Korean, European Concerns Could Nudge Gold Higher Next Week

26 November 2010, 2:26 p.m.
By Allen Sykora
Of Kitco News
http://www.kitco.com/

(Kitco News) -Renewed hostilities on the Korean Peninsula and the ongoing European sovereign-debt saga are likely to remain in the forefront next week, and if so, should be supportive for gold.
Traders and analysts said investors are nervous that other European nations, such as Portugal, will need to follow Ireland in seeking financial aid to resolve debt issues. Meanwhile, North Korea, which fired artillery toward a South Korean island earlier this week, warned that U.S.-South Korean plans for military exercises put the peninsula on the brink of war.
“Obviously, this Korean story is not going to stop,” said Afshin Nabavi, head of trading at MKS Finance. “And the current European banking situation is also going to continue.”
Thus, he and others said, gold should find more support.
These issues also have contributed to strength in the U.S. dollar lately, and a stronger greenback in turn often puts pressure on gold. Some observers said, however, there have been times in the recent past when gold and the dollar have risen in tandem as both benefit from safe-haven flows, and this may well be the case in the coming days.


For the week, December gold futures on the Comex division of the New York Mercantile Exchange rose $10.30, or 0.7%, to $1,362.60 per ounce. This occurred even though the dollar on Friday climbed to its strongest level against the euro in two months. Gold was even higher until Friday, when gains in the greenback exerted some pressure on commodities collectively.
“We’ve had people move away from gold today as the euro weakened and the dollar strengthened,” said Bart Melek, global commodity strategist with BMO Capital Markets. “But I think there will be a reversal (higher in gold) even though I don’t expect the dollar to weaken materially at all. I think flows will move back into gold.”
Investors keep pushing up bonds yields for nations such as Portugal and Spain due to concerns about holding their debt. Furthermore, there is some uneasiness about Ireland itself yet due to political infighting about accepting any bailout.
“I think silver and gold are in a really good position for more upside, not based on the dollar but on what is going on in Europe,” said Bob Haberkorn, senior market strategist with Lind-Waldock, who also looks for gold to tick upward even if the dollar does likewise.
There is the potential for another interest-rate hike in China that could pressure gold in the immediate aftermath, warned Mike Daly, gold and silver specialist with PFGBest.
“But if in fact that does not happen, my feeling is the gold market will trade sideways to higher,” he said. “With everything going on in the euro region, people are using the weaker euro to buy gold to hedge positions or to move to safer havens.”

This also helped gold rise along with the dollar earlier this year when Greece was the focus of sovereign-debt concerns.
“That region (Europe) is very fragile, and I think it’s going to move the gold higher long term,” Daly said. This especially may the case since the U.S. economic situation “isn’t fantastic either,” with high unemployment and foreclosures continuing.
 Daly also said any actual outbreak of war on the Korean Peninsula would mean safe-haven demand for gold, even if the metal at times is pressured by gains in the dollar.
“Right now, it’s a battle of words,” Daly said. “If it actually comes down to hand-to-hand combat or firing missiles…you’re going to probably see the gold market fly.”
Some of the end-of-week weakness in Comex gold may be the result of liquidation of long positions ahead of first-notice day next week, Nabavi said. Traders, who do not want to take delivery, generally roll forward to the next most-active contract, which is February, or else exit their positions. By the end of Friday, much of this activity should be wrapped up, removing some of the near-term selling pressure in the futures market, Nabavi said.
“Come Monday, we’ll probably have a fresh start,” Nabavi said. “If the tensions continue as they are with North and South Korea, I wouldn’t be surprised if we test the higher end of the range…With the European situation, I don’t think a miracle will happen over the weekend. So the situation will remain. I don’t see any reason why gold should really come off in the near future.”
Still, some worry that more gains in the dollar could mean another pullback in gold. This trend could even continue for several weeks, said Tom O’Brien, analyst and editor of The Gold Report newsletter.
“When the dollar took off about a week and a half ago, gold got hit hard,” O’Brien said, fearing more of the same.
Monthly Employment Report Highlights U.S. Economic Calendar
Some of the major U.S. economic reports on the calendar next week include the Chicago Purchasing Managers Index and consumer confidence on Tuesday, the ADP private-sector employment report and Institute for Supply Management’s manufacturing survey Wednesday, jobless claims Thursday and the monthly jobs report and ISM service-sector survey Friday.
The Friday jobs report tends to be one of the most important to financial and commodity markets each month, and Haborkorn suggested gold might find some support no matter the outcome. So far, the consensus expectation is non-farm payrolls are rising by 165,000 in November. A strong report could help stocks rally, enabling gold to tag along. But a bad report might prompt more safe-haven buying, he said.
Melek said that gold could benefit from a rise in employment, with a Federal Reserve that appears committed to quantitative easing. “December employment numbers will show risks of risks of inflation down the road,” he said.
One other issue the market may keep tabs on is margins at Chinese futures exchanges, Haberkorn said. China announced hikes for several commodities, including gold and copper, that take effect next week. Should margins be hiked more than once, as CME Group did recently with Comex silver futures, this could mean pressure on the affected commodities, although in the case of gold it could be short-lived, Haberkorn said.
“It presents buying opportunities for people looking to buy physical bullion,” he said.

By Allen Sykora of Kitco News; asykora@kitco.com