 tonnes, these sales will last just over a year before they are complete and will terminate."

Finally, the technical picture looks healthy with gold consolidating above $675 and unable to go below $670 during April's break. As you can see on the chart below the trend remains up and corrections are becoming smaller.

Click chart to enlarge
Position in gold futures, ABX, AU

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