-- Posted Tuesday, 22 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 22, a.m. (USAGOLD) -- Gold is underpinned within the recent range as the euro firms on hawkish ECB comments. Oil continues to trend higher as well, setting a new record above $118 bbl and offering additional support for the yellow metal.
The dollar remains generally consolidative, but soft within the recent range. The midpoint of the 73.19/70.70 range in the dollar index comes in just below 72.00. The series of lower highs and higher lows over the past several weeks are suggestive of a symmetrical triangle pattern. This chart formation is generally viewed as a continuation pattern, favoring an eventual breakout in the direction of the dominant trend. The trend remains decisively bearish at this point.
EUR-USD approached the record high at 1.5984 in overseas trading, spurred by hawkish comments from ECB council member Yves Mersch (Luxembourg), who said a rate cut is "in no way required in the current environment." This is further evidence that the ECB is unlikely to ease in the first half, as they remain fixated on price risks.
While the euro has been unable to set a new all-time high thus far today, scope remains for a short-term push above 1.6000. Such a move would favor an upside extension toward 1.6200.
While FX activity in recent weeks has been centered on euro strength as opposed to dollar weakness, a move above 1.6000 is likely to trigger a broader based reaction in the greenback. USD-CHF has been unable to sustain upticks above the 50-day moving average. A retreat below 1.0000 would ease pressure on the upside, returning a measure of credence to the dominant downtrend.
USD-JPY has probed back below the 103.00 level in Asian trading, reportedly weighed by bond repatriation. However, these losses could not be sustained as a generally improved risk appetite and seasonal flows have effectively put a floor under this rate for the time being.
Oil has tested above the $118 level on concerns about supply disruptions in Nigeria and Scotland. Royal Dutch Shell confirmed that about 169,000 barrels of daily production has been halted due to last week's attacks on pipelines in Nigeria, Africa's largest producer. Additionally, a refinery in Grangemouth, Scotland is in the process of being shut down in anticipation of a union strike.
Tomorrow's EIA report is likely to show a modest increase in crude oil stocks, but gasoline stocks are expected to fall again. The national average price at the pump is now $3.50 per gallon, nearly a 30% increase from prices a year ago. It is widely believed that gas prices may reach $4.00 per gallon early in the summer months.
With gold in consolidative mode and oil rallying, the gold/oil ratio has dropped to around 8. Dips below 10 in the ratio are generally viewed as a buying opportunity and a reading of 8 is considered extremely low. This is further evidence that the downside for gold is limited from here. One could take that one step further and say that this presents an excellent buying opportunity for the yellow metal.
Given the considerable impact of higher energy prices on real inflation, it's not surprising that the market is no longer calling for a 50bp interest rate cut at the end of the month. However, a quarter point cut is still anticipated and will keep the easing bias of the Fed highlighted.
There also seems to be a growing perception that the banking sector has survived the earnings season with minimal additional damage. This may indeed warrant the smaller rate cut, but I contend that the systemic risks remain considerable. This week's announcement by the BoE that they will swap £50 bln in government bonds for riskier mortgage debt and the bailout of German bank Düsseldorfer Hypothekenbank are the most recent indications of such risks.
These concerns ultimately go back to the housing markets. The outlook in the UK remains quite dour, as evidenced by Monday's sharp drop in the Rightmove house price index. The US housing market continues to show signs of weakness as well. Existing home sales, released this morning, fell 2.0% to 4.93 mln.
With the housing market still in decline, mortgaged backed securities, be they on the balance sheet of a bank or a central bank, should continue to lose value. For the banks, this may lead to further writedowns and a resulting negative impact on equities. For the central banks, this is likely to result in additional liquidity injections and the further debasement of currencies. Not to mention the hit their own balance sheets would face.
Gold offers protection against systemic risks to the global banking system, currency debasement at the hands of the central banks and inflation, particularly energy based inflation. Gold also offers non-correlated portfolio diversification against traditional asset classes. With gold trading in the lower half of the recent range, a good buying opportunity is apparent.
Gold Market Movers:
US existing home sales in Mar fell 2.0% to 4.93 mln, above expectations, versus 5.03 mln in Feb.
BoC cuts overnight rate by 50bp to 3% in a widely expected move.
German banks rescue lender after write-downs
Hawkish ECB send euro close to record levels
Gold rises as dollar decline may revive demand
