Expectations of a follow-through in last week's near 3% rally in prices did not materialize as the trade returned to the pits on Tuesday. Gold prices came under pressure early, and remained down for the day, erasing most of last week's gains on the session. The slump in crude oil was the primary force depressing bullion values today, although the dollar's rise to 72.31 on the index did not hurt either. Today's drop was likely the largest in circa four weeks' time and has brought forth the specter of breaking $900 once again, as well as raised the possibility that investors may yet be able to buy gold anywhere from $775 ( according to Value View Gold Report's Ned Schmidt, that is the 'oversold' level bargain hunters might want to hold out for) up to $845 in the not too distant future.
The greenback got a boost from the euro taking a hit following poor sentiment in Germany (see below for details on the situation in Europe) and from the fact that despite US consumer confidence being at a 16-year low, someone out there was daring enough to go out and buy new homes (sales rose an unexpected 3/3% last month). Everything sells at a price, eventually. US home prices fell nearly 15% on the year, unless of course you happen to live in the former bubble land called California, where prices fell 32%. The decimated Phoenix market saw the best April home sales as value hunters hit the streets. Let's not talk about Las Vegas.
Volatility will not be lacking for the rest of this week however, as markets feel the on-going effects of the dollar/oil wrestling match and the seasonal lack of core demand from fabrication. For an abbreviated trading week, the economic calendar remains packed with potentially dollar-moving data, thus a careful watch needs to be kept on the numbers, practically every day. In the supply/demand background of the market, recent gold buyers in India were seen at gold shops once again, this time aggressively selling their shiny acquisitions in the wake of rising gold values as the rupee fell. The country was in fact surpassed by VietNam during the first quarter of '08 as the largest consumer of the metal.
New York spot trading was last seen sustaining a $20.90 per ounce loss, quoted at $903.30 as participants keep the dollar-euro-oil tango centered in the periscope. Prices took a turn lower within the first half hour of trading and gold approached $902 per ounce during the day's lows. The greenback traded .38 higher on the index, at 72.34 while crude oil took a $3.70 hit, falling to $128.50 as a strong bout of profit-taking on the back of weak US demand expectations failed to overcome supply apprehensions following a fresh Nigerian pipeline explosion caused by rebels.
Silver fell apart dramatically today, losing 4.5% to $17.40 (down 79 cents) as the phantom shortage of small fabricated products has proven to be real only in the minds of those uninformed pundits who were trying to scare investors into creating a real one. The backpedaling on the allegations of shortages has already begun. Expect the reputations of the propagators of such nonsense to be the ones damaged, not those of the various mints that were selectively targeted. At last check, Platinum dropped a hefty $52 to $2118 and palladium fell $14 to $441 per ounce.
The Fed, as well as the ECB, continue to have their hands full with the dilemma of growth versus inflation and what to do about maintaining the former while trying to avoid the latter. Thus far, we have witnessed the Fed doing its utmost to keep the economy going as the US headed into an election year. Ironically, the lack of focus on inflation up to now has seriously undermined the likelihood of a Republican administration keeping the Oval Office as Americans appear to have shifted somewhat as well - from a preoccupation with the endless war to one on the endless drain on their wallets at the gas pump and the grocery store. Only over the past month has the Fed given indications of a shift in strategy and a leaning towards a pause in rates as the first step it is willing to take to tackle inflation. It might even become inclined to sacrifice some measure of economic growth (meager as it has been) in order to keep rising prices at bay.
Marketwatch's chief economist, Irwin Kellner, is of the opinion that:
The next step, of course, would be for the central bank to actually raise rates. Coming at a time when the economy is still weak and housing is falling, this would shock the markets - especially oil and other commodities where prices have jumped sky-high. Higher interest rates and fewer dollars in circulation could very well pop these bubbles. More important, they would also get inflation expectations back to their mooring.
Meanwhile, across the ocean, Mr. Trichet will celebrate the ECB's 10th anniversary on Sunday with the dubious distinction of having failed to meet its 2% inflation target for the past eight years. If the insistence remains on inflation combat, the outcome might be to tip fragile economies such as that in Italy into full contraction mode. On the other hand, if the inflation target is allowed a gain closer to the actual numbers, the sacrifices might have to come at the expense of the stronger economies in Europe (read: Germany).
Germany doesn't want inflation, and the weak countries don't want deflation,'' says Bernard Connolly, chief global strategist at American International Group's Banque AIG unit in London. ``The choice between the two alternatives is likely to prove contentious.''
Inflation is eroding confidence among French executives and German consumers, reports today showed. A government index of sentiment among 4,000 French manufacturers dropped to the lowest in more than two years, while Gfk AG's measure of optimism among 2,000 German shoppers declined. writes Bloomberg reporter Simon Kennedy.
The behavior of the Fed and the ECB going into the second half of the year and into next year will now become significantly more important than the jawboning that has been offered thus far by either body. Having seen markets voting in a divergent manner as well as having seen opinion polls and confidence numbers at odds with the official language they have been putting forth, both central banks have the onus on them to convince everyone they mean what they say.
The focus now shifts to how quickly and robustly gold can recover from today's slump in order to convince the trading crowd that its recent rally was more than a sucker's one. Should another breach of the $900 come to pass, (and it could well happen before 5:15 NY time as yet) the sell-off could intensify and $936/$940 will start to look like it was a nice selling opportunity, at least for May. But, like mentioned above, there is more econ data in the pipeline for the next three days. Stay tuned.