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Fire. Works. In Housing??

By Jon Nadler       Printer Friendly Version
Jul 3 2008 2:24PM

Good Afternoon,

Thursday's pre-holiday price action in gold was dominated by busy profit-taking sales in the wake of the 25 bp ECB rate hike decision. Amid plenty of internal discord regarding the wisdom and consequences of the action, the ECB this morning did follow through on its previous hawkish jawboning and hiked interest rates by a quarter point. The post-hike statement however, was not exhibiting much in the way of claws on the hawk, as Mr. Trichet indicated he had "no further bias" following today's anti-inflationary adjustment. This revived expectation that the next central bank to raise rates in order to keep inflation in check will likely be the Fed (unless you count Sweden and Denmark which already followed today).

The US dollar not only did not swoon and fall through the floor on the news, but its morticians were likely...mortified today, as the greenback actually took off and popped to nearly 72.80 on the index. This, as a result of the fact that ECB rate increase decision had already been fully factored into the gold price equation in previous weeks, and of the fact that market participants sold the metal on the less-than-dire jobs report that was released this morning. Cycle-watchers point to the overall

At last check, the yellow metal was showing losses of $13 at $932 per ounce. Silver lost 15 cents to $18.22 while platinum fell $45 to $2010 and palladium dropped $4 to $459.00. Not a good week overall, for the noble complex. Then again, it was a lousy one for automakers. Stories about GM's woes (specifically, the "B" word) continue to swirl in the background and pose some roadblocks to the noble metals' continued advance.

Today's stock session closed early for the holiday, and while the S&P briefly dipped into bear territory, it did manage a comeback from the brink. The Dow added about 73 points to a week best forgotten among investors. Let's not even talk about yesterday's epic swoon in the mining shares sector. And let's most certainly not talk about whether or not shares of miners historically lead or lag the underlying metal. In the commodities complex, the only bright spot today was in the energy sector. Oil gained 3% on the week however, and remained above $144 as the afternoon wore on. In that sense, gold picked the dollar as today's important price motivator in lieu of oil.

Persistent floor talk of potential dollar intervention in the wake of next Monday's G-8 summit in Japan kept metals on the defensive, as did pronouncements from the President of Brazil that oil prices "will adjust" in the not too distant future. On the other hand Venezuela's leader Chavez did some more chest-pounding and called for the creation of a South American version of OPEC. What timing. Bob Hope must be spinning...

The June jobs reports indicates that 62000 jobs were lost in the month and that the overall rate held steady at 5.5%. According to analysts, the report is mixed, the numbers not very good, but (in their opinions) not recession-flavored. Basically, gold has now run out of negative dollar news fuel for the week, and its holders were content to cash a few additional profitable chips before that (very much closer) fishing trip to the very nearest lake. Coming days still smell like dollar intervention to some floor traders we spoke to. A bit of breathing time is still there for the Fed at the moment, but a response to the ECB hike will eventually have to come. A rate cut would not be it.

Background news of related interest: Millions of Indian truck drivers put their vehicles' parking brakes on today to protest the soaring price of fuel. The isolated actions by the men and women keeping the global economic blood flowing could well turn into one massive concerted work stoppage that could send a warning flare of major proportions to producers, speculators, and legislators alike. This could include thousands of furloughed airline employees, about-to-be furloughed auto workers, and the list goes on. Having cut through $100 like the proverbial butter knife does not mean that $150 or $200 will be easy pickings for oil given the massive fallout of global consequences that such values could engender.

US Treasury head Henry Paulson sees the greenback as having had something to do with oil prices going ballistic, but his take is that it is only a small part of an equation which has seen a 25% drop in the greenback translate into a five-fold explosion in crude oil. He sees supply and demand at the core of the oil phenomenon - this, while legislators in his country are digging in the dirt trying to find the index fund culprits who might be the real cause of the current price of Texas Tea. Mr. Paulson also believes that inflation and the combat thereof has now taken centre stage on the global economic and central bank policy arena. At least as far as the ECB is concerned, that appears to be the case, despite protestations from Monsieur Sarkozy about the state and possible fate of the Eurozone economies in the wake of higher borrowing costs.

Had borrowing costs and lending and appraisal procedures been remotely reasonable during the go-go years in the US real estate market, we may not be reporting news such as contained in the following story. The housing market in the US is on fire. On actual fire. Thousands of upside-down owners are putting a torch to their digs instead of just taking a walk. Bloomberg reports that:

"The biggest surge of mortgage defaults in seven decades coincides with an increase in blazes in foreclosed properties led by states with the most repossessed homes, according to fire safety officials in Nevada, Massachusetts and Ohio. "The more empty houses we have, the more fires we are going to see," said James Wright, chief of the Nevada State Fire Marshal Division in Carson City, the state's capital. "It's particularly dangerous for firefighters, because they don't know what condition these buildings are in or what they might find in them."

National arson statistics for 2007, due in September or October, probably will show a significant increase as foreclosures climbed toward an all-time high in 2008's first- quarter, said James Quiggle, a spokesman for the Coalition Against Insurance Fraud in Washington. "Home arsons follow foreclosure trends, with a lag," Quiggle said, pointing to an increase after the last housing slump when the number of blazes reached 116,600 in 1992 from 111,900 in 1990. "We're facing a potential spike in arson like we've never seen before."

Insurance pays the replacement cost, which rarely covers the mortgage of a property in foreclosure, he said. The value of the land is not covered. "It takes a lot of chutzpah to set fire to a house when you're the policy holder and would be first on any suspect list," Quiggle said. "It doesn't take much for a squatter to knock over a candle or for some kids to set a fire when a building is vacant." The value of homes owned by U.S. banks more than doubled to $8.6 billion in the first quarter of 2008 from $3.59 billion a year earlier as lenders repossessed homes in default, data compiled by Federal Deposit Insurance Corp. in Washington show."

While the debate continues about what kind of recession the US is, or will be having, the numbers coming from statisticians may not fit the definition in the textbooks until perhaps Q4 (if then). In the interim, the Fed (and the ECB) are left with the choices of jawboning and interest rate tweaks. Intervention remains on the table, but for the moment, Mr. Trichet's pirouette on inflation indicates that he too underwrites a dollar no lower than 1.60 - a level that dollar morticians were cocksure would be smashed in the wake of today's rate hike.

Watch for G-8 summit stories as they play into the dollar and look for movements in oil next week. Tomorrow, the only fireworks we can reasonably expect will be in the US skies. Next week, the market will likely offer some of its own.

Happy Trading and to our US audience, a Happy Independence Day Holiday!

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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