Gold likely to see short term pressure

Gold's stability has been rocked sending it on a roller coaster ride last week. Gold hit the $1,000-an-ounce mark, before running out of momentum and closing lower than the previous week. Gold closed at $955.40 an ounce down from last week’s $960.60. The technical indicators look to $955 as a crucial support and it will be an important feature to watch out as the market opens for the week on Monday. The emerging pictures for support of gold are not encouraging and everything but politics are cooling down in that region of the world.

Although the tension in Western Asia has now eased, geo-political fears were the ones to first drive gold up. Crude, which has been held accountable for the current bull run in gold has dropped off. This was based on the growing fears of declining economic growth in the US which would translate to a decrease in demand for crude products. As crude declined, fears of inflation receded and in turn, gold came under pressure. The Friday results from Citigroup not only propped up the dollar but also allowed that the financial crisis being felt across the globe was under control. JP Morgan will be releasing results this week to intense scrutiny. Their results can possibly further dictate how the dollar will fare and in turn show gold's future course.

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EMOTIONAL GOLD

The headline grabber of the last several months has, of course, been gold. There is not much about gold that hasn't already been said or blogged and yet, it has risen 55% over the past year. Gold has reached the highest price ever of over $1000 per troy ounce before it settled at, a still more than respectable, $900. The gold bugs - the "end of the Worlders" are happy but are their doom and gloom predictions justified?

Bob McKee, chief economist at Independent Strategy, doesn't think so. He started getting long gold between $330 and $350 in 2003, citing three drivers that are clear to all: the current account deficit's pressure on the dollar, growing political uncertainty and an impending reversal of the liquidity boom.

"Some people argued then that money flowing into Asian economies would be recycled into dollars," McKee says. "There's some truth to this, but there is also a growing pressure to diversify." "Up until three or four years ago, that was a real concern because the central banks still saw gold as a dead thing," he says. "But they have done their dumping, and have no more left to sell."

The other drivers have only gotten stronger, and the question now is whether they have become so strong that the market has already discounted them. McKee doesn't think so.

"We still have some room to go in all three drivers," he says. "Assuming that the U.S. economy went into recession this last quarter, and knowing that recessions tend to last nine to 12 months, we can expect dollar weakness to continue for at least the next two quarters."

Then, he says, just when the United States begins to pick up steam, the other OECD countries could be slipping into recession with low interest rates sparking fears of inflation.

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