From JurojinWeekly.com

GOLD’S COLD SHOULDER

It’s been one month since the Fed announced the onset of quantitative easing stating that it would buy mortgage securities and government debt. According to a Bloomberg survey taken since that time, investors unambiguously turned dollar bearish as a result, sensing that the government was diluting and debasing the dollar in order to get out of a tight corner. By creating future inflation, the massive budget deficit would be made smaller, but at the cost of a shrinking dollar.

April gold reversed course from a low of $882 that day to a $967 peak just 48 hours later as investors considered the implications of the Fed’s move not to mention a record one-day fall in the value of the dollar by 3.4%. The dollar lost 10 cents versus the euro in the space of three days, which helped reflate commodity prices.

This week, gold received what should have been rocket fuel for gold bugs. But it just couldn’t muster a rally back above $900 midweek. That despite news that U.S. consumer prices fell in the year through March at a 0.4% clip for the first time since 1952. Yet investors seem reticent to buy into the notion that deflation or falling prices are set to take hold except for in the immediate short-run thanks to the very evident global recession. Once the corner has been turned, so they say, inflation will be the order of the day.

But as sure as investors are adopting a glass-half-full approach in response to decidedly mixed economic data these days, they are losing their appeal for gold.

The dollar has taken back much of the losses it was dealt after the fed’s announcement. On Wednesday it touched $1.3125 against the euro – it’s strongest since the announcement. Just a half a cent more and the reversal will have dollar bulls counting their eggs and screaming about an assault on the 2009 euro low of $1.2320. None of this is good for gold.

The European Central Bank and the governments of the collective Eurozone are likely to embark on their own quantitative easing given the alarming dislocations with European economies. Again, euro weakness is the flipside of a strengthening dollar and not a bullish angle for gold.

The Japanese yen has stopped rallying. Investors throttled the yen so hard in an effort to diversify away from risk and into safe havens that they virtually strangled the Japanese economy en route. Now the yen is losing ground sending another mixed signal gold’s way.

The economic data, as we already noted is decidedly mixed. For sure, the data is decelerating in regards to just how weak it is, but whether the economy is at a turning point is well open to debate. But that doesn’t stop equity bulls joining the rally for fear of missing the boat leaving the dock. One again, a return of risk appetite is not doing the price of gold any favors at this point.

One of the biggest heavyweight problems facing the U.S. economy is the oversupply of housing. But with mortgage demand up outside of refinancing agreements and some evidence that construction weakness may have run its course, investors are hoping for better times ahead. Such an optimistic stance doesn’t make us want to buy gold at this stage.

Meanwhile over in China, the demand from infrastructure projects for copper has created something of a price frenzy. Normally gold would join in, but it’s not in a sign that local demand is based on real underlying demand for projects rather than speculation.

The equity market’s fear gauge or CBOE Volatility index known as the VIX closed at a near 7-month low on Wednesday convincingly cracking through the floor of 40.0 that has held since September. It would seem that investors are taking the economic data to heart and making the plain statement that the second quarter of 2009 will be the ultimate washout before things start to improve. Again, not quite the sexy thought that gold bulls want to hear last thing at night.

It’s beginning to look like a test of $800 per ounce might be on the cards near-term for gold as optimism abounds. You can bet your bottom dollar that the banks’ Stress Testing results will be seen as a market positive.

The silver lining here is that gold’s demise might just be built on a rather sandy foundation. Economists might yet prove to be right about the dollar or the ongoing economic slump. It won’t feel like that when nervous longs are diving out of gold at $800, but that might just be the golden opportunity to get in on the long side.