Thursday, May 31, 2007

Battle Royal: Gold vs US Dollar

Europe central banks to miss gold sale quota again
Thu May 31, 2007 6:10AM EDT

LONDON (Reuters) - Europe's central banks are again likely to sell less gold this year than an agreed annual limit of 500 tonnes, despite a pick up in recent weeks, analysts say.

"Overall, CBGA sales are most unlikely to be maintained at this recent rate. However, we could end the agreement year a bit above 400 tonnes, rather than at or below the level," Philip Klapwijk, chairman of metals consultancy GFMS Ltd, said.

Analysts said that probably a few banks were in a hurry to sell to maintain the ratio of gold in their total reserves, but most others would go ahead with their announced plans.
Gold's share in the reserves of central banks has risen in the past years due to a sharp rise in gold prices and a drop in foreign exchange reserves at some central banks following their current account trade deficits, analysts said.

Despite all the yada-yada we have all engaged in about central bank gold sales, ultimately Gold's place at any given time is most likely related to the US Dollar's place at that same time. More often than not, these two are inversely joined at the hip.

On May 1, 2007 The US Dollar bottomed intraday at 81.25. On May 6, 2007 Gold double topped with an intraday high of 690.80. Since that week the Dollar has clawed higher and Gold has slumped lower. This would be the most concise technical reason for the past month's frustration for gold bugs. Contract rollovers and central bank gold selling may have exacerbated the current situation, but in the end this pitiful Dollar bounce is what really has Gold in a bit of a bottle today. And speaking should be no surprise that the Dollar "bounced" when it did.

The gas tank on this puny short covering rally in the Dollar looks to by running on empty. But when it's easier to print money than it is to mine Gold one can never count the Dollar out. Technically though, this "dead cat bounce" should revisit the pavement soon.

Gold is showing some technical strength here. An inverse to the Dollars technical weakness. Gold has broken it's RSI downtrend line, and as is often the case this portends a breakout in price. Gold must close above 658 to confirm the break of the May 6th downtrend line. MACD is peering into the the bullish camp here, and a crossover would also confirm the trendline break. Stochastic is paddling up a mean river, but slowly making headway.

Many recently have pointed to Golds annual weakness in the June-July-August period. I say look back no further than to the summer of 2005 to see other wise. The run in Gold and Silver to the May 2006 highs began in June of 2005. I have suspected for some time that 2007 would mirror 2005. It is beginning to look that way more with each passing day.
Silver Resistance: 13.19 / 13.23 / 13.32
Silver Support: 13.11 / 13.05 / 13.00
_______________________________All prices SPOT
Gold Resistance: 658 / 660 / 664
Gold Support: 656 / 652 / 650

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