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Still more efforts to talk the dollar back up

Section: Daily Dispatches

All That Glitters is Gold, Not the Dollar

By Steven Vames and Gavin Maguire
Dow Jones Newswires
Monday, November 29, 2004

NEW YORK -- In recent months, it's been the golden
rule, so to speak: The dollar keeps hitting historic lows
and gold keeps hitting historic highs.

It's a relationship that typifies the gold market in times
of flux for the value of the dollar, given the simple fact
that the global spot price of gold and gold futures are
priced in dollars. Because of that, a weaker U.S.
currency makes the precious metal cheaper to
non-U.S. investors. In essence, what's bad for the
dollar -- namely the threat of inflation and aversion to
perceived U.S. investment risks -- is great for gold.

On Monday, spot gold prices traded at their highest
levels since 1988, above $450 per ounce and many
market participants are now eyeing the $460/ounce
and $500/ounce levels as the next major goals. The
euro, meanwhile was at $1.3271, not far from the
all-time high of $1.3329 that it hit on Friday.

But despite the fact that the inverse lockstep has
held up so well, it's not a certainty that it will
continue to guide markets. As both the dollar's selloff
and gold's rally reach new extents, differences are
emerging in just how far out on the limb speculators
have gotten in each respective market and just how
much more they can stomach.

Since the beginning of 2002, gold prices have
climbed more than 50 percent from around $285 an
ounce. The primary driver behind that has been the
dollar's cross-currency spiral lower, particularly the
50 percent the dollar has lost since the euro traded
below $0.89 at the beginning of 2002.

Sporadic periods of uncertainty relating to terrorism
fears and the war in Iraq, as well as concerns about
the potential for a return of inflation, have also
steadily drawn buyers to gold and away from the

Following such huge market moves, however, the
profiles of each market don't necessarily look the
same. On one side are the gold bugs, whose
recent bout of love for the yellow metal has been
nothing short of speculative, given that physical
supply and demand for gold haven't changed
substantially to justify the price rally.

In fact, Ray Nessim, president and chief executive
of Manfra, Tordella & Brookes Inc, the largest
physical precious metals dealer in the U.S., said his
company are seeing investor selling rather than buying
at these levels, further supporting the theory that
speculators are pushing the rally.

Others agree the gold market may be running out of
steam. "By any measure this market is heavily
overextended so I think we're in for some serious
consolidation if not a correction at some point soon,"
argued Peter Grandich, a gold specialist and editor
of investor advisory newsletter The Grandich Letter.

By the very nature of the leveraged gold trade, those
traders have essentially borrowed the dollars to buy
gold, and a reversal of the trades would both help
the dollar and send gold lower.

But in contrast to the purely speculative gold rally,
the dollar's declines have been based on the
fundamental concern that foreigners will become
less willing to fund the enormous U.S. current
account deficit.

While much of the dollar selling has been speculative,
a large portion has been due to so-called "real money"
segments of the markets -- asset managers and
non-U.S. corporations -- that are making longer-term
decisions to allocate out of dollars or repatriate
dollar-based earnings before the dollar falls even

"During the summer months, amid the range trade,
some real-money segments of the market
accumulated increasing amounts of dollars as they
waited to see what would happen," said Thomas
Stolper, currency strategist at Goldman Sachs in
London. "At this stage, they clearly want to get rid
of this exposure," which will lead to continued
dollar selling.

Speculators betting against the dollar are only being
emboldened by that flow of those funds out of dollars,
said Stolper. "There is not much concern about any
form about a substantial correction," in the dollar,
he said.

For investors, the question will increasingly become
one of which market is more vulnerable to an
immediate correction. While sentiment on Wall Street
is overwhelmingly for the dollar to continue weakening,
analysts in the gold market are a bit less sanguine
about the prospects for further one-way trading in gold.

"I'm a roaring gold bull and have been for some time,
but right now I have to say the next $20 move in gold
could go either way," Grandich said.

One of the most immediate risks to the relationship
could come as the end of the year approaches, and
investors decide to what extent they'd like to lock in
the gains they've made by being long gold, short
dollars, or a combination of the two.

Given that hedge funds have been the primary drivers
of gold's gains in recent months, their
"calendar-centric behavior" may be the determining
factor in the timing of any gold price retreat.

"Hedge funds have been the heaviest buyers of gold
recently, and they work within calendar years so we
could see some year-end profit taking coming
through in the next few days," Grandich argued.

For both markets, some degree of profit-taking is to
be expected as funds cash in their chips for year-end
reporting and profit distributions. But such a move
could pose a bigger risk to gold than for the dollar,
since gains based purely on speculation would be
more susceptible than gains made on an combination
of speculation and ongoing real-money flows.


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