22^nd  January, 2007

Ø      Gold prices register modest gains of 1.24% for the week.

Ø      The greenback weakens against the Euro & GBP but strengthens against the Japanese Yen.

Following last week’s strong rally, the precious metals market witnessed a modest rise and ended the week with gains despite a sharp fall in crude oil prices. The yellow metal recorded a moderate gain of 1.24% for the week. Silver prices, on the other hand, just managed to close near its previous week’s levels registering a scanty gain of 0.04%. The currency market witnessed a mixed behavior from the US dollar as it registered gains against the Japanese Yen by 0.88% but trickled lower against the Euro and the British Pound by 0.36% & 0.90% respectively. During the week, the Exchange recorded a total volume of 8,645 contracts valued at $295.40 million (based on closing prices).

Trading began for the week on a hesitant note as DGCX February 2007 gold futures contract opened at $627/troy oz, lower by a dollar as compared to its previous week’s close. Prices initially declined to an intra week low of $620.90 but rallied thereafter through the remaining week to scale a high of $637/troy oz. On Friday, the contract settled at $635.80/troy oz – logging in a modest gain of $7.80/troy oz or 1.24% for the week. On the other hand, silver prices managed to end the week with negligible gains. DGCX March 2007 maturity silver contract started the week at $12.950/troy oz and dipped to an intra-week low of $12.500/troy oz before recovering to tack a high of $12.960. The contract concluded the week at $12.860/troy oz – churning in a scanty gain of half a cent per troy oz.

In the forex market, the DGCX March dated Euro contract started trading for the week at $1.2975/Euro and thereafter tumbled to a low of $1.2949 before scaling a high of $1.3030. The contract finally ended the week at $1.2996/Euro, registering a gain of 0.36%. DGCX GBP contract dated March ’07 opened at $1.9623/GBP and hugged a low of $1.9598 before mounting a high of $1.9769. On Friday, the contract concluded at $1.9740/GBP – up by 0.90%. DGCX Yen futures contract maturing in March edged lower by 0.88% for the week to settle at an exchange rate of $0.8310 for 100 yen.

The US dollar is likely to extend its gains from previous week as it climbed to its 4-year high against the yen. Traders reduced bets that the Federal Reserve will lower interest rates in coming months after reports last week showed US new home sales and consumer sentiment were stronger than the forecasts.

Ø      The US Treasury's monthly compilation of capital flows shows sizable foreign investment in US securities in November, amounting to $107.4 billion, purchases net of sales.  This is modestly more than October's $104.2 billion.

Ø      US consumer price index in US rose 0.5% after November's flat reading and was the first increase since August.  The monthly change was in line with consensus expectations at a 0.5% rise.

Ø      The UK inflation rate rose to 3% in December from 2.7% in November.

The IFO's sentiment index for Germany climbed to 109, the highest since records for a reunified Germany began in 1990.

World Markets in motion:

Gold and silver prices register weekly gains of 1.24% and 0.04% respectively. Analysis and comments from some of the experts in the field are as under:

Ø      Minerals consultancy GFMS expects the gold price to reach $670/oz in the first half of this year, although it doubts whether the recent peak of $725/oz will be exceeded. But if the situation in the Middle East deteriorates further, driving oil prices higher, gold could pass $725/oz later this year or early next year, opined GFMS CEO Paul Walker. GFMS said the main reason for any strong rally in the gold price this year would be investor buying in response to actual and potential dollar weakness. Investors would also respond to a slowdown in the US economy and would continue to switch from other asset classes, such as equities, to those perceived to be less risky. Although in percentage terms there are more investors in gold, they remain a small proportion of the total universe of investors, which offers potential to widen the market. The more positive outlook for commodity prices in general would continue to aid gold investment. If there were a slowdown in economic growth in the regions which had underpinned commodity prices recently, investor purchases of gold as a “safe-haven” investment would more than offset selling caused by general negative sentiment towards commodities. Jewellery demand, which was weak in the first half of last year but recovered in the second half, was likely to show a similar performance this year as a result of buoyant economic growth in India and China. GFMS expected central bank sales to remain low this year, and the supply of scrap gold to fall compared to last year as consumers had come to accept $600-$650/oz as ordinary levels for the gold price. Scrap sales would resume only at much higher prices. The negative factors for the gold price this year could be an increase in production from new projects or ramping up of existing projects, slackening in dehedging etc.

Ø      According to Societe Generale, gold’s internal fundamentals remain positive, although jewellery demand finally succumbed last year in the face of high and volatile prices. Societe Generale expects gold prices to fall in the range of $500-$675 with the average price being at $580. Their mild bearish view is based on reasons such as,  a) the long US dollar bear market – the most important factor in gold’s bull run – will essentially come to an end in 2007, and b) the latter stages of the commodities bull market constituted a bubble, which is in the process of deflating. They expect the gold price to slip towards $500 in the coming months, although it could recover modestly in the second half on the back of seasonal factors and solid underlying physical demand. Silver’s bull market has been more speculatively based than gold’s, although it can be argued that a key driving force, the ETF, has become a fundamental in its own right. Societe Generale considers the other fundamentals to be indifferent overall – in particular, photographic demand is almost in freefall; jewellery has been hit hard by high and volatile prices; and mine production should increase faster this year. Silver markedly outperformed gold last year, but unless the ETF continues to sweep metal up at the same rate, it is expected to under perform in 2007. Prices could eventually slide towards $8.

Ø      Goldman Sachs believes that gold has regained its historical correlation with the US dollar, and it expects a weakening dollar to support a higher gold price trend through the end of 2007.The dollar is expected to weaken significantly in the coming months, as interest rate differentials are no longer sufficient to offset the structural imbalances. Gold has historically traded in close correlation to the US dollar, reflecting its easy availability (given the large above-ground reserves held by central banks, investors, and in the form of jewellery) and relatively few industrial applications. As a result, gold trades to a great extent based on its characteristics as a store of value and medium of exchange, thus allowing it to function as a quasi-currency with a relatively stable “equilibrium exchange rate” with a US dollar basket. Beginning in August 2005, however, this relationship appeared to break down, as the price of gold rose sharply while the US dollar remained relatively firm. Goldman Sachs believes this was only a period of readjustment to a new, higher equilibrium exchange rate, as the financial markets absorbed the impact of expanded investor liquidity. Goldman believes this re-equilibration process has largely been completed and accordingly it expects the price of gold in the coming months to closely track the dollar.

The precious metals showed a lot of strength and resilience in the last week.  In spite of a sharp fall in the crude oil prices to $50 per barrel level, both gold and silver prices stood their ground and in fact ended the week on a winning note. On the other hand, the mixed movement of US dollar in the currency market failed to provide any clear guidance to the precious metals. DGCX February 2007 maturity gold contract rose by 1.24% or $7.80/troy during the week and settled at $635.80. March 2007 dated silver underperformed in comparison to the yellow metal and just managed to hold near its previous week’s level. It closed at $12.860 adding just half a cent per troy oz to its previous-week close. As per the analysts, the medium term picture which had been considerably weakened in the earlier weeks has shown a vast improvement. The short term trend on the other hand continues to remain upwards. All this augurs well for the yellow metal. Silver price charts do not as yet reflect the same strength as gold but the fact remains that if the latter rallies further, the former is bound to follow – either more or less. The weekly as well as daily charts of gold reveal the following technical parameters.

On the weekly candlesticks charts of DGCX gold futures, a small white candle has been formed showing gains for a second successive week. The prices have closed within a striking distance of the previous intermediate peak of $637.10 on weekly closing basis. A close above this level on Friday could trigger off a big rise. The price movement has shown reliance to weak fundamental factors like a plunge in crude prices and a relatively calm geopolitical situation. This should be further considered as an indication of strength. The overall volumes in course of the last week’s rise remained lower than average levels – not a positive sign. The prices are stationed above the 13-week & 34-week Exponential Moving Averages (EMA) and the averages have turned up. This should be read as a sign of strength. The momentum indicators on the weekly charts are turning bullish. The MACD has given a ‘buy’ signal. The Stochastic (8,3,3) has turned up and threatening to generate a buy signal. The 10-RSI has moved up and has crossed its 9 period EMA.  The overall picture therefore supports bullishness. On the daily charts, the short-term price trend remains up as higher peaks and troughs continue to be formed. Prices have closed above the 13-day and 34-day EMA and the averages have also started rising. The 13-day EMA has crossed above the 34-day EMA – a bullish signal. Within the momentum indicators, the Stochastic (8,3,3) has reached overbought area but still in buy mode. The MACD has triggered a buy signal.  Albeit minor declines to correct the overbought situation, the yellow metal appears to be headed further up. A cross-over of the peak established during the earlier intermediate rally could fuel further bullishness.

In case the uptrend continues, resistances could be expected at $637-38 levels, followed by $642-43 area and thereafter at $656-58 area. In case a downtrend starts, support is likely at $628-29 levels followed by $621-22 area and thereafter at $615-16 levels.

Xchange Communication:

The next 2-day training session for DGCX members & representatives will be held on 30^th and 31^st January 2007. Members interested to participate may call the Training Department  at +9714 3611616 or e-mail at training@dgcx.ae

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Tel: +971-4-361 1616, Fax: +971-4-361 1617, info@dgcx.ae
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