Fresh Bets Piled On


By Jon Nadler

Feb 26 2008 2:28PM


Good Afternoon,

This morning's advice to keep an eye on the US dollar proved timely, as the greenback took it on the chin following more poor reports from the US economic front. The US currency slid under the 75 mark on the index amid renewed trade and speculative expectations that the Fed will keep the easy money flowing in order to fend off a deep(er?) recession.

Gold and the rest of the precious metals complex were pushed back up shortly thereafter by heavy fund-driven purchases. As a result, the morning losses in gold became the gains we had alluded to as potentially in the making, in the opening comment. The $945 level was indeed recaptured (the high was near $949) as participants were willing to bet that the Fed will (at least for one more go-round) let inflation loom ominously while it keeps the tourniquet applied to the hemorrhaging real estate and consumer sectors. The Dow climbed today, but did so while writing a 'thank you' note to IBM for its $15 billion buyback move.

New York spot prices were trading just under $946.00 per ounce at last check, showing a $7.50 gain as participants were seen taking the economic numbers (inflation indices, consumer sentiment) and quite dismal US home foreclosure figures for January (up 57%) to the bank as far as Fed rate cuts in March are concerned. Silver enjoyed another very strong day in the sun, gaining 65 cents to $18.65 and even platinum managed a comeback, losing only $3 to $2148.00 per ounce. TOCOM is set to reduce margins as the market did not close limit up for the past three sessions. Palladium rose $13 to $535.00 per ounce.

News on the US inflation front was not good. At all. Marketwatch brought us the following newsflash early this morning:

"Producer prices soared in January, pushed higher by energy prices and the biggest increase in food prices in more than three years. The January producer price index climbed by 1%, the Labor Department reported Tuesday. The PPI had fallen 0.3% in December after a jump of 2.6% in November. The core PPI, which excludes food and energy prices, rose 0.4%, driven by higher drug and car prices. Year over year, the PPI is up 7.4%. This is the fastest pace since 1981. Over the same time period, the core PPI is up 2.3%. The data will provide ammunition to the hawks on the Federal Reserve, some of whom have argued recently that the Fed has already cut interest rates enough over the past six months. "

The 'ammunition' that the data provided, has thus far been blanks. Gold, oil, and other commodities are treating the rise in prices as a harbinger of stagflation and are rallying off the immediate news for perhaps as long as until the Fed signals that its rate cutting campaign needs to be halted in the wake of rising inflationary threats. That time came and went...months ago, actually.

The news reporting -from at least the oil pits- today did not even try to ascribe a supply/demand reason for the fresh spike back to just above $101 per barrel. Bloomberg puts it plain and simple:

"Reports today showed that U.S. home prices tumbled, consumer confidence weakened and producer prices rose last month. Hedge- fund managers and other large speculators increased net-long positions, or bets on higher oil prices, in the week ended Feb. 19, a Commodity Futures Trading Commission report showed."

A professional trader characterized the surge in prices as: 

"The market is being driven by speculation, fear and psychology" said Stephen Schork, principal of the trading firm The Schork Group Inc. in Villanova, Pennsylvania. "There were some investors who shorted oil when we reached $100 last week, for whatever reason, and they panicked today."

Very likely, those who shorted gold on the IMF sale speculation found themselves running for similar cover after today's data release. Ah, the miracle of funds. What would we do without them? Have normal markets that manage to work on fundamentals? What a concept...Nah.

In the interim, the pattern of difficult sales conditions in the jewelry sector coupled with a rising tide of scrap supplies continues to be visible in the gold market. While investment demand has to some extent been able to offset the slump it has in some ways contributed to it as well by propelling prices to levels where stories such as the following one are becoming routine. The Gulf Times reports via Reuters that:

"High gold prices weighed on Dubai's gold sales in January, depressing volume by at least 35%, a top industry executive said yesterday. "Even with the sales promotions we had, sales volume was quite down last month because of the levels of prices gold reached during this period,"?Tawhid Abdullah, managing director of the Dubai Gold and Jewellery Group told Reuters. "If you also look at February, it looks like sales volume will be down by about 30%. People are not yet accustomed to the recent hikes in prices," he said in an interview.

Gold rose more than 30% in 2007 amid safe-haven buying due to credit market turmoil and worries about the health of the US economy, which sent the dollar to record lows, as well as record high oil prices. Traders had hoped gold jewellery retail demand would be upbeat if prices drop below $900 an ounce.

Dubai, known as the "City of Gold", saw the volume of gold sales in the fourth quarter drop 30% on the year as high and volatile prices scared many buyers, Abdullah said. The Gulf's commercial heart is a long-established market for gold bullion and jewellery, wholesale and retail, fuelled by strong demand from the Arab world and India, the world's main gold market.

Gold demand in India, the world's top gold consumer for jewellery and other uses, has suffered, Italian consumers have temporarily suspended orders, the Dubai gold market is not buzzing and Japanese retail investors are offloading."

Remain on alert for fast-changing conditions as markets digest a thus far very news-busy week. We have durable goods and new home sales tomorrow, plus crude oil inventories. Thursday and Friday will get even wilder. As we wrote last Friday, this could be a week for new records.

Happy Trading.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.