-- Posted Tuesday, 8 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 08, a.m. (USAGOLD) -- Gold has softened within the recent range amid renewed talk of IMF gold sales. However, the underlying bias remains positive in the wake of oil's recent retest of the record highs and the generally soft dollar tone.
Talk of IMF gold sales are making the rounds again after their executive board signed off on a proposed financial reform plan. The plan includes the sale of just over 400 tonnes of IMF gold, which would be sold in a manner so as not to increase official sector sales. Congress must still approve any such sale and it remains unclear how they will respond to the request.
Oil has rebounded in recent trading to retest the recent record highs, spurred by strong demand as a hedge against a weak dollar and the resulting inflation. However, concerns about reduced demand stemming from the US economic slowdown have prevented fresh all-time highs thus far. Nonetheless, the trend remains decisively bullish, which has been supportive to the gold market. Gold is a classic hedge against a declining dollar and inflation as well, particularly energy based inflation.
The market is anticipating a modest uptick in crude oil stocks for the week ended 04-Apr, when EIA data are released on Wednesday. Meanwhile, OPEC maintains that stockpiles are at reasonable levels, so production increases are not anticipated. The market will be watching the EIA data for further drawdowns to gasoline inventories after the previous week's surprise drop.
The expectation of another Fed rate cut at the end of the month is keeping the dollar relatively suppressed and helping to support both oil and gold. A 25bp ease is fully priced in for the 30-Apr FOMC meeting, with odds for a half-point cut presently running about 36%.
The prospect of US interest rates at or below 2% will continue to weigh on the greenback. The dollar index has stabilized around the pivotal 72.00 level. The consolidative pattern that has emerged in recent sessions suggests the greenback is just taking a breather before resuming the long-term downtrend. There is nothing technically or fundamentally at this point to suggest the US currency has bottomed.
A weaker dollar makes hard commodities like oil and gold increasingly attractive as alternative investments. Simultaneously, the falling dollar makes such assets less expensive for foreign investors.
The short-term consolidative tone in the dollar is likely to persist ahead of the BoE and ECB rate announcements on Thursday. The BoE is likely to ease by 25bp, but the ECB is widely expected to hold steady in the face of encouraging Eurozone economic data and continued inflation worries. Additionally, the G7 will meet over the weekend and talk of coordinated action to support the ailing dollar continues to make the rounds.
We believe that coordinated intervention to prop up the dollar, beyond some serious jawboning is unlikely. Direct intervention in the foreign exchange market would not be effective without supporting policy moves. The Fed has made it clear that they are inclined to attempt to inflate their way out of this recession. Buying dollars would be counter-productive within the present environment of rate cuts and liquidity pumps.
Buying dollars without the support of the US would likely only have a very short-term impact. Throwing several billion dollars at the FX market would be a wasted effort. Such a move is also unlikely because the central banks seem to be dedicating their resources to providing liquidity to the global financial system in an effort to prevent a total collapse. German Finance Minister Steinbrueck alluded to this in recent comments, saying intervention to strengthen the dollar "can hardly be financed" in the volumes that would be necessary.
The best bet for any sustained correction in the greenback would be a rate hike by the US, or a rate cut by the ECB. The former simply isn't going to happen and the latter is extremely unlikely. Therefore we anticipate that the dollar will eventually resume its downtrend, which would bode well for a resumption of the uptrend in gold.
Gold Market Movers:
Redbook for week ended 05-Apr fell to 1.6%, versus 1.7% previously.
US pending home sales index for Feb at 10:00 EDT. Scope seen for slight improvement over 85.9 in Jan.
FOMC minutes for 18-Mar meeting released at 14:00 EDT.
ABC consumer confidence index for week ended 06-Apr at 17:00 EDT.
BoE to offer £15 bln in 3-month paper on 15-Apr while accepting a broader range of collateral.
IMF board backs gold sale proposal to boost income
Oil trading at $109 as speculators buy commodities
House panel questions Bear rescue plan
