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Marketwatch: Gold Prices Waver

Gold prices are already starting to rebound, after two weeks of falling prices brought on by a steep crude oil decline and worries about deflation.

But let’s factor in a few other things, like predictions in the past week that the price of a gallon of gas at the pump could drop to $1 per gallon.  And word this weekend from President-Elect Barack Obama saying this weekend that “things are going to get worse before they get better” and that he will “offer an economic stimulus plan equal to the task.”

The task ahead is difficult to put it mildly, as November unemployment figures dropped by the largest numbers seen in decades.  And where is gold?  The precious metal’s appeal as a hedge against inflation appears a bit tarnished but it is still considered a solid bet.  “I think that the whiff of deflation that’s in the air is enough to keep the near-term pressure on gold,” said James Steel, chief commodity analyst as HSBC.

There’s no doubt that we’re in troubled waters economically.  Dealing with the loss of jobs, frozen credit markets, falling home prices and other signs of economic turmoil is “my number one priority,” Obama said on NBC this weekend, adding that “more aggressive steps” are needed to cope with the crisis. The precious metal fell last week in line with the softer euro after the European Central Bank cut interest rates by a larger-than-expected three-quarters of a percentage point.

“Gold is mirroring the directions in euro-dollar after the ECB rate cuts,” said Pradeep Unni, a senior analyst at Richcomm Global Services.  “The dollar also seems to be discounting the gains ahead of the (U.S.) non-farm payrolls data scheduled tomorrow,” he adds.

The ECB cut its benchmark rate to 2.50 percent, its lowest level in nearly 2-1/2 years, as inflation plummeted and the euro zone economy sank deeper into recession.  This followed a full percentage point cut to 2 percent by the Bank of England.

In the slightly longer term, rate cuts by the Fed and the Bank of England are likely to benefit gold, if they increase liquidity, analysts said.

“The recent sharp dip in inflation pushed up real interest rates, exerting pressure on gold,” Commerzbank said in a note. “Generous rate cuts are, therefore, good for gold as they again reduce the opportunity costs involved in holding it.”

Traders turned their attention to U.S. non-farm payrolls data due on Friday for clues as to the next direction of the currency markets, and of gold.

Physical demand eased in some of gold’s traditional markets as traders awaited price falls. Indian buyers looked for prices of around $740 an ounce before making purchases, dealers reported.  The price is up as the week begins, but how long that will continue depends on what other actions are taken as the week continues.

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