Banking on Gold
Gold futures are higher for the third consecutive session, after the Dollar pulled back against the Euro in overnight trading. Despite the US currency's strength in recent weeks, Gold has remained resilient due to continued uncertainty in the US and UK banking systems. The market has reacted to Citigroup's plan to split into at least two units by pummeling bank shares. News that State Street's unrealized losses on its bond portfolio almost doubled sent financial shares into a tailspin yesterday, and indications that investors pulled more that $10 billion in assets from Merrill Lynch in the fourth quarter has done little to ease concerns. Large banks have used bailout funds to finance their acquisitions of other banks, instead of writing-off toxic debt and providing mortgage relief as originally intended. This has resulted in increased leverage for the sector, which is counterproductive and increases risks of bank collapses substantially. In the UK, the bank nationalization program has been disastrous for shareholders, and some market observers have suggested that the ambitious program has put the nation's treasury on the brink of collapse. These developments have made precious metals all the more attractive as a safe haven, but at the same time, lessened the appeal as an inflation hedge, as further banking collapses could suffocate economic growth. Industrial use of the metal is expected to remain weak through at least 2009, but Gold's demand as an investment continues to grow. Holdings in the SPDR Gold Trust have eclipsed 800 tonnes for the first time, a clear indication that investors' appetites for risky investments has eroded. The aggressive actions taken by central banks around the globe has resulted in devaluated currencies, making Gold attractive long-term. Long-term price outlooks for the metal suggest that prices may eventually eclipse the record $1,100 an ounce level set last year, but this may not happen until 2010 or beyond.
The daily February Gold chart shows that the market is likely to encounter resistance at both the downtrend line formed by highs in July, October and January highs, and at the September 25 low close of 887.10. If prices are unable to cross these thresholds, Gold may be range-bound for the foreseeable future. If prices do cross the downtrend line and offer further confirmation by breaking-through resistance, it could signal a reversal of trend. Last week's selloff pushed prices down to the 50-day moving average, which was held, suggesting the average may act as support going forward.
Rob Kurzatkowski, Senior Commodities Analyst
