-- Posted Monday, 14 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 14, a.m. (USAGOLD) -- Gold is modestly higher within the recent range as early dollar gains prove unsustainable. With further bad news expected out of the financial sector this week and oil just off its record highs, the downside in the yellow metal remains limited and scope is seen for a short-term recovery into the 950/970 zone.
In commentary last week we expressed our expectations about heightened dollar supportive rhetoric out of this past weekend's G7 meeting. So it was no surprise to see a much firmer statement on currency volatility that carried the implied threat of coordinated intervention to prop up the ailing greenback.
We maintain that any such intervention would have only a briefly positive impact on the dollar. It is also somewhat doubtful that the G7 countries would take such a step, as it would probably not include more than superficial support by the US. It simply wouldn't make sense for the US to participate in dollar buying when they are cutting interest rates and injecting huge amounts of capital into the financial system.
The dollar firmed, particularly against the euro in early trading today, but those gains have already been retraced and then some. The EUR-USD rate appears poised to set another new all-time high. Meanwhile, the dollar is weakening against the other major currencies as well.
I think the market is getting wise to the futility of dollar intervention without the benefit of any shift in monetary policy. Now if the ECB had opted to cut rates last week rather than hold steady, we might have seen the beginnings of a protracted dollar rally. Given the inflationary environment in the Eurozone, that simply wasn't going to happen, nor is it likely to happen in May.
If the Fed raises rates on 30-Apr that may spark a dollar rally as well, but such a move is highly unlikely. Even if the Fed were to hold steady in Apr -again highly unlikely - there would probably be a brief uptick in the dollar, but the market would immediately begin speculating about the size of a Jun rate cut.
Presently Fed fund futures show that a 25bp rate cut at the 30-Apr FOMC meeting is fully priced in. Odds of a larger half-point cut are about 50-50. Deferred contracts suggest there is scope for the Fed funds target to drop to 1.50% later this year.
Interest in last week's Fed TAF auction of $50 bln in 28-day credit remains brisk. There were $91.6 bln worth of proposals submitted, resulting in a bid/cover ratio of 1.83. Meanwhile, interest in the 09-Apr TSLF of $50 bln was off from previous auctions. The bid/cover ratio was just .68, versus 1.88 and 1.15 in the previous auctions.
I don't believe the fact that the latest TSLF was undersubscribed is any indication that the liquidity crisis is improving. With Deutsche Bank looking to sell $20 bln in debt, Wachovia reporting a $393 mln Q1 loss and plans to raise $7 bln in capital, and additional writedowns by Merrill Lynch and Citigroup likely this week, it seems that the opposite is true.
If the dollar is indeed able to reestablish the downtrend, despite ramped up jawboning by the G7, we could actually see the dollar's slide accelerate. Such a move would bode well for further price gains in gold. Factor in heightened systemic risks to the banking system ahead of additional writedowns and a gloomy earnings picture for stocks as a whole and we could see investment and safe-haven demand return to gold with a vengeance.
Gold Market Movers:
US retail sales for Mar bounced 0.2%, above market expectations, versus a revised -0.4% in Feb.
US business inventories for Mar at 10:00 EDT. Market is looking for +0.4%.
UK output prices for Mar surged to 6.2%.
Eurozone industrial production for Feb +0.3%.
Gold production falls at Chinese mine
Dollar jumps vs euro on G7's currency worries
Gold price recovers 1.1% as dollar fails to hold "G7 bounce"
Turk: The dollar hasn't bounced
