Gold was up $5.70 to $892.90 per ounce in trading in New York yesterday and silver was up 17 cents to $17.02 per ounce. The London AM Gold Fix at 1030 GMT this morning was at $886.00, £447.50 and €569.23 (from $892.25, £449.04 and €569.36).
Gold is again under pressure in early trading this morning with the dollar continuing to strengthen (to 1.556 to the euro) and oil continuing to sell off (below $118 per barrel) but caution remains the predominant theme ahead of the Federal Reserve’s interest rate decision (more below).
While the recent short term movements in the dollar and oil have led to weakness in gold, it is important to stay focused on the long term fundamentals. Oil and most other commodities remain near all time inflation adjusted record highs (the CRB Commodities Index closed just below record highs yesterday at 419.38) and this will lead to increasing inflation in the coming months which will see gold continue to outperform other markets and likely surpass the $1,000 per ounce mark in the coming weeks. We remain confident that given the increasing likelihood of stagflation, gold should reach $1,200 per ounce before year end.
Today, the Case Shiller House Price Index and the Conference Boards’ measure of consumer confidence will likely again be negative and they may provide direction to markets.
Irrational Exuberance Gone from Precious Metal Markets
Open interest figures in both the gold and silver markets continue to decline to levels that normally signify bottoms and good buying opportunities. Open interest in the gold market fell 1770 contracts to 420,409. This is another correction low and a huge 170,000 contracts off its high which shows that the speculative excesses seen when gold surged to $1,030 per ounce have been purged.
Similarly, the silver open interest has fallen even more sharply. It was down a very large 3278 contracts to 127,469.
FOMC, Interest Rates and Gold
Trading in the major currencies and gold looks set to remain confined to narrow ranges ahead of the Fed’s announcement tomorrow evening. There is increasing speculation that the FOMC will indicate that it may be approaching the end of its cycle of interest rate cuts as they belatedly realise the growing threat inflation and stagflation pose to the economy. The notion that should the Federal Reserve stop cutting interest rates it will be negative for gold is erroneous as was clearly seen in the 1970s. Gold was correlated with Volcker’s rising interest rates in the 1970s and it was only towards the end of the interest rate increases (near double digits) that investors sold the safe haven of gold for the high yielding U.S. dollar.
Market Sages Warn that Severe Recession Looms
Warren Buffett said yesterday that the U.S. economy is in a recession that will be more severe than most people expect. Somewhat modestly, Buffett said this is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think, Buffett said. This will not be short and shallow.”
Two other Wall Street legends, Jeremy Grantham and Peter Bernstein have made similar warnings. GMO founder Grantham predicts the U.S. market won't hit bottom until sometime in 2010, citing the painful experience of past post-bubble economies. The unraveling of the 2000 bubble is a tale still being told, he writes.
Author, financial analyst, and market historian Bernstein, meanwhile, poured cold water over hopes for a V-shaped recovery in an interview with The Wall Street Journal. You don't have a high-growth exit from this, as you've had from other kinds of crises, he says. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up. Or like a U, a flat U.
Wall Street's increasing optimism is misplaced and risk aversion continues to be warranted as does demand for real safe haven assets.
Gold tested support at $880, close to the early April lows of $870 last week, and was supported at those levels. After last week’s sharp sell off there is a risk that should gold close below $880 we could retest previous resistance at the 1980 nominal high of $850 per ounce.
$848 – Support 22nd Jan and Resistance previously 8th Nov
$871 – Support of the April lows
$954 – resistance from 21st Feb, 26th Mar and 17th Apr
Silver is trading at $16.75/16.81 per ounce at 1200 GMT.
Platinum is trading at $1944/1954per ounce (1200 GMT).
Palladium is trading at $430/435 per ounce (1200 GMT).