The Fed kept the rates on hold - as was widely expected - but everyone in the business started an intense parsing of the communique just seconds after its release. Clues as to just when the rate hikes will commence were largely lacking from the statement but expectations are that September is the most likely target month. In the interim, the ECB will very likely raise its rates in July, thus possibly giving the euro a small lead for a short period. For now however, in aftermarket trade, the dollar is telling us that Dr. B is stressing the inflation component of the economic picture more than the sluggish growth one.
The Fed actually sees the US economy as 'expanding' at this time (in a departure from its previous diagnosis) and inflation expectations (as reflected in the price of oil and some 'other' commodities) as 'high.' At the end of the day, most markets had already factored in today's Fed developments quite precisely. The only moves that the statement will likely engender would be content-related, not rate related.
The Fed's Richard Fisher was the lone voice of dissent in today's vote, arguing for an immediate .25 point hike. Gold pared is losses in the aftermarket as the greenback actually decline to 73.11 on the index taking the statement by the Fed as 'balanced' and still worried about growth risks and financial market stresses, but also as sufficiently inflation-oriented to get the markets away from expectations that rate cuts are anywhere near on a one-way street, as was the impression since September. Steady as she goes.
Today's actual futures trading session resulted in losses of more than 1% in gold, as at least one wheel came off of the hitherto fast-moving oil market (after a surprise gain in US inventories). Black gold lost $4.22 at one point, falling to $132.75 as evidence that demand destruction has commenced to convince speculators that the chips are now stacked against them.
Bullion lost $10 to $879 per ounce after having sunk as low as $872 during the morning. Pre-Fed jitters added to gold abandoning its latest attempted run at $900 as investors are (reluctantly) becoming more aware of the broad trends pointing to a shift towards inflation combat in Fed policy - economic anemia notwithstanding. More and more, the bulls are left rooting for a major financial failure or some geopolitical flare-up to build a case for new rallies upon.
Against such a possible background, let's take a look at a couple of metals which could provide for better trading and/or profit opportunities as we go forward. Please do not read this as some kind of cryptic message to sell your gold, or not to buy long-tern insurance positions. A core position in gold is, and has always been, well-advised. However, for those who wish to diversify within the precious metals complex, here are some fundamentals to take into account as regards platinum and palladium:
Strong demand for platinum and palladium in the auto industry likely will help shrink supply surpluses for the metals this year, sending prices even higher, according to an annual industry report issued Tuesday. Kitco is proud to be a sponsor of the valuable research that the CPM Group produces via these fine books, each year.
Platinum prices climbed to an all-time high of more than $2,300 in March, and palladium prices climbed to a multi-year high of $600 during the first quarter of this year, according to CPM Group's 2008 Platinum Group Metals Yearbook. [which may be purchased for a mere $75 at the CPM store online: http://store.cpmgroup.com/ ]
A combination of strong fabrication demand worldwide, declining supplies and a surge in investor interest all fueled platinum group metals prices higher last year and the trend continued in early 2008, according to the report.
Platinum group metals, widely used as catalysts in auto emissions-control systems, are benefiting from increased global auto production and tightening emissions standards worldwide, it said.
The automotive industry's inelastic demand pushed fabrication demand for platinum up by 0.8% to 7.06 million ounces in 2007 from 7.00 million in 2006, though high platinum prices hurt electronics and jewelry demand.
At the same time, rising prices have been attracting increased investment in the platinum group metals, the report said.
There were several platinum and palladium investment vehicles set up to provide further avenues for rising investor interest, CPM Group said. Those came in addition to already strong investment demand from hedge funds and institutional investors over the past couple of years, it said.
Platinum prices climbed 14.6% in 2007 compared with 2006 and, as power shortages cut production at South African mines, the supply-demand balance tightened, CPM Group said. That prompted prices to skyrocket to an average of $1,946.13 an ounce during the first five months of this year, up 56.9% year-on-year. In early March, platinum prices touched a record intraday high of $2,308.80.
Labor disruptions and other operational problems in South Africa during 2007 reined in platinum supply to 7.42 million ounces, down 4.6% from its record high in 2006. Those disruptions, compounded with earlier power shortages in South Africa, could cut supply by another 1.4% this year to 7.32 million ounces, the report said. The 2007 surplus was down more than half from the previous year to 358,000, and CPM Group expects the surplus to decline to what it calls a statistically insignificant 32,000 ounces.
Palladium prices were up 10.7% to average $359.21 an ounce in 2007 compared to 2006 as demand rose 7% to 7.96 million ounces in 2007 compared to 2006's 7.44 million. Auto-sector demand was up 6.2%, and demand for the metal in electronics and dental use also increased, according to the report.
Supply for the precious metal declined 0.8% to 8.51 million ounces globally in 2007 from 2006, and 2008 supply should shrink even more -- to 8.43 million ounces because of reduced output from South Africa and reduced Russian exports. CPM Group expects palladium surpluses to fall sharply to 56,000 ounces in 2008, down from 548,000 in 2007 and 1.13 million ounces in 2006. The platinum group metals markets are undergoing dynamic changes, CPM Group said. As a result, prices are projected to remain at high levels as these developments unfold.
Gold, on the other hand, is evidently not poised to break out and go to the moon just yet, at least according to BNP Paribas SA which said today that a stronger dollar would probably mean a weaker gold price in the next several months:
Gold should trade within a $750-950 range over the next six months, BNP Paribas forecast, before it weakens significantly in 2009. Gold will trade at about $700 in 2009 and the first half of 2010, according to the bank.
We expect the gold price to trend lower over the latter part of 2008 as the US Dollar gets more solid footings, agreed Australia's Commonwealth Bank in a new report, and to continue to trend lower over the first half of 2009 as investor support for gold wanes.
While the markets digest the Fed statement, expect some indecisive spikes in several directions for a brief period. The foundations for eventual fall rate hikes has been laid; commodities, equities, and currencies now have to live with the new reality.