Gold makes gains as risk appetite returns

Gold, silver, the noble metals, copper, crude and stock index futures all aimed to repair some of the recently inflicted price damage in the wake of what was deemed as ‘good news’ from Ireland and the wearing-away of some of the fears related to what China is up to, in its battle against inflation. Naturally, the principal driver for these market moves was, once again, the US dollar’s slippage on the trade-weighted index. However, it is not like there was no market movement that was not related to China in certain niches.

Yuan forwards gained overnight as bets rose that China will in fact raise rates one more time prior to year-end, in order to extinguish the inflationary trend underway in the country. At least one researcher from the Academy of Social Sciences has urged a tightening of the country’s money supply, aimed at that very same target. There were also reports that a draft plan for China’s property development for the 2011-2015 period is ready for presentation to the government.

Then, there is always the possibility that China might resort to a bigger ‘gun’ in its resolve to contain price runaways. ABC News alludes to “Another potential anti-inflation tool is even more politically volatile — allowing a faster rise in China's tightly controlled currency, the yuan, which would cut import costs. Beijing has allowed the yuan to gain about 3% against the dollar since June but has resisted pressure from Washington and others for a faster rise, which would hurt China's exporters and might cost jobs.”

Rising risk appetite had the greenback losing 0.44 to sink to 78.53 on the aforementioned index, albeit the larger trend appears to still favor an approach towards the 80-mark on the back of the euro’s current woes. While US dollar-sellers were once again manifest this morning, they still have their speculative hands full with the (dollar-positive) prospects of rising US yields, the erosion of growth in the eurozone and the possibility that contagion from the Irish situation might further undermine the European common currency. Some traders see the US dollar as trying to trigger a long-term bullish technical signal; one that could make for a similarly important inverse pivot point to look out for, in gold.

One item that may have been somewhat overlooked in yesterday’s reporting of the Q3 gold market statistics was certainly not overlooked by the analysts over at ABN/Amro/Virtual Metals. Their latest report covers the global gold hedge book developments (now down to only 5.5 million ounces, following the largest decline in the global hedge book in three quarters) and contains a word (or more) of caution:

“That AngloGold has sufficient confidence in the gold market for it to close out its hedge positions and gain full market exposure appears bullish for the gold price, but as the last gold major to unwind its book it also removes a key area of support. De-hedging has been an important source of gold demand in the past ten years, with about 105 million ounces of gold on a committed ounce basis having been bought back from the global hedge book since 2001.”

Gold spot prices opened $17.90 higher this morning, continuing a price bounce that commenced during the post-dinner hour last night. Spot prices were indicated at $1,353.70 and the yellow metal traded in a broader $1,348-$1,358 band before the New York open. Gold maintained most of its opening gains following the weekly jobless claims filings (which showed an increase of 2,000 cases for the latest reporting period – less than the forecast consensus and yet another indication that the US labour market is possibly on the mend).

The US economy itself might be more on the ‘mend’ than is being seen by conventional wisdom at this time. This morning, markets expect to learn that the October leading indicators will reveal an increase that might turn out to be the largest in five months’ time. As well, the report containing the details of the manufacturing activity in the Philadelphia region – also due this morning – could indicated a faster pace of expansion this month.

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