Gold resumes upward trend

Despite closing lower last Friday, gold had posted the second consecutive weekly gain. This has improved the outlook for gold. The resignation of Egypt’s president Mubarak pushed gold lower as some investors left again the safe haven. However, the situation in the Middle-East is far from returning to a peaceful status. Protests in Egypt will continue, but as announced by the opposition only once a week. Furthermore, protests emerged in Algeria over the weekend, which indicates that tensions could escalate in an oil-producing country. Thus, gold might still remain in demand for its safe haven status.

Front-month WTI crude oil future fell last Friday by 1.6% to end the session at 85.58$/bbl. With the military taking over the government in Egypt, the risk of closing the Suez Canal has diminished strongly. Thus, crude oil to Mediterranean ports in Europe is expected to flow uninterruptedly. Nevertheless, as protests emerged in Algeria, the markets are probably pricing in the risk that Algerian oil shipments might be impaired by protests in the case that tensions escalate.

In the case that crude oil prices remain under pressure as the Suez Canal remains open, the impact on gold is not necessarily negative. Usually, rising crude oil prices had been positive for gold. But recently, this correlation was rather weak. Gold corrected in January despite oil prices were moving higher. The link from rising crude oil to falling gold prices is via the US Treasury market. As PIMCO’s Gross and El Erian fueled the fear of rising inflation in the US, yields on Treasury notes and bonds rose and gold suffered as opportunity costs increased. Thus, falling crude oil prices could lead to a recovery of the US Treasury market, which would be supportive for gold. Last week, the US Treasury market already showed some signs of stabilization after a successful auction of 10yr US T-Notes.

Gold got also some support from a weaker US dollar at the beginning of last week. The euro jumped on Wednesday above 1.37 versus the US dollar after it was leaked the Bundesbank head Weber would not apply for the succession of ECB president Trichet, whose term ends in October, and would also leave the Bundesbank before his contract expires. However, the euro pared the gains the following days. Nevertheless, it had no major negative impact on gold. Some German papers even commented that inflation would rise after Weber leaves the Bundesbank and the ECB council. Those comments are real “no brainers”. Headline inflation in the eurozone rose due to scarcities in the agricultural sector, which were caused by lower harvests based on extreme weather conditions around the globe.

More important for the outlook for gold is the positioning of investors. The latest CFTC report on the commitment of traders showed the first increase of large speculators net long position. The non-commercials added 14,534 new long contracts and reduced shorts by 1,365 contracts. Thus, their net long position increased by 15,899 to 167,093 contracts. Also the net long position of large speculators rose by 6,383 to 37,063 contracts. However, the holdings in the largest Gold ETF, the SPDR Gold Trust, declined further to 1,225.5 tons, but they are still above the holdings on January 28, when gold hit the lowest price this year. Therefore, the positioning data shows signs that large investors have stopped reducing their gold positions, which is a positive indication for the price of gold.