Gold prices took off for their highest ground in two weeks today, as the divergent oil and dollar fueled additional speculative interest in the metal. There is still somewhat of a disconnect in the fact that oil as well as the dollar are scaling new highs and lows respectively while bullion is stuck some $100 away from its own recent record. Some analysts have noted that investors are possibly judging the energy complex to be a better hedge against current conditions than gold is and are thus piling into that niche for the moment. Oil has risen 79% in the past 12 months versus gold's 36% gain over the same period. The gold ETF (GLD) remained stalled at 642 tonnes for the past ten days after reaching a high of near 664 tonnes one month ago, with gold's peak.
Demand for commodities from hedge funds and other speculators has probably shifted to oil in the past few weeks, said Stephen Briggs, an analyst at Societe Generale in London. They may judge energy is a better hedge against inflation and a weaker dollar than gold, he said. - this, from Bloomberg this morning.
Things looked bleak for the US dollar this morning as reports of rising European inflation figures scaled back expectations of ECB rate cuts any time soon. The markets appeared to want to overtly contradict and/or test the 'resolve' shown by the G-7 to address undesirable volatility and extremes in the currency markets. The greenback fell to 1.5979 vis a vis the euro while oil was at one point seen at $114.95 per barrel. US inflation rose, by a relatively tame 0.3% in March, thus allowing the Fed some more wiggle room before it pulls the plug on rate cuts perhaps later in the spring. Industrial production, on the other hand, showed a surprise gain of 0.3% and is pointing to an sector that is not yet in freefall mode, despite general apprehensions that today's Beige Book raised about the overall shape the US economy is in at this juncture.
New York spot gold trading maintained a strong premium all day, at one point testing the $950 level but later pulled back to near $944 bid. Amid all this, earnings at JP Morgan fell by about half, as the firm earned a net of $2.4 billion in Q1. It is widely thought that The Street will greet such numbers with glee, as the mere fact that earnings were actually tallied at all at the firm in this challenging environment (according to Morgan), is nothing short of a feat usually seen in David Copperfield's shows. The Dow took the Morgan and Coke earnings reports as a good enough excuse to rally some 180 points during this mid-week session.
Silver rose 43 cents to $18.28 while the noble metals reversed direction as well, and platinum added $45 to $2021 and palladium climbed $9 to $461 per ounce. There are tight fundamentals for platinum, especially due to ongoing electrical shortages curtailing mining output in South Africa, where 80% of the world's supply originates.
You still have strong industrial demand, Carlos Sanchez of CPM Group NY recently said. You still have concerns over supplies. The South African situation still hasn't worked its way out of the market. That will take years, and any short-term solutions will take several months. In fact, Eskom's troubles are now expected to last between five and seven years.
The dollar was last seen attempting to hold near 71.40 on the index, as it took a battering from the spike in oil after gasoline inventories took a drop, and on the reports of the EC inflation surge. Currency strategists at Japan's Daiwa and Nomura believe that the dollar is scraping bottom as we speak, and that a rebound is in the making due to the coming end of the Fed's rate cutting campaign as well as slowdowns in Japan and Europe.
Such potentially positive dollar developments were also reflected in the opinion of gold analysts, as quoted by Bloomberg:
While the tactical outlook for gold is more comfortable now than when gold was up at and above $1,000 an ounce, we are not banging the table to buy it here,'' John Reade, an analyst at UBS AG in London, said in a report today. ``The lack of performance in gold may be an indication that investors are beginning to see an end to U.S. dollar weakness and any sign of the dollar basing will undercut the story for gold.''
On a related note, China's economy started to show signs of slowing - if we can call them that - as it posted a 10.6% growth rate in Q1, down from 11.2% in the previous quarter. Despite such a small contraction, the country is poised to possibly overtake Germany and become the third largest economy globally during 2008. Such growth rates are not necessarily what officials want, given the threats of inflation and speculative overheating. The central bank raised reserve requirements for large banks for the 16th time in two years as a result of the data.
Look for more firmness in the interim, as the weak housing starts data and blazing oil prices help gold aim back to $950/$965. However, be on alert for fast turns in either oil or the dollar as profit triggers remain very much armed, right next to the 'buy' buttons of many a fund.
On a final note, if you are interested in silver (and who isn't these days?) and want to get the real picture of what is going on in that market, do yourself a favor and make a small investment into the CPM Group's 2008 Silver Yearbook, set to be released on the 29th of the month. Rather than trying to decide which particular silver pundit may be in possession of the correct set of facts regarding current market conditions, you now have the opportunity to go straight to the source that actually gathers and dissects data for a living and learn the hard numbers and actual trends in the metal. Kitco Inc. is proud to be a sponsor for this edition of the publication. You will find the book available here: http://store.cpmgroup.com/