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February 2: Gold gains on conflicting sentiments

Source: American Gold Exchange

Austin -- Gold rose again, reaching an 11-week high as positive U.S. employment data knocked the dollar down from intraday highs. Jobless claims dropped by 12,000 to a seasonally adjusted 367,000, their lowest level in nearly four years. This news, combined with Fed Chairman Ben Benanke's testimony before Congress today that the economy is improving, helped to stimulate some risk appetite, supporting equities and commodities including all four precious metals.

At the Comex close: April gold gained $9.80 to $1,759.30; March silver picked up 37 cents to $34.16; April platinum gained $6.70 to $1,629.90; and March palladium rose $10.95 to $707.65 an ounce.

While Ben testified that the economy is improving, he also warned (presumably, out of the other side of his mouth) that it "is vulnerable to shocks." This negative statement was widely seen as telegraphing more quantitative easing later this year, which is no surprise. The odd thing is that gold seemed to benefit from both of these contradictory statements, reflecting its split personality. On the one hand, it functions as a risk asset like other commodities, and on the other hand as a safe-haven currency of last resort. So gold can gain on positive economic news because growth stimulates demand for commodities, or on negative economic news like financial shocks (e.g. today's stalled Greek debt talks), because it offers an alternative store of value. But it doesn’t often do both at once.

For most of the past year, gold's been primarily a currency of last resort as investors took shelter from the eurozone debt crisis. But that seems to be changing. According to UBS, gold's correlation with risk has jumped back into positive territory over the past twenty days. Most likely, this change is a response to the massive increases in liquidity in the U.S. and Europe. All that low-interest money has to go somewhere in search of returns. But what gold's action today also means is that the market is genuinely befuddled, and looks to gold for protection in either direction.

If gold's trend shifts decisively toward its commodity role, which seems likely as the U.S. economy gains traction and interest rates stay low, it could rally to new highs. On the other hand, if eurozone shocks derail the recovery and investors run to safety, gold would probably drop at first as the dollar rallies. But the dollar's hamstrung fundamentals, brought on by excessive debt and easing, would quickly drive investors back into the other safe haven, gold. Either way, new highs would seem to be in the cards despite—or perhaps because of—the market's conflicting sentiments.

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