Gold prices succumbed to intensifying selling pressure on Tuesday and once again failed to react to fresh highs being set in the crude and heating oil markets. The latest dollar-related rumblings have really caught the attention of speculators and now the task is to figure out whether this is a deceased feline bounce for the greenback, or an actual resurrection. For the moment, the markets appear to be taking the latter as the more likely probability despite the lingering presence of credit conditions that are stressed, to use a euphemism.
New York spot lost nearly 2%, and was last showing a $16.80 drop per ounce at $865.40 as the so-called battle for the $900 value proposition now appears more like a full retreat than a valiant fight. Mr. Bernanke stressed in his speech this morning, that once conditions normalize, the Fed's liquidity measures will no longer be needed and should be pulled from the scene. He also indicated that at the present time, financial market conditions are nowhere near normal but are on the mend. Silver fell 46 cents to $16.67, platinum lost $55 to $2050 and palladium was down $6 to $438 per ounce.
While the Fed chairman is still concerned about the fragility of the markets at the current time, the US currency appears to be looking ahead at changing conditions and possible interest rate policy reversals. The dollar closed under 73 on the index but once thus far in the month of May. Barring an October surprise anytime between now and...October, this could turn out to be a bit more than that cat in full rigor mortis mode. A prospect which has gold possibly aiming towards a value zone of between $780 and $825 - for starters. Marketwatch's chief economist, Irwin Kellner ,chimes in:
Don't look now, but the beleaguered buck appears to be bouncing back. After reaching a record low of $1.60 to the euro a few weeks ago, the dollar has since regained about 3% of its value against this key currency. It has risen even more against the Japanese yen.
In the great scheme of things, this looks like no big deal. After all, the dollar has been slipping and sliding against the euro and the yen for over seven years. That's when the buck and the euro were at parity. The dollar interrupted this decline by rising a couple of times, most notably in 2001 and 2003, but then turned and fell even lower.
However, there is a good chance that the recent run-up in the dollar could be more than just a head fake. Indeed, this just might be the start of something big. To see why, let us start with the fundamental reason for the dollar's protracted decline -- the humongous trade deficit that the United States has been running with the rest of the world.
That it narrowed by almost 6% in March is only the tip of the iceberg. For when you drill down, the numbers are even more striking.
Imports fell by the most for any month since December 2001. What makes this decline even more significant is the fact that it occurred while oil prices were rising sharply. We paid 3% more for the oil we imported in March than we did in February, but actually brought in 3% fewer barrels of the black stuff. Our performance on the export side is also noteworthy. Over the past year, exports have jumped nearly 10% from their levels at this time in 2007 as U.S. goods have become cheaper to holders of rising currencies.
These numbers suggest that the dollar may have reached a level that is low enough to start equalizing the terms of trade. Aside from this, there is the question of interest rates. Ever since the markets came to believe that the Federal Reserve would pause in its campaign to push rates lower, the dollar has stopped falling. Part of the dollar's earlier decline stemmed from investors switching to the euro and other currencies looking for higher rates of return.
Then there's the open-mouth policy. Some monetary officials on both sides of the Pond have recently voiced concern over the shrinking dollar, while others have said that they think the U.S. economy will soon speed up while the euro zone will slow. The implication of these remarks is that the dollar should rise against the euro, and if the markets don't do this on their own, there just might be some sort of coordinated central bank intervention to push the buck higher that could occur at any time.
This has caused currency traders to hedge their bets. In recent weeks there appears to have been a swing to a net long position on the dollar, from years of a net short posture. Indeed, the entire short dollar-long commodities trade seems to be unwinding. Witness the declines in prices of such key commodities as oil, gold and many foodstuffs as the dollar has firmed. A stronger dollar will help both the U.S. and its trading partners, as long as it doesn't get too strong.
Footnote: Just after the latest open-mouth policy statement by the Fed, the market is now pricing in a 40% chance of a quarter-point higher Fed funds target rate by November - that is only three Fed meetings down the road. Obviously, whatever subtle dollar-supportive innuendo was contained in Mr. Bernanke's speech, it did not escape the attention of traders. Speculators now appear to be betting in less a homogenous manner and are placing more emphasis on the selected assets they believe will carry the day later in the year and into next year. Perhaps they are shifting gears a bit early, but shifting them they are, nevertheless. The daily numbers speak for themselves.