Status Quo: Weakness

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Following five sessions of losses, gold prices edged higher early Thursday as oil briefly recaptured the $110 level and as European interest rate decision time neared. The BoE did not adjust its key rate away from 5% as it is seen as stuck between slow growth and rising inflation. The ECB is largely expected to follow suit 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, but falling commodity prices have provided last-minute relief on the inflation front - though 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.

Thus, the pound and euro will be left with the status quo as far as rates are concerned. It will be largely up to the dollar and the readings on the US economic front to change the current equation by any significant metric. 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. 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.

Bullion values picked up nearly 1.3% early in the day, opening at $810.50 per ounce in NY with players awaiting the tally of back-to-school period sales data and possibly downbeat employment figures. 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. Demand was also good in Indonesia and Thailand but concerns remain that local demand in Turkey may dissipate as wedding season draws to a close there. Silver added 22 cents to open at $13.11 while platinum gained $35 to climb back above $1400 - with a $1405 opening. Palladium was ahead by $1 at $288.00 per ounce. On the index, the US dollar was showing at 78.10 and just under 1.45 against the euro while crude oil was quoted at an even $110 per barrel. Gold currently remains in a $790 to $820 channel but lack of reaction to employment and ECB rate news could revive the tilt towards the trends we have seen over the past week.

Daily market comments 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 divided on bullion's prospects between now and year-end. JP Morgan expects at 10% gain from current levels before the time comes to change calendars, while Dresdner Bank AG looks for the metal to decline by nearly the same percentage by the same target date. Projections that the ECB's hawkish stance will be limited to words only, and that the probability of any inflation-combatting rate hikes has now been sent to the 'zero' bin will likely continue to underpin the dollar as it feverishly repairs the damage it sustained over the past year. Mr. Trichet's take that downside risks to the regional economy are countervailed by rising risks to price stability did nothing to boost the euro, while the greenback rose to near 78.20 despite poor jobs numbers this morning. Thus, the trading wheel keeps turning.

Happy Trading.