Post-Fed meeting dollar sentiment shifted back towards aggressive selling and crude oil leaped towards $139 along with hefty rises in practically every commodity today. Gold got a nitro boost from the hedgies today and vaulted by some 3% on the day, trading at near $912.00 at last check. The Fed may have changed the language in its most recent statement to signal a more hawkish stance on inflation, but markets took the absence of a Fed rate hike timetable specification in its post-meeting statement as a signal to continue the commodities rally.
In effect, the Fed's lack of immediate rate hikes had the same effect on the dollar and on gold today as an actual cut in rates in months past. While the Fed cautioned that 'in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high,' it failed to address inflation matters with anything more than a rate cut cessation. The perception that the Fed is now behind the curve on raising rates as much as it was behind it when cuts were actually needed, very clearly emboldened the return of momentum traders with their large cash piles into the commodities complex.
Today's surge was a legacy of the fact that just as the market may contain many sell stops, it also obviously contains a number of buy stops. A good part of today's move came from Asia and London before NY opened for business. While today's run to well above $900 represents an encouraging move on the charts, the $915 mark and then $945 mark must both still be overcome in order to re-establish the full-on bull track in gold.
One floor trader wryly characterized the day after the Fed meeting as one during which interest rates and the greenback were sharply unchanged making a reference to the pattern of continuing low short-term interest rates and the weaker dollar. In addition, the escalation in Comex gold's open interest level appears to indicate that our old friends, the momentum trading funds are back in action. Finally, the advent of electronic trading tends to sharply augment volatility levels. Some analysts argue that this can do damage to the floor trading crowd, as price swings of this magnitude now only take minutes and hours instead of several days.
While the inflation hawks have clearly won at this week's meeting, the central bank deemed it was a bit too early to signal an actual rate hike given still fragile conditions in the financial sector and the economy. With the euro still looking like it will be the first beneficiary of a rate hike this summer (which is tantamount to a virtual rate cut in the dollar), the dollar retreated to near 72.60 on the index and thus gold made up yesterday's losses and added another 1% to them ahead the start of today's session.
The euro climbed back above 1.57 against the greenback and participants focused on currency movements almost exclusively today, largely ignoring final Q1 GDP, existing home sales, and initial jobless claims. Silver rose 46 cents to $17.20 while platinum got a $52 boost today, rising to $2055 and palladium climbed $2 to $464 per ounce. First quarter GDP was revised to 1% - a rate of growth which was higher than the feel in the real world and puts the US economy on a 2.5% expansion track over the past year. What recession? Well, don't tell that to the average US worker who is angry enough at his President to squarely lay blame for rising fuel prices on him and curtail spending while socking away the $600 stimulus cheque sent to him by Uncle Sam.
What's next in the world of commodities? Some expect a mushroom cloud of speculative fever to engulf the complex for as long as the window of cheap dollar opportunity is kept open by the Fed. However, the lack of firm action or stronger rhetoric may come back to bite the Fed yet, as it watches commodity-driven inflation spoil the summer fun. On the other hand, according to some players who have made good money trading the complex, the commodity price chart street that we are on is not marked 'one-way' for its entire stretch, although it still presumably leads to Eldorado. One familiar name to those who follow gold and the dollar thinks we are still in for a pause/correction/pullback - whatever one would like to call it, despite the spike to a new record in the commodity index. Bloomberg fills in the details:
Commodities face a ``correction'' after a seven-year rally, which will help ease global inflation, noted investor Dr. Marc Faber said.
``Commodity prices will come down in the next six months to one year,'' Faber, publisher of investment newsletter the Gloom, Boom and Doom Report, said at a briefing in Taipei today. Commodity prices will resume their gains after the correction, he said, with demand for oil doubling in the next 12 years.
``Some inflation pressures will abate'' as commodity prices decline, said Faber. ``It doesn't mean I am bearish about commodities. I think commodity bull markets will last'' about 20 years, he said. Dr. Faber said he's negative about the dollar in the long term, though the U.S. currency may ``strengthen somewhat'' in the short term.
An afternoon close above $915 could alter the terrain of the playing field and bullion could once again try to retake aim at $935/$945 unless the hedgies pull the profit plug. The Dow's 277 point plunge and breach of the 11750 level and oil taking out the $140 level in aftermarket trade could provide just the right stimulus for such a track, but as we have seen over the past two weeks, volatility is more than alive and well - it is spreading like the Andromeda Strain. Sizeable moves in various markets are now in the picture. Tread extremely carefully.