Dollar Very Overbought, Gold Very Oversold

Gold was down again yesterday and fell to new 11 month lows at $742. Gold recovered in afterhours electronic trading and in Asian and early European trading today it has risen to over $755/oz. The dollar has fallen from recent highs against the euro of 1.3879 to less than 1.41 and oil has risen again on fears that Hurricane Ike may do more damage than expected to oil production facilities in the Gulf of Mexico.

The sentiment in the gold market remains very negative, long positions have been reduced dramatically and gold is the most oversold it has been since the commencement of the bull market in 2000. There are very few analysts willing to put their necks out and call the bottom of this market and the sharpness and steepness of the selloff has created doubts even in the most ardent gold bugs mind. This is bullish from a contrarian perspective and may portend that we are near the lows of this sell off.

Especially a much of the selling has been done by speculative elements in the leveraged futures markets rather than by investors who have led to physical demand.

Further gains for the dollar are likely to be limited and today’s Commerce Department report is expected to show that US retail sales fell in August adding to signs of a slowing US economy. Weak data will fuel worries that the US economy is faltering and feed negative dollar sentiment and lead to safe haven demand for gold. The USD looks very overbought and buying may have reached a saturation point (especially in light of the appalling trade deficit figures yesterday) and a sharp retracement is very likely.

With Lehman Brothers (LEH) and Washington Mutual (WM) looking like being the latest casualties of the growing solvency crisis, gold’s safe haven qualities will come into their own in the coming months.

Today’s Data and Influence

Markets await the release of retail sales for August at 13:30 GMT and then the Producer Price Index. The University of Michigan’s Confidence Index is due for release at 15:00 GMT.
Gold and Silver

Gold is trading at $754.90/755.50 per ounce (1130 GMT).
Silver is trading at $10.84/10.91 per ounce (1130 GMT).
PGMs

Platinum is trading at $1171/1181 per ounce (1130 GMT).
Palladium is trading at $243/249 per ounce (1130 GMT).

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