Bargain Hunters And Short Coverers Tee Off On Gold

Last Friday gold sank to five-week lows of $1175. Smelling a bargain, investors and traders stepped in today and began snapping up the yellow precious metal. They sent it up almost 2%.

The brightest side of today’s action for bulls is that the great, great majority of the rise came through regular trading although a weaker dollar lent a small bit of assistance.

We’re not optimistic for gold to maintain this level or go higher right at this moment because tomorrow begins the FOMC’s April meeting. Regardless of what the concrete outcome of the two-day session, which winds up on Wednesday, speculation in the markets will probably be skewed toward hawkishness on Fed rates.

Without chiming in with our two-cents on realities for the moment, the rise today is a little odd because one would think that normally this would be a day when gold and other precious-metals traders would be positioning themselves for the unexpected. In the case of gold, that would mean staying on the sidelines.

Experience tells us that if the press release and statements by the chair of the FOMC – Janet Yellen in this case – are initially read as hawkish, a day or two later they are read as dovish. The same but in reverse holds true if the statement is first read as dovish.

So, the bottom line: the next two to four days will provide us with uncertainty in the precious metals.

The grating and grinding sounds coming out of Europe concerning a Greek debt deal remind us that Greece is still a problem child. So, the machinations produced a decent amount of haven buying in gold. However, Greece is replacing its negotiation team, presumably with one less annoying to the rest of the Euro zone team. That may be an indication Greece is beginning to crack.

One way or another, Greece and Europe have to come to some sort of understanding. We believe, though, that this is like a nail negotiating with a hammer. Greece is going to take a pounding no matter what. There was very strong physical demand in Asia overnight. That also helped boost spot prices. Last week the premium above quote was $1. Today it was $4, denoting brisk buying.

In markets elsewhere, West Texas Crude was down a bit, indicating the schizophrenia in the market. One side of the oil brain says rig counts in the U.S. keep falling and that raises prices. The other side of the brain says U.S. inventories are rising and that lowers prices. Inventories are now at a record 489 million barrels. That’s a 25-day supply. That’s a lot of oil.

As we can see from recent trading patterns, gold and crude are no longer trading in tandem.

The yield on the 10-year U.S. Treasury was down a touch, as well, indicating bond traders’ lack of faith in a Fed interest raise at this juncture. The dollar was down marginally, as we said above, although it gained ground on the yen.

An interesting developing story is Japan’s debt. It is near crisis levels. The country’s bonds were downgraded today by Fitch. That could have an interesting effect on gold prices in the longer run.

Wishing you as always, good trading,