Gold prices worked within an extremely narrow six-dollar channel overnight but worked hard in the wake of once again record values in crude oil ($119.93) following a UK pipeline shutdown and an attack on oil facilities in Nigeria. Black gold is still showing an 82% gain over the past year, while gold is currently having difficulties maintaining a 30% gain over the same period. Investment funds have taken note of the fact and have been drifting out of bullion since it peaked near $1034 last month. Demand from Dubai and India was on the lukewarm side, but it was better nonetheless than in the previous days. Locals we surveyed expect a bounce in offtake as May 7th approaches but see that overall demand remains lower than a year ago and buyers are still apprehensive about market volatility.
New York spot trading opened the final week of what has been a turbulent month on the upside, showing a $4 gain at $890.00 bid per ounce and today's action may largely consist of speculative positioning as there is no economic data release to take into account and as players gear up for a busy week of statistics and the all-important Fed meeting. Silver opened with a 4 cent rise, quoted at $16.88 while platinum rose $13 at $1970 and palladium fell $8 at $434 per ounce. The dollar was drifting near 72.65 on the index and near 1.563 against the euro while crude oil was still showing a 70 cent gain at $119.21 per barrel.
So, will the Fed offer one more rate accommodation, or won't it? Many analysts are now convinced that the only remaining excuse to lower rates by the minimum quarter point that is expected is to prevent disappointment in the markets that have become dependent on the cuts. Others feel that the rate cut campaign has already gone overboard and is not the cure for what ails the US at the moment. The jawboning that will come after the meeting will be dissected word for word as that is where most players expect to find the substance of the Fed's stance as we go forward. Nevertheless, here are both sides of the argument as we approach this pivot point in policy. Thereafter, you may roll the dice and wait for them to land:
Jack Crooks, editor of Weiss Research’s latest investment offerings, World Currency Alert and World Currency Options and founder of Black Swan Capital and Ross International Asset Management gives us his take on the two sides of the dollar debate:
The FOMC is meeting tomorrow. A lively topic of conversation that can be expected from currency traders is the direction of the infamous Fed Funds rate. The obvious question leading up to the interest rate decision: What are the implications of this FOMC meeting on the U.S. dollar? More specifically, has the Fed Funds rate found a bottom, or does the U.S. central bank have more work to do?
Dollar pessimists believe there is still no positive argument in favor of the U.S. economy. The Federal Reserve's dual mandate, maintaining economic growth and price stability, has become quite popular in currency circles. Much of the dollar's demise has been attributed to the Fed's obligation to sustain growth, even when inflation isn't necessarily contained. And keeping the U.S. economy ahead hasn't been an easy task for them. Some of the problems catching up with the economy and infecting the core are:
An unstable manufacturing sector;
Deteriorating business conditions;
Sluggish consumer spending;
Serious slack in the labor market;
And a widespread feeling that money isn't so easy to come by anymore.
All of the aforementioned troubles have been initiated or exacerbated by the ongoing U.S. housing market collapse. The impact of the housing debacle on U.S. consumers has been swift, sudden, and severe. American Express recently told analysts that financially stressed consumers are making fewer payments less often.
Conversely, dollar optimists believe intense commodity inflation will force an adjustment to Fed policy. The Fed's dual mandate has left them somewhat attached to a sinking economy, but they sometimes recognize that inflation risks exist. The fear of inflation and inflation are two different entities and the Fed has the job of keeping both under control. Imagine what the Fed is thinking right now.
Crude oil recently topped $119 a barrel. But beyond the heavily monitored energy prices, food has also been in high demand. Riots have broken out in Haiti because of food shortages. A handful of countries that include China and India have pulled back on their rice exports in order to sufficiently meet domestic demand. And the U.S. recently learned that Sam's Club and Costco are monitoring the amount of bulk rice purchases they allow customers to make.
Dollar optimists believe that inflation on commodities will ultimately warrant some kind of adjustment to Fed policy. Consequently, this would be good news for the greenback because few analysts will argue that the Federal Reserve needs to hike interest rates. But the possibility that the Fed may halt its easing campaign is growing among analysts.
A monetary policy revaluation could spark a legitimate dollar rally.
If Fed Chairman Ben Bernanke and Co. were to carve out a bottom-turn in their easing campaign, it just might give buyers enough reason to come out in support of the dollar. And a legitimate dollar rally would likely impact commodities, considering the extreme negative correlation that's existed between the two parties,
If you’re looking for some currency specific advice heading into Tuesday’s FOMC meeting, have a look at the chart of the U.S. dollar index. It may offer up some guidance. Given the way things stand, I’d say a rate cut of 25 basis points or fewer likely won’t kick off an extended dollar decline. And if the Fed does opt out of rate cuts this time around, it would be a huge departure from expectations leading up to the decision.
That, of course, could kick off a sharp dollar rally.
The bias is slightly positive as we start the week, but do not expect the trading to be on a one-way street in various markets. There are some who are holding dice that say No rate cut. Remain nimble.
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