A day of heavy losses derailed gold further off the bull track as the US dollar took a sizeable leap against the euro ( now near 1.56) and as oil prices eased significantly (now near $115.50 per barrel). The greenback's largest gain in three weeks against the euro came on the heels of an unexpectedly weak reading on the economy in Germany and following a fresh round of 'excessive volatility' comments as regards the dollar/euro situation, by the EU's Jean-Claude Juncker. The fact that Credit Suisse swung to a loss and tossed out another $5 billion in credit related losses did not faze gold early in the trading session, as it was already struggling to maintain the $900 level. A fresh dip of well over 2% to $881.00 was thus the result of the action so far today.
Participants were likely paying more attention to the fact that Barclays managed a profit and diverged from the banking sector's common syndrome of large writedowns these days. Also helping siphon funds away from metals was the surprise drop in initial jobless claims, and although weak new home sales should have helped matters, they did little more than perhaps cushion the fall somewhat. The retreat in crude oil from levels that were thought of as excessive even by its most recent of buyers, helped cool some of the hitherto omnipresent inflation apprehensions. Gold investors are also beginning to see several pivot points taking shape in currencies, the credit crisis, and the official sector's (thus far only verbal) commitment to stability, and they are lightening up on metals positions as a result. The question is, how light is enough and what the prospects for rebounds are or will be as we get into mid-May soon (AKA as 'the doldrums')
New York spot gold was down $18 per ounce at last check, quoted at $886 as the market is clearly on the defensive now that several critical supports have been demolished. Silver was down 40 cents on the day, at $16.61, while the noble metals continued lower as well, with platinum losing $34 at $1967 and palladium dropping $8 at $439 per ounce respectively. Yesterday's announcement by Japan's Mitsui Mining & Smelting Co. that it plans to introduce a diesel catalyst which has successfully substituted platinum with silver, has knocked some of the wind out of platinum's sails, despite the continuing deficit scenario taking shape in the metal. There is hardly any surprise in the fact that users of very expensive metals are scrambling to find replacements for the same. Evidently, some are succeeding in their quest. Nonetheless, according to the latest from GFMS, the noble metal could still reach $2400 in the current year on account of ultra-tight supplies.
The gold ETF lost another 2% if its holdings and is threatening to now break under the 600 tonne figure in its balances, if current price decline patterns continue. Some support for gold around these levels could however emerge from good old India, as the country is gearing up for the festival of Akshaya Tritiya on the 7th of next month. Sidelined buyers who believe gold could be picked up for around $870 or so per ounce would be eager to make some purchases for that auspicious date. Their wishes have just been brought closer to reality by another 2%
Amateur market observers who have lately proclaimed that investment is the only important price supportive and/or defining component in gold, and that jewelry no longer matters, may welcome such buyers with open arms. Anything to avoid a fall to the 1980 high of $845 is now seen as practically vital. Equally vital, but less likely is the Fed's stance on rates. The perma-bull newsletter vendors who argued for rates going to zero and interest rate cuts persisting well into the year now have their inboxes full of demands for an explanation from subscribers who keep reading more and more news items about the imminent end of the aggressive accommodation campaign by the US central bank. More than that, there is also a rising number of analysts who predict a forceful mopping up campaign by the Fed, of all of this excess liquidity, the moment the economic engine turns over. Think it won't happen? Well, it happened in 1982, 1987, 1990, 1997, and 2001 - and successfully. It's the change in Fed's behavior that has eluded many a pundit. The 1982 example contains a gold price that fell 28% after the expected post liquidity injection inflation spike failed to materialize.
We leave you with a quote from our colleagues at CPM Group NY regarding this issue:
Financial market commentators, especially gold oriented ones, seem to have been slow to pick up on this change in how central banks approach financial crises, even though the central banks have been quite forthright about how this works ('throwing money out of helicopters' is one often quoted and grossly misunderstood attempt at humor on the part of a monetary authority to describe the process) and the fact that this has been the primary approach to financial crises since 1982, for a quarter of a century. Books have been written about how central banks can and do work during this period, yet many market observers still refer to a central bank management model from the 1970s or 1920s as the model of how they think central banks work.
On a final note, if you are interested in silver (and today's Mitsui news gives additional some reasons to be interested in it) 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 is a proud sponsor of this quality research and we believe you will benefit from delving into its contents. You will find the book available here: http://store.cpmgroup.com/