-- Posted Thursday, 6 March 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
March 06, a.m. (USAGOLD) -- Gold is consolidating Wednesday's move to new record highs. The recovery from corrective losses earlier in the week was impressive indeed as traders continue to view any setback as a buying opportunity. New record highs in oil above 105.00 and fresh all-time lows in the dollar are keeping the yellow metal underpinned.
Oil rebounded sharply on Wednesday, spurred by the surprise drawdown in crude oil stocks. Most traders were expecting EIA data for the week ended 29-Feb to show an eighth consecutive increase in crude inventories. Instead, the data showed that stocks dropped by 3.1 mln barrels. That surprise sparked renewed buying interest, driving oil to new record highs. Upside follow through in overseas trading, saw Brent spot trade as high as 102.89, while front month futures on NYMEX nearly reached 106.00.
OPEC also confirmed on Wednesday that they would not be increasing output. OPEC officials signaled this stance well in advance, so the announcement was widely expected, despite recent pressure from the Bush administration. Nonetheless, the official word just added to the buying frenzy.
The futures exceeded the inflation-adjusted record high set in 1980 at 103.76 earlier in the week. Look for Brent spot to test this level next, then move into the 104.16/77 zone based on measuring objectives. Such a move would likely put the futures above 107.00.
Many argue that supply/demand fundamentals don't support oil at these lofty levels, even factoring in increased demand from emerging economies. US Senator Carl Levin (D-MI) suggests that speculators are distorting prices and that if only the fundamentals were considered, oil would be $20 lower. That may be true, but who cares? The reality is that fund and investment demand for all commodities is huge right now and growing.
Recent news stories have shown that even the most conservative pension funds are increasing their commodity allocations. The California Public Employees' Retirement System, the largest pension fund in the US, has said it may increase its commodities investments by 16-times over the next three years to $7.2 bln. This is a trend that is likely to continue and one can therefore expect the uptrend in oil and most other commodities to continue as well.
Gold certainly will benefit from broad-based commodity buying by the funds, but it also benefits as the classic hedge against inflation. As the commodities are driven higher, inflation spirals higher as well and savvy investors seek relief by buying gold.
The dollar fell to new record lows in overseas trading as both the ECB and BoE held steady on rates. While both events were widely expected, some held out hope that the ECB might offer relief to struggling exporters with an ease. The dollar index dropped to a new all-time low of 73.10, while EUR-USD neared the 1.5400 level. Sterling regained the 2.0000 level for the first time this year and is pressuring the 100-day moving average.
Another Fed rate cut on 18-Mar is a foregone conclusion. The only outstanding question is: Will the cut be greater than 25bp? The market believes the answer to that question is "yes." Fed funds futures have a 50bp cut fully priced in and odds of a jumbo 75bp ease are running about 75%.
The prospect of widening interest rate differentials will keep the dollar on the ropes for the foreseeable future. As the dollar continues its long-term downtrend, the appeal of gold as an alternative asset increases. Additionally, a weaker dollar makes dollar denominated commodities, like oil and gold, less expensive for holders of foreign currencies.
More rate cuts are just going to add to the upward trajectory of inflation and drive commodity prices ever higher. It's a vicious cycle we seem to be locked into, which only increases the need for gold as a hedge.
Gold Market Movers:
US pending home sales for Jan at 10:00ET, expected to be steady at soft 85.9.
US initial claims for week ended 01-Mar 351k, better than expectations, versus a revised 375k for the previous week.
Monster employment index for Feb 165, versus 160 in Jan.
ECB leaves refi rate unchanged at 4.00%. Trichet cites upside inflation risks.
BoE left bank rate unchanged at 5.25%. No statement.
What's really driving the price of oil?
Tidal wave of fund money hits commodities
Gold's glitter lures buyers, even near $1,000
Stock index futures suggest a lower open on Wall Street.
