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Gold Takes the Spotlight Today

Tue, Nov 3 2009, 23:45 GMT
by James Hyerczyk

ForexHound.com

December Gold surged to a new all-time high after the Reserve Bank of India purchased 200 metric tons of gold from the International Monetary Fund. The purchase was worth about $6.7 billion. Traders at first were hesitant to drive this market higher until it became clear that this transaction could be the start of additional buying by other central banks.

The U.S. Dollar managed to hold on to its gains despite the strong rally in the gold market.  While the weaker Dollar has been blamed for the August to October rally in gold, stronger gold is no expected to drive the Dollar to new lows.  The fundamentals have shifted.  The Dollar is getting stronger because of investor aversion to risk while gold is up because of central bank demand.

Trading has been thin and rangebound this week ahead of tomorrow’s Fed meeting and Thursday’s European Central Bank and Bank of England meetings.  Investors are looking for the Fed to leave interest rates at historically low levels, but it may reveal a few hints as to how it plans to exit from their stimulus programs.  Interest rate traders are betting that the Fed will not hike rates until sometime after April. 

Today, the Dollar opened up higher based on a strong overnight trade. The Dollar gained strength after the Reserve Bank of Australia hiked its benchmark interest rate by 25 basis points.  This was expected by traders, but the guidance offered by the RBA suggested that additional rate hikes were not in the near-term picture.  Both higher yielding and commodity based currencies weakened on the news. 

Stock index futures traded mostly sideways under thin, choppy conditions.  Traders seemed reluctant to position themselves either way ahead of tomorrow’s Fed FOMC meeting.  Fear that the government’s stimulus money may be cut off soon is worrying investors. Many investors expect a rocky recovery which means that stocks may be overpriced.

Treasury futures finished.  Talk of the Fed ending its stimulus plans and pulling liquidity out of the market helped to push yields higher.  Traders want to know what the Fed exit strategy will look like.  This uncertainty is no doubt keeping traders on the sidelines.

Higher gold prices helped boost the crude oil market today.  Recently higher equity markets, a weaker Dollar and speculation were driving up the price of December Crude Oil. Take equities and the Dollar out of the equation and you have speculators.  Once again speculators are providing the support.  The supply and demand picture is still bearish. 

Published on  Tue, Nov 3 2009, 23:46 GMT