Broker's Notes: US dollar under pressure; gold remains firm

Gold

Gold continued to trade firm hovering near its strongest level in eight weeks hit the previous day, with worries that the US economic recovery was stalling likely to drive the metal to new highs. Silver rose to its highest level in nearly two months as its cheapness versus other precious metals attracted bargain buying.  Recent poor economic data from the United States stoked fears of a double-dip recession, which prompted some investors to ditch stocks and shift to bullion.

But gold remains vulnerable if investors have to sell positions to cover any sharp fall in equity markets caused by continued skepticism about the global economic recovery. One key fact that many investors forget before investing into the yellow metal is its status as COMMODITY. Being a commodity it needs to respect the theory of averaging that every other commodity succumbs to after every massive rise. It is arguable that the technical picture and the fundamentals are as sound as ever for gold especially given the increasing concern about the fate of fiat currencies, but it’s the physical demand (that still constitutes to over 65% of the demand) that has been ignored in this process. If the physicals markets are ignored, sustainability of any rise from here would be difficult and could trigger massive sell off.

The Bombay Bullion Association reported that India's gold imports in August are set to halve to about 17-18 tonnes from a year ago.  In August 2009, India had imported 34.2 tonnes. January to August, gold imports would amount to 187-188 tonnes, down 3 percent from a year ago's 193.4 tonnes, data from the BBA shows.

US dollar

The US dollar was under pressure after U.S. data on Wednesday heightened fears the world's biggest economy is at risk of another downturn. New home sales slumped to the slowest pace on record in July and durable goods orders were weaker than expected.  The dollar index, a gauge of its performance against a basket of six major currencies, edged down 0.3 percent to 83.035 Support is seen at the Aug. 24 low of 82.86 and the 82.00 level, while resistance stands at 83.556, a six-week high hit on Tuesday. 

Euro

The euro further recovered from a nine-year trough against the yen after data on Wednesday showed business morale in Germany improved to its highest in more than three years in August, offsetting concerns about fiscally weak euro zone countries. However investors have to note that all is not well in Europe. Yesterday’s S&P downgrade of Ireland once again focused the attention of the market on the sovereign debt problems of the periphery member nations frustrating the nascent rally in the pair.  There is no doubt that sovereign debt concerns remain the key negative factor weighing on the single currency

Yen

The yen slipped further from a 15-year high against the dollar as investors wait to see if Japanese authorities will go beyond trying to just talk down the currency. News that Bank of Japan Governor Masaaki Shirakawa will attend the Kansas City Federal Reserve conference in Jackson Hole, Wyoming, this week was making some players hesitant to push the yen higher. The Japanese government could urge the BOJ to ease monetary policy further to ease the pain in the economy from a strong yen in an economic stimulus package now being worked out.

Oil

Oil rose for a second day on the Dubai Gold and Commodities Exchange (DGCX) as equities gained and investors speculated that crude prices have declined faster than the slowdown in the global economic recovery. According to a report from the Energy Department US crude oil supplies rose 4.11 million barrels to 358.3 million barrels last week. Inventories were forecast to climb 300,000 barrels, according to the median market estimate. Tropical Storm Earl, the fifth named storm of the Atlantic season, developed “ahead of schedule” off the coast of Africa to join Hurricane Danielle on a trek to the west, the National Hurricane Center said.

Source: Richcomm Global, Dubai; www.richcommglobal.com