Weakness in the U.S. dollar in 2010 could lead central banks to the gold trough

The gold market is expected to open flat at begin of year 2010, based on overnight Globex trade. The dollar is weaker against most foreign currencies and the energy sector is trading higher. Speculative/ investment demand for gold bullion has slowed this month with gold prices down 6.3 percent for the month and down 9.7 percent from the peak at $1227.50. This also reflected in the stats from SPDR Gold Trust as the NAV has lost 3.873 billion dollars from the peak on December 2nd, an 8.8 percent drop. Gold has not been such a formidable investment for the month of December, even though record highs were posted on December 2nd. We have been guiding investors to hedge bullion holdings and/or ETF’s this month.

Rebounds in the gold market should be limited to the $1135 – 1151 level, if gold decisively settles above 1170, short call option hedges should be covered. Expect gold to trade toward the 1055 level and possibly as low as 995 in the first quarter. The long term underlying support for the gold market is global investor demand and central bank interest. Another round of weakness in the U.S. dollar in 2010 could lead central banks to the gold trough, replacing $ foreign reserves with the yellow metal.

Many Western countries hold 60% to 80% of their reserves in gold. Eastern countries have a very low gold to total foreign reserves ratio, with many concentrated in the U.S. Dollar. The demand trends for gold should continue with many wealthy countries in the East and in South America holding under 2 percent of their reserves in gold, including China. The chart pattern for gold is currently bearish as we approach the New Year, $125 off of the December highs and no bounce. Pullbacks towards the 1050.00- 1000.00 area should attract buying. The long term upside count for gold is 1332.00.

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