Kitco Precious Metals and Economic Review: Positioning an Expected Federal Funds Decision - Equities Down, Dollar Up, Metals Mixed
Kitco Precious Metals and Economic Review – Week Ending June 13, 2008
Wendy Lynn Ip, June 14, 2008, 11 PM ET
Gold’s London PM Fix edged down over the course of last week as the dollar strengthened on the increased probability of a federal funds rate increase this coming June 25, 2008, by 25 basis points. The reevaluation of the upcoming interest rate announcement began last Monday evening with Federal Reserve Chairman’s, Ben Bernanke, comments on increasing inflationary pressures from crude oil prices and continued onward through Wednesday with the release of the Beige Book, providing the Federal Open Market Committee with a review of the economic conditions in the 12 Federal Districts. With a greater probability of an interest rate increase, the dollar strengthened against a basket of six major trading currencies while equities fell on fears of stagflation. Gold had fallen with the dollar’s rise, reaching a London PM low of $862 per ounce last Thursday before strengthening a touch on Friday to $866 per ounce. Even with the loss, gold’s real annual gains had increased by 3 percentage points to post at 32%.
Silver’s performance on the spot market was similar to that of gold’s. Its London Fix would reach a low of $16.31 per ounce on Friday while its average would post at $16.85, 0.03% higher than the week ending June 6. Like gold, its real annual gains crept up a touch, increasing by 4 percentage points from the last review to post at 25%.
Platinum Group Metals
Platinum edged down along with gold for most of last week, reaching a low on Thursday of $2,005 per ounce (London PM) before nearly rebounding on Friday to $2,043 per ounce. Its average price had risen by 1.1% from the week ending June 6, 2008, to post at $2,033 per ounce. Its average price would post 0.6% higher than its 10-day moving average, but fall 0.5% short of its 30-day moving average. Real annual gains increased by 3 percentage points from my last review to post at 55%.
Palladium performed roughly similar to platinum, but not as close as we have observed in the past. Its price, like gold, would strengthen by Friday. Its London PM had fallen to a weekly low of $426 per ounce on Thursday, still higher than the low in last week’s review. Its average price would increase by 0.6% to post a weekly average of $432 per ounce, rising above its 10-day moving average. Real annual gains increased by 1 percentage point from the week prior post at 15%.
Finally, rhodium remained steady at $9,525 per ounce from the onset of the week until bids came rushing in on Thursday and Friday, driving up its price by $150 per ounce and finishing the week at $9,700. Even with the strong surge, its average price of $9,562 per ounce would fall 1.2% from its average in the week ending June 6. It would continue to sit above its 60-day to 120-day moving averages. Rhodium’s real annual gains had fallen by 4 percentage points from the week prior to post at 53%.
Additional Details on Metal Performance
The correlations came in jumbled across the board last week. Those closely watching the spot market had observed a decoupling in palladium and rhodium from the rest of the metals on Thursday and Friday over the NY market, as those metals soared higher. The slight improvement in the economic outlook translates into a better outlook for the automotive industry and vehicle demand. Palladium is used as an input in catalytic converters for small diesel cars; while rhodium is used for larger vehicles requiring stricter emissions control.
The currencies brought mixed results to the table. We typically expect a positive correlation between the currencies and the metals. This is to say that a weaker U.S. dollar often enhances metal demand in those selected countries or holders of the stronger currency, placing positive price pressures on the metals. With a tighter monetary policy stance coming in from many central banks (India, Canada, China, Europe, Australia, U.K. and even the U.S.), there was a bit of a reevaluation that took place last week of where the U.S. dollar is likely to be heading in the near term. It is believed that this reevaluation coupled with actions taken by central banks lead to a decoupling of many expected relationships we have seen between the metals and the variables listed below. The metals decoupled from their typical relationship with oil as well as equities, as partly indicated by the S&P 500.
The correlations between the metals’ spot price and lease rates came in negative for the week ending June 13, 2008. Again, so far, no consistent pattern has emerged. What we do know is that sentiment for the dollar had increased over the course of last week with U.S. key interest rates set to rise on June 25, 2008. Lease rates for gold and silver had gained for nearly all terms (aside from gold’s 1-month rate), indicating that U.S. dollar sentiment outstripped that of the metals.
U.S. Brief Statistical Update
Inflationary concerns and federal funds rate expectations took center stage in many official statements made last week. Last Monday’s comments made by Federal Reserve Chairman, Ben Bernanke, on the inflationary pressures created by crude oil prices gave market participants a strong indication that there was no chance of seeing a federal funds rate reduction. This helped to support the dollar through the course of the week. Indeed, after Wednesday’s release of the Beige Book the probability that the target federal funds rate would increase by 25 basis points had increased while the probability that the rate would be maintained at 2% had fallen. For more details, please see www.clevelandfed.org/research/data/fedfunds/index.cfm. The expectation of a rate increase had supported the dollar through the course of last week. The U.S. Dollar Index, tracking a basket of six major trading currencies, rose by 0.5%.
The consumer sector is still remains weak even with income tax rebates in hand – The tax rebate fiscal policy was devised to stimulate consumer spending and enhance overall economic performance. Even with the mild increase in May’s retail sales (up by 1% from April), the consumer sentiment index, compiled by the University of Michigan, fell by 3.1 points in June from May’s revised figure and by 34% from June of 2007. Energy prices posed consumer concerns. Consumers expect overall inflation to remain elevated at 5.1% over the course of the next year. On the employment side, initial unemployment insurance claims continue to creep up, posting a preliminary 384,000 claims for the week ending June 7, 2008 – rising by 22% from the same week last year.
On the price index front, the overall seasonally adjusted consumer price index rose by 4.1% from 12 months ago. The index still remains elevated; however, there is no indication that prices are accelerating. Both energy and food prices have been leading the way to a higher overall prices. The energy price index had risen by 16% while the food index rose by 5% in one year’s time. In addition to domestically created inflation, the U.S. has been importing inflation as well, with a weaker dollar and fairly stable demand for imported crude oil. Month-on-month, the U.S. import price index had risen by 2.3% in May with added pressure from petroleum imports.
Global equities, tracked in this review, fell over the week. Economic uncertainty and inflation fighting measures taken by many central banks was one of the main drivers behind the continued downturn in the markets. Monetary policy tightening was taken by the Reserve Bank of India, increasing its target rates by 25 basis points to 8%, and the People’s Bank of China, who raised the reserve requirement ratio by 100 basis points to be in full effect by June 25, 2008. The Bank of Canada did not tighten its monetary policy; however, it did not reduce its target interest rates as many market participants had expected. The Canadian rate remains at 3%. Additionally, comments made by Federal Reserve Chairman, Ben Bernanke, and European Central Bank president, Jean Claude Trichet, on the need to fight inflation gave market participants expectations of interest rate increases.
This wraps up this weekly review. Until next time, take care and I wish you all a very good week.
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