Gold prices fell back towards the $933putative supportarea following the dollar's success at turning back to well above the 80-mark on the trade-weighted index overnight. Crude oil prices easing back from their lofty $73 levels also helped drag the yellow metal to lower levels. The spectacular advance in oil (complete with forecasts of 'imminent' $85 prices) comes amid an absence of positive fundamentals (sound familiar?) and is clearly bearing the footprint of speculative funds at play (also sound familiar?).
This is precisely why we are paying a lot more attention to the forecasts calling for $40 and sub-$40 oil following this papier-mache price spike. It's as real as a theatre set. Thus, the inevitable headline in this morning's news flows: Oil Drops on Speculation Rally Went Too Far, Too Fast. Would have been enough to just say: Oil = Speculation. But that would just state the obvious. Kind of like saying a month ago that the swine flu was clearly turning into a pandemic.
The dollar's climb was likely aided by news from Euroland that industrial production fell by a record amount in April. Records are made to be broken? Hope not. This morning's figure came in at 21.6%, and it would have statisticians looking back to 1986 for any point of reference. Ouch. However, most beneficial to the greenback's ascent today, were comments from Japanese Finance Minister Yosano who declared that confidence in the U.S. currency in the Land of the Rising Sun is 'unshakable' and that (in his opinion) the status of the dollar as the global reserve currency is 'safe.'
Later this morning, we expect some dollar reaction to consumer confidence numbers. Whatever confidence is highlighted however, it must be shown against a background that reveals the fact that US household wealth declined by $1.3 trillion in the first quarter of this year. Impoverished US households can only look forward at this point; there is no going back to the carefree good ol' days. At some point, housing and stock market values will bounce and the (already in progress) easing in the rate of declines in net worth will turn into a gradual augmentation of same. However, it might take some time before the malls once become a beehive of cheery spenders at play.
The dollar/oil combo is still the story of the week, and it has carried over from the May maelstrom. Silver dropped54 cents at the start, quoted at $14.84as thespeculators pondered how much longer the white metal might remain at such difficult to justify (in terms of fundamentals) levels. Platinum lost $25 per ounce, to fall to $1237.00 and palladium declined $6 to $249.00 per ounce. Relatively steady patterns in the noble metals, despite these daily gyrations and an absence of solid news from the auto front. Saab may have been rescued by Koenigsegg. Raise your hands if you have heard of that automaker. Anyo ne?
New York spot dealings opened the Friday session with a 16.50 per ounce loss and had bullion quoted at $938.00 as participants now gear up for book-squaring and scrutinizing what's on the agenda for next week. This week will likely conclude with a 1.5 to 2 percent loss for the yellow metal. The weekly Bloomberg gold price survey shows most analysts expecting lower values next week - the first such negative group outlook since December- as the summer doldrums turn up the heat, and as investors turn to other, higher yielding assets.
One such asset may well be the Aussie.Or, the Kiwi. Here is what Marketwatch's Lisa Twaronite finds following a brief survey of the somewhat neglected currencies of the past stormy year:
The high-yielding Southern Hemisphere currencies were on track for weekly gains against the low-yielding dollar and yen Friday, and Japanese investors' risk appetite was part of the reason. While the Aussie was slightly down in early Asian trade Friday, buying 81.76 U.S. cents, it remained headed for weekly gains of around 3%. New Zealand's so-called kiwi has gained almost as much. And against the yen, they have both gained about 2%.
There has been renewed interest in overseas assets by Japanese investors and the Australian dollar is the denomination of choice, on an unhedged basis, said Sue Trinh, senior currency strategist at RBC Capital Markets.
Japan's Ministry of Finance data show that investment from Japanese institutional investors in Australian bonds is picking up, Trinh said in a recent research report. Tracking the three-month moving average, the net bond outflow from Japan to Australia has increased from just 480 million Australian dollars ($392 million) to 2.2 billion Australian dollars since early 2009.
The flow signals the return of the carry trade, in which traders borrow lower-yielding currencies, such as U.S. dollars and yen, and invest them in assets denominated in higher-yielding currencies, such as the Australian and New Zealand dollars. Such trades usually lose their popularity as risk aversion rises, and traders, fearing losses, liquidate their positions. Their return suggests investors' appetite for risk is picking up. Strength in equity markets whetted that appetite Friday. In early trading in Sydney, the benchmark S& P/ASX 200 Index was up 0.4% at 4064.1, and New Zealand's NZSX 50 gained 0.1% to 2799.69.
Elsewhere in the region, Japan's Nikkei 225 Average was up 1%, South Korea's Kospi was up about 4%, while Hong Kong's Hang Seng Index was up 1.8%. Australia's benchmark interest rate is 3%, while the Reserve Bank of New Zealand left its benchmark unchanged at 2.5% on Thursday. That compares with a U.S. rate target range close to zero and a 0.1% policy target in Japan.
Some investors had expected the RBNZ to cut rates in light of the currency's appreciation. The recent rise in the New Zealand dollar creates an unhelpful tension with our projections. A stronger dollar at a time of weak global growth risks delaying or even reversing the projected increase in exports, putting the sustainability of recovery at risk, RBNZ Gov. Alan Bollard said in a statement after the bank's decision. But the bank is unlikely to back up any tough talk with action, analysts said.
The statement tried to jawbone the currency lower, said RBC's Trinh. However, in the press conference afterwards, Bollard went on to say New Zealand dollar intervention wouldn't have any effect, and the RBNZ was limited in what it can do on currency. From our perspective, these comments were a green light to buy the New Zealand dollar, she said.
Focus now shifts to the G-8 meeting and in turn, the spotlight at that tete-a-tete has already become the 'how' and 'when' of dealing with the deficits and the mopping up of the liquidity injections in order to sterilize their potential inflationary effects. Expect more jawboning about the topic in coming days. Resolve to deal with the issue will not be in short supply, even if the tools to take care of it with will likely not be revealed down to the blueprint level of detail.
A brief Friday footnote. A lot of ill-informed noise has been generated by the Royal Canadian Mint's gold reconciliation story, seen in the Canadian press of late. Some 'market advisors' found an opportunity in this story, to try to instigate some kind of a run of the custodial accounts of that, and other mints around the world. How pathetic. We need very few words to emphatically tell you that Kitco reaffirmsits 100% degree of confidence in the RCMs ability to keep the customers' metals freeof any material losses, no matter what the ultimate tally will turn out to be.
The RCM has issued a letter on the subject matter, and it has assured everyone that customer metal accounts are unaffected by the reconciliation problem. We expect a complete report on the findings of an on-going investigation and continue to remain at ease with the status of both our own as well as our customers' balances at the Mint. As well as those at any other mints around the world. Some over-zealous alarmists need to get a grip and learn how vaults, insurance policies, and such operate in the real world. Until then, we can only call them saboteurs. And anyone who listens to them, sadly misinformed.