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Kitco Precious Metals and Economic Review - Global Liquidity Concerns on Eve of Interest Rate Announcement; Gold Soared.

By Wendy Lynn Ip      Printer Friendly Version
Mar 17 2008 10:05AM

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Kitco Precious Metals and Economic Review - Week Ending March 14, 2008

Gold

Last week was marked by heightened price volatility and, within an environment that is jittery from the resurfacing of global liquidity concerns, gold would post a bid price that would breach the $1000 per ounce mark. Given the trend that was started in the week prior, there were doubts that gold would perform as strong as it did, but enhanced volatility provided periods of buying opportunities and investors took advantage of these. Overall the trading environment was a buzz with actions taken by the Federal Reserve and several other central banks to enhance liquidity to funding markets. This week the market will be buzzing over the Federal Reserve’s interest rate announcement to be made this March 18. Federal Funds Futures is giving a 100% probability to a 75 basis point cut in the rate. There is even a probability that we will observe a full 100 basis point cut. Rate cuts this large tend to be a double edged. They tend to support equities; however, they also feed recessionary talk and fears, leading investors away from equities and to safer assets like precious metals and other commodities. As a result, the annual real growth in metal prices has been consistently very strong. Whatever the outcome, much of the current pricing that we are finding in the metals has already incorporated federal funds rate expectations either directly or indirectly via the valuation of the U.S. dollar. Last week, the dollar continued to fall against a basket of major currencies. The USDX fell to a low of 71.67, as gold surged to a London PM of $1003 per ounce. Its average London PM Fix would just skim the top of its 10-day moving average, but sit comfortably above its 30-day to 120-day average. Annual real gains increased by 5 percentage points from the week prior, posting 46%.

Silver

Silver’s London Fix would tend to follow the week ending March 7. Its price path was just as volatile as gold on spot market, creating good buying opportunities for the interested investor. There were no records to be made in pricing, finishing the week well within the $20 per ounce region. Silver would fall just short of its 10-day moving average by a penny. It would sit comfortably above its 30-day to 120-day average. Real annual gains brought the biggest news for the metal as it had increased by 14 percentage points from the week ending March 7, posting at 51%.

Platinum Group Metals

Platinum and palladium edged down with gold and silver on Monday. The metals would trend upward from that point onward in its London PM Fix, but it would not be enough to post a positive gain by the end of the week. Volatility in the market had taken its toll on the metals’ prices. While gold and silver managed to post a weekly gain, platinum fell by 5.2% while palladium fell by 10.2%. It would seem that the surge in their prices from South African mining issues had lost some of their support with the announcement of a 5% increase in power supply to the industry by Eskom. Nevertheless, what is clear is that the fall on March 7 and March 10 provided buying opportunities to investors throughout the course of the week.

Rhodium would also find softness in its price last week, but still managed to post a modest weekly gain of just less than one percent or $83 per ounce. It would be the only one out of the metals reviewed that would sit comfortably above its 10-day moving average, but, like the other metals, it would continue to post significant annual real gains. Rhodium gained 50% in its pricing from a year prior. The average price for rhodium for the same week last year was $6025 per ounce (nominal) or $6229.32 (real – purchasing power adjusted).

Well, this wraps up this weekly review. Until next time, take care and I wish you all a very good week.

Wendy

Additional Details on Metal Performance

As I had mentioned last week, all currencies have been converted into U.S. dollars prior to calculating their correlation with the metals. The exchange rate price (price quotation) is what is used and not the volume (quantity quotation) so that we will observe an increase in the exchange rate price as the U.S. dollar depreciates. For example, by using the exchange rate price, we would be able to directly draw the conclusion that there was a strong positive correlation between gold and the Australian dollar against the U.S. dollar from March 7 through March 14. The value was 0.85. If I had used the exchange rate volume, I would end up with a negative value for the cell entry. An example might help clarify this. Consider three days of data in the table below.

Notice that the price of gold dipped from March 7 to March 10 and rose on March 11. We observe the very same pattern for the exchange rate price derived from number of U.S. dollars (USD) per one Australian dollar (AUD). Here, we see that the Australian dollar dipped relative to the U.S. dollar on March 10 and then picked up on March 11. The result is a positive correlation with gold, as their paths moved in the same direction. On the other hand, when we use the exchange rate volume, we see that the U.S. dollar relative to the Australian dollar picked up on March 10 and fell on March 11, which is opposite from the path of gold. The result is a negative correlation, which is something that we should expect to find between the U.S. dollar and gold, at least in theory.

Now, as we can see from the table below, most of the metals reviewed were positively correlated with each other during the period from March 7 through March 14. Rhodium proved to be the exception, as it trended downward until settling at $9300 per ounce on Thursday. What is more, we find the expected positive correlation between the value of the currencies against the U.S. dollar and the metals. The exception, again, lies with what went on in rhodium’s price path. We would typically not expect to find this type of situation with an ailing dollar, but, at higher prices, a testing of its levels is expected. The final oddity of the week came with the performance of U.S. equities, as given by the S&P 500, and the performance of the metals. The correlation points to a certain degree of weakness that had occurred in both markets.

U.S. Brief Statistical Update

Data for the week began with Tuesday’s release of the international trade balance for January 2008, where the weaker dollar had helped to foster a deficit of $58.2 billion. This was slightly higher than the month prior. The news had no impact on the market as the estimate lied within expectations.

On Thursday, retail sales revealed that consumer spending for February was softer than anticipated, falling by 0.6% (preliminary) from the month prior. Strength in the consumer sector is needed if the U.S. is going to have non-negative growth in GDP. As it stands right now, the housing and manufacturing sectors seem to be taking their toll on households’ ability and even willingness to spend.

Another revelation for the week came on Friday with the release of February’s consumer price index, annual non-seasonally adjusted rate, at 4%, 0.3 percentage points lower from the month prior. Given food and energy inflation coupled with a lower dollar value and reduced target interest rates, the data release had many bewildered as to the cause of the fall. Officially, the reasons stated were falls in: apparel; new and used motor vehicles; and energy costs. Many questioned the last factor, but the report pointed that reduced consumer demand for energy had led to its reduction.

On the topic of energy, WTI crude oil reached an all time high last week, reaching an average of $108 per barrel on investor support in commodities and a lower dollar. The recent surge in crude oil made for an 86% increase in its price from a year ago.

The lower dollar also ensured positive inflationary trends in internationally traded goods. Import prices surged by an annual13.6% in February 2008, the highest percentage growth since the beginning of the series in 1983. It is clear that the lower dollar value, which fell to an all time low of 71.67 last Friday against a basket of six currencies, is negatively impacting the domestic economy.

Lastly, this coming Tuesday, the Federal Reserve will announce its new target interest rates. Given the events from last week regarding additional global and domestic liquidity issues, a 75 basis point cut in the federal funds rate is expected; however, some advise to not be surprised if we observe a 100 basis point cut.

Equities

Stocks fell last week, as liquidity pressures in the funding markets resurfaced. The announcement of an injection of U.S. $200 billion by the Federal Reserve as well as liquidity assistance from the Bank of Canada, Bank of England, European Central Bank, and the Swiss National Bank would temporarily help equity markets; however, it would not be enough to drive equities into a positive growth region by the week’s end. Concerns were further fueled on Friday with the New York Federal Reserve’s implementation of regulations allowing them to provide JP Morgan, an investment house, with a loan used to then extend credit to Bear Stearns. Typically, the central bank only lends to other banks, but the Depression era regulation allows them to extend credit to other types of financial institutions.

Previous Articles: http://www.kitco.com/ind/index.html#ip

Enhanced Liquidity: Federal Reserve and other central banks announce specific measures designed to address liquidity pressures in funding markets

South African Power Crisis: Mines to get 95% Power Back, Urgent Meeting with South African President, Gold Fields Affected, Mines to get priority in S.Africa power plans

 

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