-- Posted Tuesday, 18 March 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
March 18, a.m. (USAGOLD) -- Gold made several overseas corrective probes below $1,000, but these dips have been viewed as buying opportunities thus far. Mounting worries about systemic risks in the US and global banking systems, counter-party risk concerns and an anticipated jumbo rate cut by the Fed should keep the yellow metal generally well bid.
The Fed will announce the new target for Fed funds at 14:15ET today. It is widely anticipated that the Fed will cut the rate by at least 75bp to 2.25%, but there is a strong possibility that we'll see a full percentage point ease to 2.00%.
I'm leaning toward the latter. Given everything that has happened over the past couple weeks; all the efforts made to increase liquidity, the bailout and sale of a major financial institution, I just don't think the Fed can risk disappointing the market with a tentative move. Even with a full 100bp cut, the Fed will still have a couple bullets left to use if the credit markets still refuse to unlock. In fact, deferred Fed funds futures contracts continue to suggest potential for rates to move toward 1.50% and lower by this summer.
With a 100bp rate cut priced in, the actual announcement may actually spark a bit of a recovery in the dollar, assuming the Fed doesn't have any more new tricks up its sleeve. However, the combination of rate cut expectations and massive increases in liquidity have been absolutely toxic for the dollar. The greenback set new all-time lows against the euro and Swiss franc, and a new 12-year low against the yen on Monday. The dollar remains generally soft against the British pound as well, with cable trading comfortably above 2.0100.
Talk of coordinated intervention to support the ailing dollar continues to make the rounds. However, as pointed out in a WSJ article today, it seems counterproductive to be simultaneously cutting interest rates and buying dollars. There might be some logic in trying to slow the dollar's descent in an effort to promote market stability, but it just seems unlikely that the Fed/Treasury would participate in such intervention.
I could see the BoJ and the ECB taking a stab at slowing dollar losses, given the negative impact they're seeing in their export markets. However, as noted in recent reports, the global foreign exchange market trades over $3 trl a day. Throwing money at the FX market in the hope of changing sentiment, without the backing of a clear shift in policy, has a rather dubious chance of success.
An ECB rate cut would have the best chance of slowing the downtrend in the dollar. However, recent signals from the ECB have shown that they remain supremely worried about price risks and even hinted recently about a rate hike to keep inflation in check.
Of course inflation remains a major concern on our side of the pond too, but the US is committed to the path of inflating its way out of the recession...much to the chagrin of the rest of the world. Despite all the new liquidity and all the recent rate cuts, the credit markets remain on lock-down and the US economy is on life-support. We seem to be headed toward stagflation, the worst of both worlds, where prices continue to spiral higher and the economy continues to slow.
At any rate, the FX market is going to want to test the resolve of the central banks, to find where their threshold of pain forces them to react. Look for the dollar to remain under pressure until the market forces their collective hands and we either see the much talked about coordinated intervention (with or without US participation) or we see a rate cut in Europe. Gold tends to have a negative correlation with the dollar. As the greenback continues to lose ground, the gold bull market should continue as well.
In this environment of global uncertainty, risk aversion remains a major theme in the market. Gold will remain supported by continued safe-haven flows. And of course gold is also the classic hedge against inflation, which should also keep the yellow metal tracking higher. A rebound above 1015.60/1017.61 would bode well for a retest of the 1032.20 high from Monday. Further out, sights remain on Fibonacci objectives at 1078.13 and 1148.60.
Gold Market Movers:
Fed rate announcement at 14:15ET
US PPI for Feb at 8:30ET. The market is looking for 0.4%, versus 1.0% in Jan.
US housing starts for Feb at 8:30ET. The market is looking for 0.99M, versus 1.012M in Jan.
Canada CPI for Feb moderated to 1.8% y/y, versus 2.2% in Jan. However, core edged higher to 1.5% y/y, versus 1.4% in Jan.
UK CPI for Feb rises to 2.5% y/y, versus 2.2% in Jan.
$2000 an ounce gold is in the cards
S.Africa's Eskom may be forced to cut power to mines
Lehman Brothers slumps as Wall St wonders: who's next?
High street banks hold out their begging bowls
Stock index futures suggest a higher open on Wall Street.
