Gold-dollar relationship reminiscent of 2008

Gold futures rebounded by $1.30 on Thursday to end at $1,595.50 after falling 3.1% this week, the worst week for gold since mid-March. Stoxx and Euro/dollar also rebounded on some positive news out of Europe. The European Financial Stability Facility has approved the next payment to Greece, Spain nationalized Bankia and the socialist Greek Pasok Party leader, Evangelos Venizelos, may be able to form a unity government and have Greece stay within the Eurozone. Still, a Bloomberg poll shows that more than 50% of investors expect Greece will exit the Eurozone by the end of 2012.

Gold futures are now up only 1.8% for 2012, having sold off about 11% from its peak in February. Dollar index has climbed in 10 consecutive days as of Friday Asia morning. Last time this occurred was in early August 2008 when the world financial system was heading to an abyss. Gold fell 14% in the first 2 weeks of August, 2008 while the dollar index rallied 5% compared to a fall in gold price of about 4.5% and a rise of the dollar index of 1.9% in the past 2 weeks.

While gold price fell from the February peak, volatility of gold, as measured by the gold ETF (GLD) actually has fallen from 19% to about 14% as of May 3 until the volatility surged over the past few days. Declining volatility in gold may reflect lower speculative interest.

This lack of interest also is confirmed by the Commodity Exchange data. Total net long positions in gold options and futures held by managed money as of May 1 are hovering at 116,000 contracts, the level back at the end of January, 2009. In the next 8-11 months, net long contracts climbed more than 120,000 and gold surged about 30%.

Lower activity by traders and lower net-long speculative positions suggest gold is not a crowded trade.

Barclay's analyst revised down the year-end gold forecast by 8% to $1,716 as gold is behaving more like a risky asset. However, Goldman's analyst maintained his year-end forecast at $1,840 saying that gold is still the currency of last resort. Goldman also expects more easing from the Fed.

Next week, the events to watch are Greek politics, Eurozone preliminary Q1 GDP on Tuesday and the FOMC April minutes on Wednesday.

About the Author
Austin Kiddle

Austin Kiddle is a director of the London-based gold broker Sharps Pixley Ltd.

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