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Save a Buck

By Jon Nadler       Printer Friendly Version
Jun 27 2008 2:34PM

Good Afternoon,

New York gold followed up on yesterday's buy stop-infused marathon with a $12 gain to just under $930 as the greenback was still slipping (at 72.32 on the index) and oil was still ahead by $2.41 at $142.05 per barrel. Current speculative focus revolves around $925 but $936 to $945 remains the more significant value zone to overcome. Such an achievement depends in large part on whether crude oil heads for $150 prior to (ahemmm...)Independence Day or not.

The setup in that [oil] market could soon result in some bloody noses soon - and not from the current altitude at which black gold finds itself...Frankly, juggling dynamite and road flares at the same time could make for some fireworks a few days early. We remain less than comfortable with an oil-driven surge in gold at a time when the attention is so tightly focused on how to bring prices of the former down. We also remain of the opinion that the dollar has been given a plank at 1.60 on the euro and that it will not walk off of it and drown this summer, but rather it will use it as a springboard in coming months.

Yesterday's stock market rout was expected to level off as consumer spending figures came in better than was anticipated. However, despite such news, the market shed another 150 points and has set this June up as one for the record books. The bad ones, that is. Pending or actual losses at Lehman, AIG, Citi, and RBS kept the mood on the floor on the sour side and rumours of Chrysler's demise and GM's apparently incurable woes added to the equity gloom. Crude oil and the dollar did not help either. Silver rose 50 cents, to $17.64 but platinum gave back some of Thursday's gains, dropping $9 to $2044.00 per ounce. 

As July 3rd approaches and the ECB is expected to do that which the Fed currently won't, the dollar continues to have problems on the index and against the euro. The footprint of momentum hedge funds is wide and deep in these markets and the massive amount of money being tossed around simply bends various commodities out of any recognizable shape. Welcome to the world of electronic trading, where you can now expect to see 3 to 5 percent moves on an intra-day basis becoming commonplace, and leaving small investors' speculative capital looking like shredded wheat.

Furthermore, changing behavior among would-be and current investors could keep money off the table in the markets. Apparently, more and more Americans are discovering the joys of..saving. Unthinkable, will say some. Then again, pundits assured us of a recession by now, and they had to go back to the drawing board on that one. While consumer spending was up, savings was up even more. As consumer confidence sank to a 28-year low, the attitude shifted to socking money away as times are uncertain. So, piggybanks win over the roulette table, hybrids push SUVs aside, people start caring, Kim Jong-Il blows up his nuke facilities. Times are a changin'...The UK's Guardian finds that:

"The personal saving rate -- which was in negative territory as recently as November as households went into debt to maintain spending -- jumped to 5 percent in May, the highest since March 1995, according to Commerce Department data released on Friday. Some $48 billion in rebate checks arrived in May, but households increased their spending by just $7 billion, or about 14 percent of the extra money they received. With another roughly $50 billion of the nearly $110 billion total in stimulus checks arriving in June, the next month's report is likely to show the saving rate jumped again, perhaps to 8 or 9 percent, said UniCredit economist Harm Bandholz."

All eyes still remain on oil. More on why, from Bloomberg:

"The U.S. House of Representatives approved a bill aimed at curbing excessive energy-market speculation. The bill, which passed 402-19, would require the Commodity Futures Trading Commission to consider using position limits, or constraints on the size of the stake each speculative investor can own, and raising margin requirements, the amount of money required to trade. The vote came after the record was set.

The measure is "not likely to be bullish," said Tim Evans, an energy analyst for Citi Futures Perspective in New York. "You can argue that it may not be effective, but I don't know that you can actually argue that it's bullish."

Yesterday, oil rose $5.09, or 3.8 percent, to $139.64 a barrel, a record settlement price, as Libya threatened to cut output, OPEC's president said prices may reach $170 by the summer and the dollar weakened. Yesterday's all-time-high intraday price surpassed the $139.89 reached June 16. Oil futures have moved by 2 percent or more on half of the trading days this month. Prices veered 43.4 percent from the 30- day average yesterday, the highest volatility in 16 months, according to Bloomberg data. Volatility is a measure of how far the price of a commodity such as oil deviates from average closing prices over a prior period, such as 30 or 60 days.

The House passed the measure just hours before recessing for a week for the July 4 Independence Day holiday, a time when members typically return home and meet with constituents. Rising retail gasoline prices, which averaged $4.07 a gallon on June 25 and reached a high of $4.08 on June 16 according to the AAA, have angered voters. Gas prices are up 34 percent this year.

The measure calls on the CFTC to "curb immediately the role of excessive speculation" in any market it oversees in which energy futures or swaps are traded. The bill directs the CFTC to use its authority to "eliminate excessive speculation, price distortion, sudden or unreasonable fluctuations or unwarranted changes in prices, or other unlawful activity that is causing major market disturbances that prevent the market from accurately reflecting the forces of supply and demand for energy commodities."

The measure needs to be passed by the Senate and signed by the president before becoming law. The CFTC, which regulates U.S. commodity futures and options markets, said earlier this month that it formed an interagency task force to evaluate developments in commodity markets, including the role of speculators. The task force includes the Federal Reserve, the Securities and Exchange Commission, the CFTC and the U.S. Departments of Treasury, Energy and Agriculture."

Should the measure become law, it could lead to some interesting times ahead - and not just for oil. Spec funds would lack the ability to camouflage themselves and try no to be noticed in other commodities. Certainly, the political motivations in prioritizing oil as the target of such restrictions are transparent. However, if oil is fair game, who is to say that other commodities will not be targeted if the outcome of their price distortions also stokes inflation? Only time will tell. Or, perhaps the price of some of these assets will.

Swift price moves should not be discounted in the abbreviated trading week that lies ahead. Should the stock market crack and peel any further, or should oil take a surprising turn, we could be in for quite a ride. One seasoned trader we spoke with yesterday felt that we could see the day(s) when a $50-$75 move in gold will be the headline. Look for the usual suspects to provide the market-moving energy and keep an eye out on next week's ECB news as well as the fact that the US Treasury's Mr. Paulson will be meeting with Mr. Trichet and "currency issues may also come up at the meeting." You know the 'issues.'

Happy Trading, Pleasant Weekend.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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