Gold Corrects, but Weak Dollar Underpins

by Peter A. Grant

March 03, a.m.
(from USAGOLD.com) --

Gold has retreated from the fresh new all-time high established on Wednesday at 1440.00. With no new substantive developments in North Africa and the Middle East, investors have been locking in profits. However, they are likely looking for opportunities to re-enter the market as well on corrective dips. The January correction was a textbook retreat to within 2% of the 200-day moving average, followed by new record highs. Beautiful. Despite today's softness, technically, the dominant uptrend is back underway.

The level of uncertainty that prevails in the Middle East/North African region is likely to be a limiting factor on the downside for the metals. An overture by Venezuelan President Hugo Chavez to mediate the Libyan crisis has been roundly rejected by everyone...except perhaps Colonel Gadaffi. Fears of further contagion continue to swirl, which is driving investors out of the region. The Dubai stock market has plummeted to 7-yr lows and Saudi Arabia’s benchmark stock index tumbled 15 percent this week. Oil prices have backed-off the highs, but the aforementioned concerns are likely to limit the downside in crude as well.

Continued weakness in the dollar is also likely to limit the downside in metals and oil. The greenback extended to yet another new low for the year today after the ECB further stoked rate hike expectations this morning. The ECB held steady on rates, as was widely expected, but Jean-Claude Trichet took a more hawkish tone in the press conference. Trichet acknowledged that inflation risks were on the upside, requiring "strong vigilance." He went on to suggest that a rate hike in April was not certain, but possible. While Trichet continues to couch his rhetoric, the sharp intraday rise in the euro clearly shows how the market is interpreting his comments.

Meanwhile, Fed chairman Bernanke gave no indication in his MPR speeches this week that the Fed was anywhere close to raising rates. Perhaps this was the plan all along: Export inflation around the world and then wait out Europe, make them hike first so that the dollar can collapse and Bernanke can at long last get the domestic inflation he so desperately desires. It's a dangerous game though. Not only do we erode global goodwill in creating inflation and destabilizing economies (and governments) around the world, but investors are skeptical of Fed assurances that it will be able to contain inflation to target (around 2%). Barring some miraculous rebound in consumer spending, employment and housing, it is far more likely that the Fed will keep the liquidity taps running wide open for too long, rather than too short a time.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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