CORRECTION TO GOLD MAY NOW BE OVER

 
David Morris
The major US, UK and European stock indices have had a good start to the year with most seeing decent gains. Civil unrest across North Africa and fears that demonstrations may spread to other countries have been waved aside by investors. Even Friday’s dismal headline non-farm payroll number was passed off as a weather-related aberration, while the surprise drop in the US unemployment rate to 9 per cent offered traders the perfect excuse to “buy the dip.”

As equities grind higher, it is the rise in commodity prices that is hitting the headlines. Brent crude oil appears to be bedding in above $100 per barrel, while copper has hit fresh all time highs. The prices of sugar, rice, wheat, cotton and corn are all soaring, fuelling fears that inflation is taking hold, particularly in developing countries.

But it has been a different story for precious metals. Last year gold rose 30 per cent while silver soared 84 per cent. However, both have sold off sharply in the past month leading many analysts to say that a top is now in. Chart wise, both metals had seemed overdue a correction for a while. Well, now we’ve had one. Gold fell 8 per cent in January alone, while silver fell over 10 per cent.

It was a vicious shake-out which forced out both the over-leveraged and less- committed paper longs. However, the past ten days have seen a bounce leading many to hope that the correction is over. Silver held onto support around $26.50 and never broke below its 100-day moving average. It is now trading above $29 per ounce. A few closes above $29.80 could set the stage for an attempt to take out its recent highs. Gold broke below its 100-day moving average but bounced off $1,310. It needs to break back above $1,360 and $1,374 (its 100 and 50-day moving averages respectively) for the bulls to relax a bit. The fundamentals look stronger than ever with physical demand providing solid support. Central banks seem intent on devaluing their respective currencies in a bid to boost their relative competitiveness. Now inflation is taking hold, and as Ben Bernanke seems likely to argue for further quantitative easing, the bullish outlook is set to continue.