The Morning Gold Report: Gold Remains Defensive in Lower Half of Range

July 24 (USAGOLD) -- Gold is maintaining a defensive tone after falling back below the midpoint of the broad 1032.20/845.50 range on Wednesday. Weak oil and a firmer dollar continue to weigh on the yellow metal.

Oil remains weak in the wake of yesterday's EIA crude stocks report, which showed a 1.6 mln barrel drawdown in inventories for the week ended 18-Jul. This was in line with market expectations and is reflective of slackening US demand for crude. Crude oil imports were off sharply by 985k bbl/day.

A guy I used to trade with in Chicago reported to me that people really seem to be changing their commuting habits in that city. "The trains are packed," he said. Here in Denver, scooters now seem to be everywhere.

Brent spot crude has become rather oversold on a short-term basis. With good Fibonacci support at 123.61, and good chart support at 121.37/29, we could see oil rebound from this general area. However, much like on the way up, crude is not a train I'd be inclined to step in front of on the way down either.

However, the gold/oil ratio remains fairly well supported above 7. With expectations that the ratio could recover further to 8, a buying opportunity is evident in gold ahead of good chart/Fibonacci support at 912.60/907.32.

This scenario is bolstered by the reemergence of strong physical demand, particularly from India. In a Reuters article this morning, a wholesaler in Bangalore was quoted as saying, "There is a lot of appetite for prices at lower levels. At $915 an ounce, there would be huge interest."

The dollar remains fairly well bid, supported by a raft of poor economic data out of the Eurozone. In addition, the Reserve Bank of New Zealand cut rates for the first time in 5-years, a move that was only about 50% priced in by the market. That, along with dovish guidance, sent the NZ$ into a tailspin.

However, the EUR-USD rate seems to have found support ahead of the early-July low at 1.5611. A close above 1.5665/71, where the 50-day and 100-day moving averages converge, would be a short-term negative signal for the dollar. However, 1.5800 must be regained to return credence to the bearish dollar outlook that calls for renewed tests above 1.6000.

The dollar index is also probing above its 50-day moving average, bringing the early-July highs at 73.08/15 within striking distance. I think the recent leg higher in the greenback is more about weakness in other currencies than it is about actual dollar strength.

The GSE rescue plan won resounding approval from the House on Wednesday and will go back to the Senate for a vote today. However, despite CBO estimates that the plan could cost taxpayers a mere $25 bln, US Senator Jim Bunning (R-KY) believes the total cost could be closer to $1 trillion.

U.S. Rep Ron Paul (R-TX) has similar concerns, noting that buried within the nearly 600 page bill is an $800 bln increase in the U.S. debt ceiling. That number is awfully close to the reported $780 bln in GSE liabilities linked to subprime and Alt-A mortgages. One might construe that the legislation, if not actually anticipating all $780 bln going bad, is certainly prepared for the eventuality.

VIDEO: Ron Paul comments on Housing Bill

The prospect that the bailout of the GSEs could actually cost 32-times what the CBO has estimated does not bode well for the dollar, as additional expansion of the money supply is going to be the likely means of funding the rescue. However, it does bode well for gold.