Gold as the Crystal Ball

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Good Afternoon,

A third day of gains in values, albeit much more moderate than those seen on Monday, was in store for gold market participants today. New York spot trading reached a high near $884 while crude oil was making fresh headlines by touching $122.73 per barrel. Once oil started to surge, the US dollar broke under 73 on the index, (also aided by the wider than expected loss of $2.19 billion at Fannie Mae and an $11 billion loss at UBS) and a little more buoyancy was seen in bullion.

Most of the early gains were given up by mid-afternoon however, as crude prices pulled back about one dollar from their highs and as the greenback once again aimed back towards the 73 mark. Oil remained at the front line of today's action in commodities, thus it bears close watching as it is once again becoming vulnerable to a serious correction amid this speculative binge.

Buyers squared off with profit-takers and appeared to have the winning hand early in the day. More fresh buyers will be needed to overcome the current uncertainties in the metal. That part remains less than certain however, as CFTC records show that speculative long positions on the exchange registered their lowest level since last September (at a time when bullion was near $732) as of last week, after another 4%+ drop in bets on higher gold prices and amid a 9.6% decline in balances held by the gold ETF. Silver added 16 cents, trading at $16.95 and the noble metals rose quite nicely, with platinum gaining $31 at $1960 and palladium rising $5 to $427 per ounce.

Commodity prices surges have definitely made it onto the radar of central banks and present a fresh challenge to policymakers who are still trying to avert a global economic slump of the type that the IMF recently envisioned. Much depends on the one commodity that everyone has to have in order to (literally) keep the engines of growth going. While Goldman Sachs pundits see crude reaching $150 to $200 within two years, hedge fund manager Barton Biggs believes that if oil can just stabilize near $100 instead of heading towards those levels, the effect would be that " the U.S. economy will grow in the second half of 2008, the Standard & Poor's 500 Index may climb to a record this summer and commodity prices will retreat as much as 30 percent."

While oil continues to be at the center of the action over the recent period, it appears we ought not to be ignoring what gold as a possible leading indicator may be telling us about...the euro (and of course, the dollar). From London, Reuters' Veronica Brown reports that:

"It's been quite some rally for the euro, scorching its way to $1.60 against a beleaguered dollar last month, but if recent moves in gold are anything to go by it might just be time to sell.

Bullion has broken ranks with its commodity stable-mates to plumb four-month lows last week, shedding almost $200 after hitting a record $1,030.80 an ounce in mid-March . Traditionally the greenback's inverse relationship with the precious metal goes thus: if the dollar falls, gold rises as the weaker U.S. currency makes bullion cheaper for non-U.S. investors and vice versa.

Gold's role as a safe store in troubled times shone out, with a 60 percent spike to the March high in just seven months as markets endured shocks stemming from the global credit crunch that started in August last year. Trade between the euro and dollar accounts for some 27 percent of $3.2 trillion-a-day global foreign exchange turnover and the euro/dollar-gold absolute correlation is among the strongest -- averaging 94 percent since the start of 2007.

So it's hardly surprising that bullion's record high was attributed in part to a then record high in euro/dollar the same day.