Friday, 20 May 2011

Gold futures advance in ‘tug-of-war’ market

Gold and silver futures edged higher in electronic trading during Asian trading hours Friday, with both metals turning positive for the week.

Gold for June delivery rose $3.10 to $1,495.50 an ounce, with the move bringing the week-to-date gains into positive territory, up 0.1%. Silver for July rose 23 cents to $35.16 an ounce, bringing week-to-date gains to 0.3%.

In regular New York trading on Thursday, gold settled down $3.40, while silver closed down 17 cents, after some disappointing macroeconomic data. Read more on Thursday's metals moves.

Although both gold and silver could post a gain this week, the path to higher ground has been by no means smooth.

“There is still a tug-of-war taking place between those who believe the commodity trade has peaked in front of the end of [the U.S. Federal Reserve’s] quantitative easing 2, and those who believe it is just a correction,” said metal analysts at MF Global.

Commodity futures plunged earlier in the month, with silver futures selling off after margin requirements to trade the metal were raised.

The MF Global analysts said Friday that they believe the recent price action is a correction rather that the start of a sustained downward move after the April 28 Federal Open Market Committee statement and press conference.

“We had previously expected gold to peak near the end of QE2 on June 30, but the April 28 FOMC meeting pushed those expectations back due to its dovish tone,” they said.

“Comments from [Fed board members] Evans and Dudley continued that tone by suggesting that the Fed should not overreact to inflation and that accommodation is still appropriate. That tone was also continued by weakness in the Philadelphia Fed survey and existing-home sales numbers yesterday. The inability of Congress to cut spending and agree on a debt-ceiling hike is also supportive, in our opinion,” they said.

Copper for July delivery rose 2 cents to $4.07 a pound, after falling 5 cents on Thursday.

Platinum for July delivery rose 50 cents to $1,769.50 an ounce, after dropping $10.90 in New York the previous day.

Quantitative Easing is an ugly name for a simple idea.Central banks buy long-term government bonds with newly printed money,flooding the markets with new cash in other words.This raises the bonds prices,lowers their yields and provides a helpful boost when central banks' main tool,the short-term interest rate is close to zero.

The markets have pegged in QE2 to cease by the end of this quarter thus sinifying an end to recessionary fears.This erodes gold's value as a safe asset against the dollar pushing the price downwards.

Sarah Turner is MarketWatch's bureau chief in Sydney.
Additional Reporting:James Mwangi in Nairobi

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