January 22, 2004
Dollar Bounces Threaten To Cut Gold Down By Many Ounces
Or why gold could retest $400 an ounce by February 9

I stand by my previous speculation that gold will retest $400 an ounce on many occasions before it holds (just as $300 an ounce was retested many times). However, a retest of $400 an ounce could be a healthy event -- as panicky speculators run to exits a more focused base of gold owners could take their place. 

That said, a retest of the psychologically and technically* important $400 an ounce level could also bring with it a great deal of investor angst. This is especially the case given that two important events loom large.

G7 & Washington Agreement

The key concern for the gold market in the near term is the upcoming Group of Seven meeting in Florida (Feb 6-7). If central bankers can arrive at a basic doctrine with regards to the price of the U.S. dollar the price of gold could suffer.  Quite frankly, a weakening dollar – and the investor fear associated with a weakening dollar - was one of, if not the only reasons why gold was able to reach a 15-year high of $431.50 an ounce on January 6.
 
Another concern for gold investors is the renewal of the Washington Agreement (expected before the official renewal date of September 2004).  Although the impact of Bundesbank’s recent announcement was largely expected and had a minimal impact on the price of gold, the threat here is that other central banks may soon line up and also announce gold sales (Societe Generale analysts speculate that France and Italy could request quotas to sell gold). Although no one is necessarily expecting central bankers not to renew their gold dumping agreement, the exact outcome is uncertain.

Outlook Uncertain

* ScotiaMocatta noted yesterday that a break below $405.50 could ‘encourage’ a retest of $400 an ounce, and that $400 an ounce represents a 50% correction of the $370/$430 range.  Technical analysis may be for the birds, but if enough investor’s believe that stops are lined up around $400 an ounce a self-fulfilling prophecy could unfold: meaning that deep pocketed fund buyers would not emerge until $400 is retested.

Suffice it to say, and thanks to some semblance of tranquility in the FOREX markets, the outlook for gold is not as bullish now as it was a few short weeks ago.  And although the rhetorical stand from European policy makers on the Euro has been unorganized/mixed at best, the probability of more tangible central bank policies arriving before February 9 exists. Should central bankers unite and volatility in the dollar/euro temporarily subside, the sell off in gold could be outsized. Alternatively, if central bankers leave the meeting intent on raising the stakes in the ongoing currency war, each subsequent bout of volatility in the dollar could draw more attention to gold.

If I were a betting man, I would bet that baring some unexpected financial calamity that gold will be trading in the 300s on or before February 9.  Quite frankly, and although I see no reason not to keep some gold/silver in your portfolio, there is something about central bankers scheming behind closed doors that gives me pause.


Related:
G7 positions on dollar ahead of Florida meeting Reuters
The Great Gold Conspiracy Has No End Game FallStreet


BWillett@fallstreet.com

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