-- Posted Friday, 18 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 18, a.m. (USAGOLD) -- Gold is retreating into the range as equities rebounded on a spate of decent earnings news. The improved risk appetite is drawing capital back into the stock market, at the expense of commodities. Oil prices have retreated from the recent record highs and the dollar has rebounded as well, putting further pressure on the yellow metal.
Citigroup reported a Q1 loss of $5.1 bln after taking additional writedowns of $12 bln. The loss falls within market expectations and with the feeling that 'things could have been much worse,' this has become a classic case of sell the room, buy the fact. The market also seems to like the fact that Citi was fairly aggressive in writing-off credit related investments so there is a sense that the worst may be behind them.
Citi's losses come on the heels of yesterday's report that Merrill Lynch lost $2 bln in the first quarter, its third consecutive quarterly loss. An additional $2.3 bln in writedowns were detailed. Pretty dismal results, but again things could have been worse. A statement that Merrill remains well capitalized and is not anticipating additional new common equity raises helped shares recover intraday.
While the Citi and Merrill news certainly could have been worse, it is far from encouraging. Both posted huge quarterly losses and huge additional writedowns. Meanwhile, Royal Bank of Scotland reported that it may raise as much as $24 bln in additional capital from shareholders. The ongoing credit/liquidity crisis is far from over and the associated systemic risks to the global banking system persist.
Reports that dollar Libor rates have been kept artificially low as a result of intentional deceptive reporting by the banks is a damning indictment of the industry. It is also suggestive that the banking sector is in fact worse off than reported. There have been indications that banks are/were falsely reporting to the British Bankers' Association the rates they are paying for short-term money in order to hide their desperation for cash. If proven to be true, this would be very negative for banks and likely the economy as a whole.
Gold is an excellent hedge against general economic uncertainty as well as the turmoil and systemic risks evident in the banking sector. The latest pullback within the range offers a second chance to buy gold near the $900 level in anticipation of an eventual resumption of the dominant uptrend. We saw solid interest on the last dip down to this level, including jewelry buying out of India. India is far and away the largest physical consumer of gold.
Good earnings from the likes of Google and Caterpillar have sparked an increase in risk appetite for stocks, but recent economic data continue to suggest that we are in the midst of a recession. It is likely that the rebound in stocks is merely a bout of short covering, rather than broad-based buying in anticipation of improving economic conditions. In fact, earnings on average are down 26% for the 61 companies in the S&P 500 that have reported this far.
The rebound in stocks has also sparked a modest recovery in the dollar. The dollar index has popped back above the pivotal 72.00 level, but remains within the 70.69/73.19 range established last month. Flows out of low yielding safe-haven currencies like the Swiss franc and yen are indicative of the aforementioned lowering of risk aversion.
The USD-JPY rate has pushed above the 104.00 level for the first time since late Feb. USD-CHF has exceeded resistance at 1.0250 and has subsequently approached the 1.0300 level. The EUR-USD rate, which just set a new all-time high just shy of 1.6000 on Thursday, has retreated into its range as well. Good support is noted at 1.5671 down to 1.5628.
Today's setback in the euro has done little to damage the long term positive trend (dollar bearish). Nothing has changed fundamentally to suggest that the dollar has bottomed. Recent comments from Europe that the market has "misunderstood' last weekend's G7 statement on currencies has traders a little edgy amid heightened potential for coordinated intervention. However, this still seems rather unlikely in our opinion.
While expectations of Fed easing have been edging lower in recent sessions, a 25bp rate cut is still expected at the end of the month. At the same time, the ECB is expected to hold steady again in May. The continued widening of interest rate differentials remains dollar negative. This week's generally poor economic data and expectations that next week's data is going to offer further confirmation of the recession should temper the upside potential in the greenback as well.
Oil has been bolstered recently by dollar weakness and has understandably come off the recent record highs on dollar strength. However, oil remains comfortably above $110 at this point and has actually firmed intraday over the past several hours. Global fundamentals remain positive for oil and if the dollar is unable to sustain the recent bounce, look for energy commodities to be right back at the highs.
Gold is the classic hedge against dollar weakness and the resulting inflation, particularly energy based inflation. The recent pullback offers yet another buying opportunity in the lower half of the recent range.
Gold Market Movers:
Canada wholesale trade for Feb tumbled 1.8%.
BoE's Bean expects CPI to exceed 3% in 2008 and says credit crisis has worsened.
German PPI for Mar surged 0.7% m/m, 4.2% y/y.
Bankers cast doubt on key interest rate amid crisis
Can gold hit $2,000?
