Another day of major malaise in news and in the markets helped push precious metals prices higher still as participants sought salvation in anything but the dollar. This morning's feeble GDP figures reinforced sentiment that the Fed will have little choice but to lower rates in mid-March despite the more than obvious signs of inflation hanging over the economy. The attention (read: buying frenzy) that funds are paying to the commodities sector is only adding to that cloud layer.
Today, investors received assurances from the US President that the economy is not headed into a recession, and that the housing problem can be solved by waiting for the economic stimulus package to kick in. They also received assurances from the Fed Chairman that the banking system is sound, and that despite coming failures of a number (as yet unknown) of smaller banks in the wake of the subprime mess, there is little reason to worry. And thus, we got the US dollar sliding to 73.65 on the index, crude oil rising $2.02 to $101.66, the Dow losing 135 points. Looks like a vote of a different type of confidence to us.
Gold prices took the opportunity of the aforementioned conditions to 'go for it' and touched the $970 mark after gaining one percent on the day (thus far). Any metal that looked like it may be in for either profit-taking or a slippage in demand due to perceptions of an impending recession turned the other way and became safe-haven umbrellas for funds and investors today. Silver rose 47 cents to $19.75, platinum reversed course and added $18.00 to $2146.00 and palladium gained $18 to $572.00 per ounce.
Sources at Reuters inform us that:
The International Monetary Fund said on Thursday no timetable has been set for the sale of a limited portion -- about 12.9 million ounces (403.3 tonnes) -- of the IMF's total gold holdings of 103.4 million ounces. In a background paper on the proposed sale of IMF gold stocks, the IMF also said if the gold is sold on the market, rather than in off-market transactions, the sales will be phased over time to avoid disruption of the gold market, as recommended by an independent panel.
Based upon this, it is reasonably safe to assume at least two things: a) the sales, when they come (and come they will) will not significantly impact the market unless there is a major downtrend already underway, and, b) we may lay the theories of sinister motives behind the sales to rest once and for all. Disruption of the markets is not on the IMF agenda. Disruption of the market was not on the agenda of the central banks either, when they agreed to go under the terms of the CBGA. Believe it, or not.
So, what is next?
We have about a two and a half week window up to the March 18 Fed meeting. In the interim, next Wednesday, Thursday and Friday we get another large dose of US economic figures. Any one of them could be market-moving news if it is seen as bad enough. Although gold faces some resistance around $975 and short-term conditions are tipping into overbought territory, the metal could fulfill the four-digit value -if not in the period leading up to the Fed meeting- then right after the certainty of the half point or so rate cut that is so widely expected to come.
The question then becomes whether the market then aims for $1,080 and remains supported by a still declining dollar, or whether a significant correction becomes the first order of the day after a 45% year-on-year gain in prices and a number of market watchers calling a top (even at the risk of getting lynched). The other question to ponder is what other asset may look like a terrific bargain at the time when (and if) gold shoots for the $1K+ mark and how many hedge funds decide that such an asset represents the 'next big thing' to be in.
As for the Fed, it has to decide just how far it is willing to let inflation rise if it learns that its rate cutting campaign still does not take hold as consumers may be debt-sated. The traces on the charts (and not just gold's) are looking like speculative blow-offs to many participants, but they continue to feed off of bleak news from the US economy and may be able to do so well into the second quarter. They also continue to ignore the virtual drought of Indian gold demand and the rising tide of secondary scrap supplies.
Finally, we need to keep a lookout for possible signs of a 1980's style gold mania emerging among average investors - the group that usually decides that when gold makes it to the front page of the newspaper then it is a proven winner and the time has finally come to jump onto the bandwagon. Rewind to January of 1980.
We've seen the same pattern with real estate not that long ago. There was hardly a magazine out there on the shelves at Hudson News that did not bait with: How YOU Can Make Big Money in Real Estate Too! And so, people camped out in tents near Florida condos, waiting for their chance at the lottery tickets that might allow them to buy that hot commodity. If there is a better contrarian indicator out there, we have yet to learn about it.
There is another day of hand-wringing coming tomorrow, as nonfarm payrolls, unemployment, and consumer credit numbers are slated to hit the wires. Let's see how the greenback takes the news and what the funds may be up to tomorrow. We promised you an exciting week last Friday. Who knew just how exciting?