VTB Capital about Gold: Downtrend Is Still Intact
OREANDA-NEWS. February 12, 2010. Gold suffered losses in the past week, erasing all gains from the very start of February in a heavy sell-off at the end of last week. The December downtrend remained intact with yet another failed attempt to breach it at the start of last week.
The dollar was still stronger and the whole precious complex suffered, while the EURUSD cross slipped to lows just above USD 1.36 and the dollar index hit resistance at 80.5. The single currency was still weaker, remaining under pressure after the ECB left interest rates unchanged at 1% and ECB President Jean-Claude Trichet highlighted fiscal and debt problems in some Eurozone member states.
At the same time, the official US January unemployment reading fell to 9.7% from 10% in the month before, countering expectations for a rise. So, little wonder then that sentiment over Eurozone remains downbeat especially against the backdrop of improving economic conditions in the US, even though a recovery is going to take some time. In contrast to persistent concerns over the debt burden in some Eurozone countries, the US currency is faring better.
Also, we are certainly some way away from full blown inflation in traditionally hawkish Europe and in this respect the Eurozone will be less of a concern than the US where the Fed is likely to make its move sooner than expected. In this respect, gold’s appeal as a hedge against inflation will be less apparent, once the US central bank decides to move and curb inflation expectations, being one of the first central banks among developed economies to start large scale monetary tightening. This in turn will keep the dollar underpinned and gold’s prospects as an investment vehicle will lose more shine.
In the meantime, the bullion continues to trade against the US dollar, but despite a tremendous spike in volatility gold was still performing better relatively to the rest of the precious complex and especially silver after the gold to silver ratio neared 70 earlier this week. Yet, investors are still on the sidelines and seasonality has yet to kick in, signalled by improving physical demand from Asia. Importantly, the latest sell-off in gold went in line with losses in other commodities and equity markets, as risk averse sentiment had once more gripped the broader market. The bullion’s inverse correlation to the US dollar index had strengthened a little at the very start of February, nearing December highs around 74%.
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