Mervyn King: Not Now, My Darling

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Once again, gold tried to edge higher early Thursday as oil briefly recaptured the $110 level and as European interest rate decision time neared. Most of bullion's morning gains evaporated however, after the Dow, crude oil, and the euro sank in unison. Bullion retreated to the sub $800 area for a third day in afternoon trading after its advance was thwarted by sellers. The yellow metal was last seen at the $798 (down $2.40) level with approximately three hours left in electronic trading for the day. Futures lost $5 after having tried but failed at the $819 resistance which had previously supported bullish sentiment.

Traders were busy raising cash today. What to sell? Gold and oil fit the bill. Why raise cash? Why the malaise in equities? The Fed's Beige Book tea leaves continue to show reruns of previous vital statistics; pockets of slow growth and higher prices in half of its twelve reporting regions. Climbing jobless claims and murky retail sales figures did not inspire confidence about corporate profits either. The near 350-point slide in the Dow also came on the heels of the growing recognition that the signs of a cooling global economy are reflected the falling oil price. Others have commented that last night's GOP jamboree speech fest has investors somewhat jittery about a Republican victory in November. We won't touch politics with any pole, of any length here.

If anything, the margin calls resulting from this massive stock market drop could engender further gold position liquidations from some of the players likely to receive such notices. The short-term direction in gold remains pointed to lower levels, and selling could intensify if $790 is breached this week. This is a correlation pattern which was first observed back in February of 2007 when a major slide in Asian equities gave rise to margin calls and resulted in liquidations in other, liquid assets. Back then, the talk was centered on the end of the Yen carry-trade. Seems like the good old days...

Status Quo continued on the central bank front today, as the BoE did not adjust its key interest rate and stood pat at 5% hampered by simultaneous slow growth and rising inflation. The MPC left rates alone as Governor Mervyn King took inflation signals as more pressing than the growth concerns expressed earlier this week by Chancellor Darling, who painted a British economic picture as grim as any since WWII. The ECB followed suit and did nothing either, as it has its own set of similar difficulties to contend with. The Eurozone economy is but one more quarterly contraction away from having the "R" label applied to it, even though recently falling commodity prices have provided last-minute relief on the inflation front.

The easing in inflationary pressures was not as much as was necessary in order for the ECB to reverse its July move and focus on reviving growth by cutting rates by a small amount. Analysts expect such a move (or perhaps two) to need to take place before year-end. A whiff of stagflation continues to emanate from both sides of the Atlantic at this juncture, thus the mostly (aside from their jawboning about growth and inflation) static stance of the central banks. There are but twelve days until it is the Fed's turn to decide what to do about rates. Judging by how much of its inflation-combat homework has already been done by proxy -by various markets (oil for example)- its meeting may be about as exciting as those in London and Frankfurt were today. It's called 'no bias.'

The good news in this equation may be that gold's 9% drop and foray to nine-month lows last month was met with the first rise in Indian demand in eleven months. The country is gearing up for two months of gold-friendly festivals and as a result of much better values in bullion it has hiked its August imports by 70% over last year. Demand was also good in Indonesia and Thailand (on political jitters) but concerns remain that local demand in another vital gold consuming market-Turkey-may dissipate as wedding season draws to a close there.

Silver lost 10 cents to $13.79 while platinum gained $18 to climb to $1388. Palladium was down $3 at $284.00 per ounce. On the index, the US dollar last was showing at 78.58 and at 1.435 against the euro. Earlier projections of a 1.40 euro may materialize well before the original estimate of end-2008 at this pace. Crude oil was quoted at an even $108 per barrel. Gold currently remains in a $790 to $820 channel but today's events and news could revive the tilt towards the weakening trends we have seen over the past week.

Daily gold market comments sent to us from Standard Bank appear to indicate that risks of lower metals values remain on the scene due to (at least) the following background factors:

1. "Although market expectations are for rates to be held constant at 4.25%, investors must pay attention to Trichet's comments for clues on the trajectory for rates - especially in light of growing downside risks to Eurozone economic growth. Dovish comments could see the greenback rally again - which could mean more downside risks for precious metals.

2. Easing financial market systemic risk means further downside risk potential for precious metals. Also, note that the spread between the generic US 2-year swap and government bond yields has broken below 100 bp (after climbing as high as 121 bp since the start of the US credit market crisis). This could crimp safe-haven investment fund flows into precious metals."

Other market-tracking and trading firms are also divided on bullion's prospects between now and year-end. We have already seen projections of $850 within 1 month and $900 within three from UBS. Then, we have JP Morgan which expects at 10% gain from current levels before the time comes to change the desk calendars, while Dresdner Bank AG looks for the metal to decline by nearly the same percentage by the same target date. Thus, the trading wheel keeps turning.

If the stock market continues to aim for a fall-off under the 11,000 mark it is possible that some safe-haven bullion buyers could emerge in time. Provided of course, they have any money left after meeting margin calls from their stockbroker. Watch for an afternoon closing of under $800 and reconcile them with starry-eyed pundits calling for four digits values around the corner. Whatever you do, act on your own convictions. Makes for a better night's sleep...

Happy Trading.