Lipstick Works

on February 04 2010 9:53 AM

Good Morning,

The US dollar surged to a seven-month high against the euro early this morning, dragging gold and oil lower following their attempts to rally earlier this week. Bullion prices fell back to the psychologically important $1100 pivot point in overnight trading, as poor Indian demand and the aforementioned rise in the greenback tempered the enthusiasm with which the metal started the trading week.

The base metals and energy sector did not fare much better on the heels of the strength exhibited by the US currency. The GMFS Base Metals Index is off nearly 12% over the past 30 days, copper has lost nearly 50 cents since the beginning of the year, and black gold was last seen near $76.25 with a 75-cent loss on the day.

Bullion prices opened Thursday's session with losses across the board, as the commodities' complex felt the pressure from the dollar's gains. Spot gold was quoted at $1104 per ounce, showing a drop of $5.40 on the open. Silver lost 17 cents, starting the day off at $16.20 an ounce. Platinum fell $16 an ounce, to open at $1553 while palladium declined $1 to $434 the troy ounce. This morning's jobs report was definitely not the type that the markets expected, and although there was one little bright spot in the market, courtesy of increased US productivity numbers for Q4, the Dow futures did not take this morning's statistics very well.

The US Labour Department indicated that initial jobless application rose to 480,000 in the week ended January 30. This was the highest such level of filings in seven weeks, and it underscores the lack confidence in the corporate world that the economic recovery will be sustained. The global de-leveraging process continues. Debt worries, the jobs picture, and lack of proper growth continue to dominate the scene. Risk appetite -under such circumstances- has...its risks. Who wants to play in this minefield?

Rhodium was bid at $2400 per ounce. Carmaker Toyota's woes are on the rise, as its iconic Prius model is now the possible subject of a braking problem-related recall. Markets appear to be expecting a deep bow of apology from the firm's top executive, while the falling share values of the company have heavily pressured the Nikkei stock average.

Toyota stock has fallen some $20 over recent weeks and is trading near $72 per share, with some analysts calling for a possible further $10/share loss. The latest check of the trade-weighted index showed the US dollar climbing to 79.58 ( a gain of 0.16) whilst against the euro, the greenback was quoted at 1.383, showing little in the way of signs of slowing, following a couple of sessions of profit-taking.

The prospect of further gains in the dollar, which would cut gold's appeal as an alternative asset and make dollar-priced commodities more expensive for holders of other currencies, is seen as a risk for precious metals this year. wrote Reuters' Jan Harvey this morning.

Currency analysts at Deutsche Bank are looking at the likelihood of dollar strength this year, primarily based on Fed (monetary policy) tightening, and have a target of 1.35 on the euro/dollar, and that is the reason we are slightly bearish on precious metals, he added. We are not imagining a significant correction, but this is a dollar story.

A dollar story, indeed. As has been the case since at least two years ago, but even more so, since late last summer. However, this is also a Greek odyssey. The EU Commission endorsed the so-called Greek Stability Program yesterday. To us, it sounds more like an EU and euro stability blueprint. The proposed Greek plan aims to cut the country's budget deficit to below 3% of GDP by 2012.

However, the IMF has said that it can still step in and help right the listing Greek ship if needed. Spreading labour protests in Greece threaten to undermine President Papandreou's implementation of what he himself has labeled as the painful measures needed in order to cut spending.

The mainly Greek-flavoured European jitters that were once again seen rising this morning also included plenty of hand-wringing about Portugal, Spain, Hungary, Ireland, and Dubai. As a result, emerging market equities took a hit, and commodities headed lower, while the US dollar once again benefited from an inflow of safe-haven oriented funds.

Yesterday, we brought you contrasting views on gold's price prospects, as seen by various mining firm executives and market pundits. Today, it is time to let some fund managers speak their mind. Once again, the range of perspectives is as wide and as varied as one might expect it to be at this possible inflection point in the market. Consider the 'sound bites' brought to us by the Financial Times Advisers overnight:

Multi-managers at T Bailey Asset Management have sold some of their gold holdings in its cautious managed fund in favour of soft commodities. The fund held 9.7 per cent in gold and reduced this to 4.7 per cent in December last year. The managers at T Bailey sold some of the gold in favour of commodities such as agriculture.

Philippa Gee, head of sales, marketing and communications for T Bailey, said while fund managers favoured gold in the long-term, because of the stage of the economic cycle there was a move from hard to soft commodities. Ms. Gee said: In the short-term we have our sold gold in the cautious managed fund. We have gone into soft commodities and bought an agriculture exchange traded fund. This is because of where we are in the cycle, soft commodities are more attractive.Jason Evans, partner of Bristol-based IFA Kohn Cougar, said gold was not a 'proper' investment. He said: It is a speculative investment because it does not have an earnings stream. No one can put a proper price on gold. People perceive gold to be a safe haven and a store of value and when investors are worried about the value of the dollar they pile into gold but no one can determine its proper price.Bradley George, co-portfolio manager for the Investec Global Gold Fund, said the degree of investment demand for gold was likely to force a peak that is nearer $1300 an ounce over the next six months with $1000 an ounce becoming the long-term floor.There you have it, enough variance in views to give any speculative trader an opportunity to fret or get excited, given their take on the opinions expressed above. And then, there is Mike Maloney, author of Rich Dad's Guide to Investing in Gold and Silver who argues that gold's current bull market will continue to infinity (or, to at least the high five-digits in five years, no less!) as bullion is forced to cover the amount of both base money and outstanding revolving credit. Not half as good as his forecast for $1000...per ounce silver. Welcome to Harare on the Hudson.

Whether T Bailey's move, Mr. Maloney's prophecies, or Investec's expectations prove to be profitable or well-founded, and within what timeframe, well, that remains to be seen. However, none of this ought to matter to a genuine gold owner. One whose position in the metal is not seen as an 'investment' with which to make more money, but rather as the taking out of an insurance policy for the one type of risk against which one cannot ever properly hedge against: uncertainty. For practically every other kind of market risk, there are lots of effective tools already available. Most of these hedging vehicles were not on offer back in 1980, to be sure.

Watch for continued volatility and potential sell-offs as we near the pre-weekend book-squaring ritual. Also, keep an eye on the growing number of days the euro spends under 1.40 as PIGS woes continue to impact regional investing psychology. The dollar may not be the most attractive animal on the block, but the safe-haven shade of lipstick it currently wears certainly appears to be doing the trick, when compared to the...other investment beauty pageant candidate. At last count, gold was off $14 with the dollar not rising much at all from earlier levels...

 Happy Trading.

Jon Nadler Senior Analyst

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