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UPDATE: Stronger Dollar, Technical Weakness Push Gold Futures To Six-Week Low

By Allen Sykora of Kitco News
Friday May 17, 2012 11:30 AM

(Kitco News) - A stronger U.S. dollar, continued exchange-traded-fund redemptions, worries about when the Federal Open Market Committee may scale back quantitative easing and technical factors are all weighing on U.S. gold futures.

The most-active June gold contract traded on the Comex division of the New York Mercantile Exchange is headed for its seventh straight down day. As of 11:12 a.m. EDT Friday, it was $24.50 lower to $1,362.40 an ounce and bottomed at $1,357.60, its weakest level since April 18.

“Today, in particular, there has been further pressure from the stronger dollar,” said Robin Bhar, metals analyst with Societe Generale. The euro hit a low of $1.2796, its weakest level since April 4 and a decline of roughly two cents over the last week.

Also, Bhar said some pressure on gold stems from comments by San Francisco Federal Reserve President John Williams, who suggested Thursday that the central bank could taper its monetary stimulus, perhaps as soon as this summer.

Further, whereas Thursday’s U.S. economic data was all weaker than forecast, a pair of reports Friday topped expectations. The preliminary May University of Michigan consumer sentiment index jumped to 83.7, the best reading since 2007, from 76.4 in April. The Conference Board reported that April Leading Economic Indicators climbed 0.6%.

Some of the pressure on gold is technically oriented follow-through selling, a couple of traders said. “We’ve been coming off for the last week or so,” one said. In particular, the break back below $1,400 an ounce earlier this week added to the downward momentum, said another.

Kevin Grady, president of Phoenix Futures and Options, said the technical-chart picture is hurting gold at the moment. To start to reverse this, he said, the market has to get back above the area around $1,404, which is the 50% retracement of the rally from the mid-April low of $1,321.50 to the early-May high of $1,487.20.

“It’s more of a technical trade,” he said of the recent activity, chalking up the bounce from Thursday’s lows to some of the weaker shorts having buy to cover positions in which they had sold.

“We’ve had some ongoing liquidation and selling from the speculative community,” Bhar said. “Investors are still exiting from physically backed exchange-traded funds.”

Holdings in the world’s largest gold ETF, SPDR Gold Trust, have fallen to 1,041.42 metric tons from 1,350.82 at the end of 2012. Sharps Pixley pointed out that these holdings are now the lowest in four years. A World Gold Council quarterly trends report earlier this week said overall first-quarter global gold demand fell 13% year-on-year, as outflows from ETFs more than offset increases in demand for jewelry, bars and coins.

By Allen Sykora of Kitco News asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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