-- Posted Monday, 7 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 07, a.m. (USAGOLD) -- Gold edged modestly higher overseas, as the recovery from recent corrective tests below $900 continues. Increased talk of a US recession and further rate cuts by the Fed are expected to weigh on the dollar, which should underpin gold. Renewed strength in oil has increased the hedge appeal of the yellow metal as well.
Poor jobs data last week have resulted in heightened concerns that the US economy is already in a recession. We're just awaiting confirmation in the data. Fed Chairman Bernanke went so far as to actually acknowledge the possibility of a contraction in testimony before the Joint Economic Committee and the Senate Banking Committee. This was a marked departure from previous testimony where he touted the likelihood of "moderate growth."
Fed policy will now shift from preventing a recession to mitigating the recession. These two methods are exactly the same and involve further cuts to the Fed funds and discount rates. Fed funds futures for May show that a 25bp rate cut is fully priced in by the market. Odds of a 50bp cut are running at about 30% right now.
Factor in ongoing Fed efforts to increase liquidity in the financial markets -- there is a TAF auction of $50 bln in 28-day funds today and the next TSLF auction will be held on Thursday -- and the dollar is likely to remain under pressure. Dollar weakness makes gold increasingly attractive as an alternative asset, while simultaneously making the yellow metal less expensive for holders of foreign currencies.
Rate announcements from the BoJ (09-Apr), BoE (10-Apr) and ECB (10-Apr) this week are expected to confirm widening interest rate differentials that will contribute to dollar weakness. The one possible exception would be the BoE, which may cut by 25bp on Thursday, but could just as easily delay that move until May amid rising price risks.
We anticipate that the ECB will hold steady on rates in the wake of repeated upside surprises in economic data, particularly out of Germany. The latest example was today's release of German industrial production for Feb, which showed a surprise increase of 0.4%, when the market was looking for -0.6%. Given the ECB mandate of price stability, I think we can safely assume they will hold steady on the refi rate at 4%.
Flows in the $3 trl a day foreign exchange market follow yield. With Eurozone rates expected to remain at 4% and US rates likely to drop to 2% or lower, look for heightened demand for euros to come at the expense of the greenback.
EUR-USD approached the 1.5800 level on Friday, but has since consolidated within the recent range. A short-term move back above 1.5800 would bode well for a challenge of the recent record highs at 1.5897/1.5905, and a resumption of the dominant uptrend. Such a move would have a rather positive impact on gold, favoring a return to the $950/960 zone. Further out, renewed tests above $1000 would be expected.
Renewed strength in oil is offering additional support for the yellow metal. Despite heightened risks of a US recession, and a resulting drop off in energy demand, investment interest in oil as a hedge against inflation remains strong.
OPEC announced that output fell last month to an average 32.35 mln barrels per day, down 85k barrels from Feb. In addition, gasoline stockpiles unexpectedly dropped in the week ended 28-Mar, which is likely to result in higher prices at the pump. Energy based inflation has been a major driving force in the long-tern bull trend in gold.
Gold Market Movers:
US consumer credit for Feb at 15:00 EDT. The market is looking for $5.8 bln, versus $6.9 bln in Jan.
German industrial production for Feb +0.4%, much better than the market was expecting.
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