Pressured by a stronger dollar ahead of Tuesday's Fed meeting, as well as ignoring a fairly resilient oil market, gold prices stumbled and fell sharply on Monday as long liquidation dominated the session. After failing to take out overhead resistance at $910 the metal turned south as last week's advance failed to attract follow-through buyers and as the fallout of the OPEC meeting (though not yet factored into today's crude prices) still implies more supply in the marketplace. The liquid commodity rose on the day as a result of the temporary offset of augmented Saudi output by the sabotage attacks in Nigeria. The weekend OPEC hand-wringing session in Jeddah concluded with Saudi pledges of output hikes of 200,000 barrels per day (to a level of 9.7 million per day - a level not seen in decades) and with an outline of plans to boost oil production to 12.5 million barrels per day by the end of next year.
Under normal circumstance, such supply increase news would have been able to temper the still red-hot price of black gold, however escalating tensions between Israel and Iran and the latest MEND attack on Nigerian oil installations offset the communique from Jeddah and kept oil on the boil as the week got underway. Ironically, the Nigerian rebels announced a halt to their string of sabotages as of tomorrow, while staging one last one (apparently, for good measure). If the suspension of the attacks becomes reality, the market will have to deal with yet another source of supply in the...(repaired) pipeline.
A slump in German business sentiment looked set to complicate the ECB plan to raise rates next month and gave the US dollar an additional boost, lifting it to 73.50 on the index this morning. After that, it was basically a question of who could sell ahead of others. New York gold spent the majority of today deep in the negative column, showing losses of from $18 to $25 and testing nearby support at $875 despite the firmness in oil and news that Citi will likely jettison 10% of its investment banking and trading wizards in an effort to contain costs and mitigate losses. Silver fell 60 cents to $16.72 and the noble metals posted losses on the day as well, with platinum dropping $16 to $2035 and palladium shedding $6 to $465 per ounce. Today's tumble in gold has undone a week of carefully constructed advances (aiming the metal back towards the $850 support zone) and has, of course, already elicited cries of foul play and howls about suppression among gold and silver conspiracy-based apologists.
Perhaps there is another explanation to offer regarding current sentiment. We certainly do not agree with many of his angles on a variety of matters (be they political or not), but having started as a staff economist at the New York Fed, Larry Kudlow does know a thing or two about the central bank, jawboning, strategic policy matters, and gold market behavior. Here is what Mr. K has to say about today's action in the gold market and what it may be telling us (via Bloomberg) about the near future:
The gold market has sold off $20 Monday, and my hunch is it has something to do with the Federal Reserve policy meeting that begins tomorrow and will conclude with a public announcement at 2:15pm ET Wednesday. A big gold drop strongly hints at market expectations for a tough-minded Fed that will defend the dollar and move to contain rising inflation.
Nobody expects the U.S. central bank to raise its target rate this week -- although, frankly, I wish it would. In effect, it would be taking back some of the excessive rate cuts made last winter. And I think those rate cuts have a lot to do with high oil prices and the cheap dollar. But the gold plunge today might be suggesting some tougher language from the FOMC policy statement on Wednesday. If, for example, the Fed language is biased against inflation, and perhaps even mentions the dollar, it would be a clear signal that rate hikes are coming sooner rather than later.
There’s been a big debate about this, with hawks versus doves arguing over how tough the Fed’s gonna be on inflation. Bernanke sounded very tough -- but then Donald Kohn and others seemed to be leaking to the media that they wouldn’t be so tough. Today’s gold drop suggests that Bernanke is going to win the day and pave the way for a quarter-point rate hike, either next month or in August. The futures market is pricing in several more rate hikes after that.I continue to believe that fighting inflation and appreciating the dollar would be the best medicine for the economy, and in the short term would be strong medicine to reduce world energy prices, including gasoline at the pump.
If Paul Volcker were running the Fed, speculation would be high today that the central bank would beat the market with a dramatic rate hike announced on Wednesday. Nobody today equates Bernanke with Volcker. And today’s stagflation is certainly a smaller dose than we had in the 1970s. But who knows? Maybe Gentle Ben will surprise us all with a Volckeresque action.
Well, those are some of the ways to deal with the problem of inflation and the weak currency. Other central banks have other ideas about how to achieve results. Commodity Online informs us that Vietnam went straight for the jugular on this one, and opted to employ a radical approach to keep the dong from eroding:
Vietnam has chosen a novel method to contain trade deficit that has tripled this year—temporarily ban gold imports.
Vietnam, the second largest gold investor in the world has already imported 60 tonnes of gold valued at US$ 1.8 bn, a 100 percent increase over the same period last year. The price of gold was quoted by local dealers at around $US873 an ounce, lower than international prices
The suspension of gold imports is not likely to raise domestic prices because of plentiful supplies and weak demand. This is as part of the country’s effort to rein in inflation. But traders added only a prolonged suspension could cut domestic supplies and trigger a scramble for safe-haven assets. Fears that the dong could fall in value are making dollar holders reluctant to let go of their foreign exchange.
Traditionally, Vietnamese use gold for savings, jewellery and real estate transactions but when inflation is high many choose gold or the U.S. dollar to hedge against inflation. The central bank have given quotas to 40 banks and trading houses to import 73 tonnes of gold in 2008, up slightly from about 70 tonnes in 2007.
Vietnam imported 77.7 tonnes of gold for jewellery and investments in 2007. On the other hand main gold consumer India imported more than 700 tonnes last year. Analysts, however, don't expect the Vietnamese decision to have any significant impact on gold markets. Following a year of overheating and high credit growth, 2008 has been strained for Vietnam, where macroeconomic stability was taken for granted as it boasted one of the world's highest growth rates, averaging 7.5% a year since 2000.
Much depends on the duration of such a suspension in imports, but there is little doubt that some enterprising fellows are already getting some little seagoing vessels ready to ferry the yellow metal into Vietnam with. Clandestinely. There is also a very good chance of the discount to world prices that gold enjoys there vanishing as soon as supplies are seen as slimming down. The gold market should however heed the move as possibly impactful (if it is prolonged enough) as Vietnam is indeed right behind India on the list of gold consumers and any of the 60 tonnes it does not import in the second half of the year (aside from what will be brought in under the cover of darkness) will need to find a new home (and it may not be in India as locals wait for lower prices).
Hectic trading in the gold/oil/dollar trio will continue to define the next 48 hours and sizeable moves should not surprise players. Spectators remain safe. It's Gentle Ben's turn to take the spotlight.