Gold analysts split on outlook, focus on dollar
Fri Feb 11, 2005 12:05 PM ET
By Zachary Howard


NEW YORK, Feb 11 (Reuters) - Gold is at a crossroads now that worries about the dollar have abated somewhat, and analysts on Friday were split over the outlook for the recently shining precious metal.

The dollar's recovery in recent weeks diverted investor interest and some analysts said gold has already peaked. But a fall to $400 an ounce looks like a long shot, and the metal looks set to rally into next week after bouncing from key chart support.

April gold at the COMEX division of the New York Mercantile Exchange is down 9 percent in value since reaching a 16-1/2 year high on Dec. 2 at $460.50 an ounce. It bottomed at a four-month low on Wednesday at $411.50.

On Friday morning, the benchmark contract was $3.50 higher at $422.20 an ounce.

"I think the dollar is in the process of trying to bottom and then work sideways to higher, and that would probably put gold in the position of eventually looking to retest the $405 support level," said James Quinn, an AG Edwards & Sons commodity commentator.

A rising U.S. currency caps demand for dollar-denominated assets such as precious metals by making them pricier for overseas investors.

Since the year began, the dollar has risen nearly 6 percent against a basket of major currencies, as focus has shifted from the "twin" U.S. budget and trade deficits to dollar-positive factors, such as rising interest rates and a more rapid pace of economic growth than in other parts of the world.

"I think we've seen the highs in gold for the year," said Leonard Kaplan, president of Prospector Asset Management.

"The market is beginning to realize that the Fed is serious that it really is going to raise rates every single time, and then it becomes very apparent that the dollar rally is for real, because the rally is going to be heavily supported," he added.

Supporting gold is the apparent U.S. opposition to proposed sales or revaluation of gold held by the International Monetary Fund to finance Third World debt relief, analysts said.

Gold rallied Friday, even as the dollar steadied from a steep fall Thursday, on data showing a smaller U.S. trade deficit in December, which failed to dispel concerns about structural problems in the U.S. economy.

"The dollar is whipping around and still very much in a trading range," said Ian MacDonald, managing director of precious metals at International Assets Holding Corp. "The market is trying to decide which is the weaker of the currencies -- the dollar or the euro? Or, is it the yen?

"Technically and fundamentally, gold is looking good," MacDonald added. "It is very cheap in foreign currency terms. If you look at gold in the euro or the Indian rupee, it's a basic fire sale. So, there is your floor. I do see the market moving higher."

MacDonald saw April gold facing initial resistance at the $423 area, followed by $428 an ounce.

"On the downside, we've got very good support at $412 to $415," MacDonald said. "It is going to be very hard to get gold through that level. You would need a very dramatic piece of news."

Scott Meyers at Pioneer Futures felt that the dollar rally was ending.

"I like gold," Meyers said. "I think gold had its retracement and the dollar had its little run, but it's not going to stick."


© Reuters 2005. All Rights Reserved.