FX: Gold Rally Resumes As Dollar Continues To Slump
After a pausing for a couple of sessions, Gold investors once again stepped up, to drive the yellow metal higher. Futures rose back towards the record highs, gaining more than $8 overnight to trade at an intraday High of $1,069.
Investors who have been following the most recent rally will not be surprised to see the corresponding decline in the US dollar. The overnight decline in the ICE US Dollar Index was primarily led by a strong Euro which pushed down the Dollar towards a 14 month low in USD:EUR. On London’s Intercontinental Exchange (ICE) the Dollar index has recovered slightly after trading below 75.30 throughout the early hours of the morning.
While the weak US Dollar is providing a fundamental base to the rally, there is also a definitive speculative element to it also. The level ‘net-long’ speculative trading is at an all time high, with reports suggesting that Hedge funds and institutional traders hold significant speculative positions.
Also in an interesting move, the CME Group announced yesterday that it will now accept Gold as trading collateral for exchange members for all its exchange products. This is the first time a recognised exchange has allowed the commodity as an accepted collateral asset. Under the new ruling the CME will allow each exchange member to lodge up to $200m worth of physical Gold as collateral against its open trading positions.
Famously the highly valued yellow metal has been regarded as fairly useless in a practical sense however as an asset class it would appear that Gold is gaining stature. Analysts identified the fact that the eligible exchange members will already have substantial physical Gold holdings and subsequently the CME’s decision will not have an immediate impact on demand.
Crucially the CME’s decision highlights a growing theme in the global economy, with international investors turning away from America. Using gold bullion as a collateral reserve provides traders with another alternative to the US Dollar and US Debt Securities, which predominantly feature as trading collateral.
Last month several reports suggested that certain oil producing states were exploring a move away from a Dollar pricing mechanism in the Crude Oil market. Similarly in recent months, a number of international Finance minister have been reported to have questioned the effectiveness of the Dollar as a global reserve currency.
Some may argue that the US Dollar and US Government Bonds are becoming less relevant to International institutions, both in the investment industry and the wider economic organisations. Undoubtedly the US Dollar’s role in the global economic structure has been under the microscope, however at such an early stage many feel as though the line between political posturing and the potential for real practical measures will remain blurred for some time.
What is certain however is gold’s persistent appeal in this uncertain time for the US Dollar. The current high represents a 21% rise over the year to date. The more bullish analysts are expecting a sustained rally; some even expect that gold will rise a further 10% from today’s record breaking high, with prices speculated to reach between $1,100 - $1,300 an ounce before the end of 2009.
On the London Stock Exchange Gold equities have generally found strength in the overnight gold rally, FTSE 100 constituent Randgold Resources (LSE: RRS, NYSE: GOLD) and the FTSE250’s Petropavlovsk (LSE: POG) both rose almost 1%. Meanwhile Canadian based Yamana Gold (LSE: YAU, TSX: YRI, NYSE: AUY) was trading marginally higher, rising a quarter of a percent.
On the junior market, AIM’s Gold stocks have also been strong, led by Pan African Resources (AIM: PAF) who rose more than 4.5%, followed by Kazakhstan operating Frontier Mining (AIM: FML) advanced more than 3½%.
West African gold producer Cluff Gold (AIM & TSX: CLF) was also fairly strong, rising 3%. China focused exploration company Leyshon Resource (AIM: LEY), GoldPlat (AIM GDP) and Avocet Mining (AIM: AVM) rose around 2%.
