Gold market to start out 2011 on a strong note

Gold market to start out 2011 on a strong note. Support may come from a resumption of
investment inflows and a renewed focus on European sovereign debt issues. Background support will be offered by quantitative ease, and improved jewelry demand. Negative factors will linger in the background as well, but should be shelved in the midst of fresh investment this week.

We favor trading metals as positive trading affairs this week.At the beginning of 2010, the gold market started out the year with a week-long rally followed by a correction that lasted about a full month. Stocks rallied as well, before they also began a month-long selloff. There isn’t anything to prompt us from expecting anything different this year, especially given the trends that existed at the end of last year.

The euro rebounded sharply last week as attention on sovereign debt issues waned, and the currency held at key support from the 200-day MA. A resumption of attention on the issue of sovereign debt could add support to gold prices this week. The stock market may be able to maintain December’s gains, as strength is being seen in consumer goods demand. The retail stock ETF has performed well and gold jewelry demand during Christmas was said to be improved over 2009 levels. Additionally, Friday brought us several reports from wine distributors who say that sales of higher-end brands of Champagne have improved going into New Year’s Eve. Apparently watering down 2-Buck Chuck with soda water is falling out of favor as people have more money in their pockets.

The negative side of the market will focus on trends in other markets that have developed in the past two months. The dollar, stock market, and treasury yields have all moved higher since early-Nov when the Fed announced its QE2 program and when the election changed the construct of Congress. We believe that markets have been pricing in better economic data and earnings potential, due to either the prospect that QE2 or tax cut extensions boost the economy in 2011. We lean toward the tax cut extensions as having the stronger influence, as the first QE program did more to alleviate tight lending than spur economic activity. Higher rates stock prices could create competition for metals with regard to new investment. The rise in interest rates and the potential that monetary policy becomes normalized will take away from the argument that negative real yields will boost gold prices.

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