-- Posted Wednesday, 5 March 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
March 05, a.m. (USAGOLD) -- Gold retreated on Tuesday, reportedly on fund selling. This was initially attributed to profit taking, with funds looking to lock in nearly 20% gains ahead of the end of the quarter. Subsequently it became evident that there were rumors circulating that a distressed hedge fund was being forced to liquidate assets and the rest of the market was trying to get out in front of it.
There was indeed a distressed hedge fund that was forced to liquidate after failing to meet margin calls, but it liquidated Swiss mid-cap stocks and it did that last week. Focus Capital is (or should I say was) a $1 bln New York based hedge fund that has reportedly lost 80% of its value and is expected to close.
While there are certainly other struggling hedge funds out there, particularly those specializing in credit, this appears to have been a case of the market rehashing old news. Just last week, London-based hedge fund Peloton Partners was forced to liquidate one of their asset-backed securities funds valued at $2 bln.
A managing director at P-Solve Alternative Investments, which invests in hedge funds and had exposure to Focus, said: "The tide of hedge funds shutting has only just begun; there is a long lag between poor performance and money flowing out of the door." P-Solve has written off their £1.49 mln ($2.95 mln) investment in Focus.
While some funds with exposure to riskier credit vehicles have suspended redemptions, investors that are able to reallocate are likely to continue piling into commodity funds which are showing remarkable returns of late. This should continue to benefit gold. As one of our forum posters pointed out yesterday: The Chinese symbols for crisis and opportunity are the same.
The dollar turned mildly corrective yesterday, but safe haven flows into the yen and Swiss franc keep the overall bias for the greenback bearish. USD-JPY seems destined for a test of important support at 101.67/23. Penetration would clear the way for a challenge of 100.00. A move below 100.00 would make the all-time low at 79.85 (Apr-95) increasingly attractive. Such a move would likely cause the BOJ to ramp up efforts to support the dollar as a means to protect Japanese exporters.
USD-CHF remains targeted to 1.0200, with potential as low as 1.0000. EUR-USD has regained the 1.5200/11 level and is expected to retest Monday's record high at 1.5276. Penetration of the latter would put the euro back on track for a challenge of 1.5300, with potential toward 1.5500 and 1.5624. Every uptick in the euro increases the cries of Eurozone exporters for the ECB to cut rates. Every downtick in the dollar makes gold more appealing as an alternative asset, and cheaper for holders of foreign currencies.
Parts of the EU are already on the verge of recession. Wholesale selling of Italian and Greek debt in favor of more secure German bunds pushed Eurozone bond spreads to their highest levels since the launch of the combined currency. Italy has made noise about abandoning the euro in the past, since without their own currency they are unable to devalue and make their goods and services more competitive. Cracks in the EMU could be a significant destabilizing force on the continent.
Oil is also rebounding from recent corrective losses after finding support around $100/b. A climb back above $102 would return focus to recent record highs. With OPEC not expected to raise production, despite mounting pressure from the Bush administration. While growing US inventories may limit the pace of short term gains, solid global demand, speculative buying and broad-based fund interest in commodities should remain supportive for oil. The trend remains decisively bullish and higher energy prices help to underpin gold as well.
Platinum remains under pressure on speculation that the South African power crisis may ease somewhat. Platinum extended to the downside in overseas trading on reports that miners will be told on 07-Mar if they can increase their power usage to more than 90% of capacity.
Eskom, the state power utility, was rumored to be halting connections to all new developments bigger than a residential home. These reports were subsequently denied by Eskom. While platinum was due for a correction, if these reports were the basis for expectations that the mines might return to 100% power, look for platinum to fully recovery from these losses. The likely unwinding of long platinum/short gold spreads seems to be keeping the yellow metal comparatively well bid.
Gold Market Movers:
US ISM-NMI for Feb rebounded top 49.3, better than the market was expecting, versus 44.6 in Jan.
US factory orders for Jan fell 2.5%, in-line with market expectations, versus a revised +2.0% in Dec.
US ADP employment survey for Feb -23k, below expectations, versus a revised 126k in Jan.
Eurozone retain sales for Jan +0.4% m/m, -0.1% y/y.
Eskom denies halting new developments
Stock index futures suggest a lower open on Wall Street.
