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Explaining The Irrationality In Today’s Gold Prices

The regular trading sell off in gold continued today, knocking it down more than $15 an ounce in late afternoon trading. Gold was off its lows for the day, however.

A weakening dollar helped to take some of the sting of loss out of declines throughout the precious metals complex.

Today theoretically should have been an up day for gold, given that the durable orders report issued was spotty, core elements declining again and downward revisions issued for an already bleak-looking February.

Weak data on U.S. jobless claims, manufacturing and some home sales this week have hurt the dollar, but boosted uncertainty concerning the timing of a Fed interest rate rise in the next few coming sessions of the FOMC. (The next meeting begins Tuesday.

The weak data should dictate that the rate rise will be put off, but apparently gold investors did not get the memo.

Equities worldwide are booming on essentially free money – given that interest rates are so low now – and that has dulled the attractiveness of gold. Lower interest rates should mean better conditions for a rise in gold. A rise in U.S. interest rates would depress the price further.

If you’re really paying attention to the possibility of a rise in Fed interest rates, keep an eye on Fed funds futures, which now are implying a roughly 50% chance the Fed could raise rates in September. It has factored in a full rate hike for December. The expectation for September was just greater than 50% two weeks ago.

Perhaps gold investors agree with sentiment widely circulating that says the data from the U.S. economy’s first quarter is to be discounted because of weather, and that any bounce will not really be felt until late in the current (2nd) quarter and not fully until Q3.

That thinking then would surely point to September, if not December for a rate rise.

JPMorgan chief U.S. economist Michael Feroli said the firm still expects a September rate hike from the Fed. "Even with weaker early Q2 momentum, we think by late summer there will be more convincing evidence that the Q1 weakness has passed," he wrote.

"More importantly, our Fed call is more sensitive to labor market outcomes, and the relative stability of the jobless claims data suggests that (once again) the disappointment on GDP is not being reflected in labor market outcomes."

Crude oil is a strange phantom in global markets. OPEC oil alone outstrips demand by 2 million barrels per day. Meanwhile U.S. crude stocks keep growing despite the fact that the number of rigs in the country has slipped by almost half since last January. Of course, one question that must be asked and answered is this: how much were the idled rigs producing and at what price?

We can safely say that many of those rigs were low-productivity wells and after extraction and transport costs, the oil produced was only profitable at $75+ per barrel. So, those may be a long time in coming back on line.

In spite of the weaker dollar, West Texas Intermediate crude was down 1% today, although Brent North Sea rose due to Forex pressures on the dollar.

Unless there is a huge negative international event, gold and silver may be in a holding pattern until Wednesday when the Fed releases its preliminary comments after the FOMC meeting.

Wishing you, as always, good trading,

Gary Wagner



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals 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 Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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