-- Posted Tuesday, 15 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 15, a.m. (USAGOLD) -- Gold continues to edge higher within the recent range, underpinned by fresh all-time highs in oil and a generally soft tone for the dollar.
Oil has surged to yet another record high amid some minor supply concerns. A Royal Dutch Shell pipeline that carries 1.2 mln bpd between the US Gulf Coast and the Midwest was shut down over the weekend and is currently operating at a reduced capacity. Additionally, ENI has reported a reduction of 5,000 bpd at one of its facilities in Nigeria.
These are relatively minor disruptions, although one of the deadliest days in Iraq in months may have contributed to recent oil gains as well. However, the latest round of gains may also be a result of positioning in advance of the next drop in the dollar.
Despite G7 comments over the weekend expressing concern about recent currency market volatility, the dollar has been unable to sustain recent upticks. The EUR-USD appears poised for a run to new all-time highs, while the USD-JPY and USD-CHF rates remain vulnerable below their 50-day moving averages.
The dollar index remains soft below the pivotal 72.00 level and appears to be consolidating within a symmetrical triangle pattern. This pattern favors an eventual breakout in the direction of the trend, which remains unquestionably bearish.
A weak dollar makes hard assets such as oil and gold increasingly attractive as alternative investments. If the dollar resumes its downtrend we would anticipate that gold would eventually resume its uptrend.
With further interest rate cuts likely in the US and growing concerns about a recession, the dollar does indeed seem vulnerable. While comments by the G7 carried the implied threat of coordinated intervention to prop up the dollar, so far its been all talk.
We have maintained over the past several months that the market is going to want to bid up the euro to the point where the ECB will react with a policy move. Likewise, the market is going to want to find the point for the dollar where the G7 will actually do more than talk. Given the present market environment and the fact that US participation in any dollar intervention would likely be limited to verbal support, there seems to be quite a bit more room for the dollar to fall.
As the value of the dollar falls, inflation results. While US CPI suggests that the rate of inflation is presently running at about 4% y/y, the actual rate of inflation is probably at least twice that figure. Gold is the classic hedge against inflation, which should continue to be supportive for the market.
Skyrocketing food prices have resulted in an increasing number of violent incidents around the world. World Bank President Robert Zoellick recently warned that at lease 33 countries are vulnerable to instability as a result of rapidly rising food prices.
The price of Thai medium-quality rice, a global benchmark, has more than doubled in just the past four months. Some experts see scope for further gains of as much as 40% in the months ahead which is only going to exacerbate the developing food crisis.
The reasons for the crisis are many:
Rising oil prices have resulted in increases to the costs of fertilizer, machinery operation, harvesting, storage and delivery.
Increasing global demand for food, particularly from rapidly growing countries such as China and India. Population growth often comes at the expense of arable land.
A changing diet in developing countries that has resulted in land traditionally used to grow crops being converted to grazing land for livestock. The per acre yield measured in calories is substantially lower for pasture.
A shift from growing food crops to growing crops for biofuels, which has sparked a speculative buying frenzy in all of the agricultural commodities. This in turn drives up the price of meat as well, as feed prices for livestock soar.
Weather related events such as the Australian drought, the severe winter in parts of Asia among others have impacted harvests.
Reduced global investments in agriculture in recent years have resulted in a negative impact on crop yields.
Millions of refugees from various global conflicts, unable to produce food on their own, now must rely on food programs.
Producing countries have stopped or curtailed exports in an effort to hold down domestic prices, resulting in an inflationary spiral in countries that are net importers.
As the food crisis worsens, pay particular attention to the Asian giants India and China. India has a population of 1.13 billion and nearly 20% - about 220 million - of them are underfed. The potential for social and political unrest is huge.
Meanwhile, China accounts for nearly 25% of global population, but only has 7% of the world's arable land. Rice is a staple in the Chinese diet and is also one of the foods whose price has gone parabolic in recent months. With the Olympics just four months away, and the Chinese desire to maintain 'face' under close global scrutiny, they are likely to deal swiftly with any food related social unrest.
The Chinese do have massive currency reserves which they can tap to buy rice and other food commodities in an effort to maintain order, but this just adds to the price spiral. The potential for heightened global unrest is just one more reason to own gold.
Gold Market Movers:
US TIC inflows for Feb rebounds to $64.1 bln.
US PPI for Mar +1.1%, higher than market expectations. Core +0.2%.
NY Empire State Index for Apr rebounds to 0.63 from -22.23 in Mar.
German ZEW economic expectations for Apr plummet to -40.7, versus -32 in Mar.
UK CPI for Mar holds steady at 2.5%.
Oil hits record high
U.S. foreclosures jump 57% as homeowners walk away
Swaps tied to losses became 'Frankenstein's Monster'
