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Gold Futures Rise to $1,116 as Dollar Weakness Boosts Gold Price

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Wed, 03 Feb 2010 1:24:38 CST

Gold futures traded higher by $11 to $1,116 on the COMEX, fueling a rise in investments tied to the price of gold, such as gold stocks and gold ETFs. Following its best day of 2010 in which gold futures gained $21 the gold price continued its march higher amidst a weaker U.S. dollar and news of an unexpectedly dovish central bank meeting. The SPDR Gold Trust (GLD) and the Market Vectors Gold Mining ETF (GDX) posted gains of 0.7% and 1.5%, respectively. Meanwhile, Canada’s S&P/TSX Global Gold Index, the most widely followed basket of Canadian gold stocks, advanced $2.30 to $317.95 as Canadian-based gold producers were boosted by the rising price of gold.

Gold prices were bid up following overnight news from Australia, where the nation’s central bank released a surprisingly dovish policy decision. The Reserve Bank of Australia (RBA) announced it will maintain its benchmark interest rate at 3.75% - a move that none of the 20 analysts in a Bloomberg survey expected - signaling policymakers are focused on evaluating the sustainability of the strength of the economic recovery before raising interest rates further. The RBA’s decision was surprising given that it has been one of the only central banks around the world to move to tighten monetary policy in order to stem the potential consequences of inflation emanating from the easy monetary policies implemented during the financial crisis.

European economic data further served to support the price of gold this morning, as the Eurozone Producer Price Index (PPI) for December was roughly in-line with expectations at 0.1%. Prices of capital, intermediate, durable and non-durable consumer goods each increased 0.1% on the month while energy prices were the only item to decline, by 0.2%. This moderate inflation data provided further evidence to support market speculation that the European Central Bank (ECB) will leave interest rates unchanged at its upcoming monetary policy meeting this Thursday.

While the gold price has performed well over the past two days, Mark Hulbert - founder of the Hulbert Financial Digest - poured some cold water on the fire of gold bulls who believe the recent action marks the resumption of the uptrend in the price of gold futures. In his latest report, Hulbert noted that the average recommended gold exposure among the gold timers tracked by the Hulbert Financial Digest rose to 32.2% from a low of 18% late last week - which from a contrarian perspective is cause for concern.

As Hulbert explained, “This is not how sentiment typically behaves at market bottoms of more major significance, according to contrarian theory. The prevailing mood at such bottoms is one of skepticism, when any rise is treated as nothing more than a suckers’ rally to seduce the unsuspecting into investing before the bear market resumes in earnest. In contrast, it is a bad sign when, like now, gold timers are quick to declare that the worst is over. This is the source of the aphorism that bear markets like to descend a slope of hope.”

Another worrisome sign from a contrarian perspective according to Hulbert is the fact that his sentiment index reading of 18% last week was significantly higher than the lows seen at the end of the two previous corrections in the gold price - March 2009 at -17% and July 2009 at -10%. However, he also commented that this analysis only applies over the shorter-term - the next couple of months and that the gold price and gold futures could still be headed to $5,000 per ounce, as numerous gold bugs are presently predicting.