-- Posted Wednesday, 23 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 23, a.m. (USAGOLD) -- Gold has retreated to the $900 zone, weighed by a modest bounce in the dollar and a slight pullback in oil. However, potential below $900 is thought to be limited.
The euro pushed to a new all-time high against the dollar at 1.6020 on Tuesday. While the dollar remains generally weak, these gains are primarily attributed to euro strength stemming from expectations of widening interest rate differentials. While the dollar remains consolidative against the other major currencies, the underlying trend is still seen as quite bearish.
The euro has gotten a boost this week from hawkish statements by ECB members. Banque de France Governor Christian Noyer told the WSJ that rates "can go both ways". This was an attempt to clarify ECB council member Mersch (Luxembourg) hawkish comment from yesterday, which Noyer said were misinterpreted. You may recall that Mr. Mersch said a rate cut is "in no way required in the current environment."
The EU's Juncker reiterated his concern about currency market volatility, which raised concerns once again about coordinated intervention to prop up the dollar. The EUR-USD rate backed off the record highs in response, but the reaction was pretty limited. The market seems to be getting wise to the fact that these implied threats regarding intervention are nothing more than a feeble attempt to jawbone the dollar higher. Or probably more accurately, slow the decent of the greenback.
We maintain that direct intervention is unlikely. However, if the ECB does throw some money at the FX market it would be just another delaying action. The ECB would have to cut rates, or convince the US to raise rates to truly have even a near term impact on the dollar downtrend.
Neither seems very likely. In fact, recent comments by ECB members regarding price risks highlight the growing chances of a rate hike. As for the Fed, the potential for a 50bp rate cut next week has been priced out by the market amid growing emphasis on inflation in recent Fedspeak. Nonetheless, the Fed is still expected to cut rates by 25bp, dropping the target for Fed funds to 2.0%. The implied yield on the May Fed funds futures contract is presently 2.02%, suggesting a 92% chance of such a move.
While oil has retreated modestly intraday, it remains within striking distance of the record highs awaiting EIA inventory data later today. Supply concerns remain highlighted following militant attacks against two additional pipelines in Nigeria on Monday. Expectations of a strike at a refinery in Scotland is also contributing to worries about tighter supplies.
On the demand side of the equation, Chinese oil imports are accelerating in advance of this summer's Olympic games. Imports were up 25% in March against the same period last year. Q1 imports were up 14% versus Q1-07. This suggests that any pullback in US demand resulting from a recession is likely to be offset at least partially by heightened demand from emerging countries. The weaker dollar also makes oil less expensive for holders of foreign currencies.
OPEC continues to resist pressures to increase oil output, citing that the declining dollar and speculation are to blame for record prices.
Meanwhile, there is increasing global pressure to rethink biofuel initiatives due to skyrocketing grain prices which have driven food prices sharply higher. There has always been plenty of science that shows that biofuels are at best a break-even proposition, given the amount of water and energy needed to generate them. If you factor in the broader impact, such as clear cutting forests to grow biofuel crops, many argue that the net impact really favors carbon based energy.
If the trade-off is E-85 gasoline or starvation on a global scale, I think E-85 should go the way of the dodo. If there is a ultimately a pullback in mandated biofuel targets, oil is going to continue to soar.
One of my best market contacts summed it up nicely this morning, "We gotta stop burning our food." His sister has a PhD in ag science and works for a major university and the government breeding wheat. She contends that there is plenty of food in the world, it's just in the wrong places. Apparently what we have is a distribution problem.
Such problems can generally be corrected by free market price activity. However, the governments of the world are going to have a hard time keeping their mitts out of this one. With price controls come the potential for exacerbating the problem.
Bond insurer Ambac reported a larger than expected Q1 loss this morning after getting hit with $3 bln in subprime related charges. All three ratings agencies have Ambac on a "negative outlook" and downgrades remain a real possibility.
John Dugan, the controller of the currency discussed the growing risk of US bank failures in an interview with the Financial Times (linked below in Market Movers). There are strong indications that the credit crisis is spreading from Wall Street to Main Street amid heightened potential for defaults on a wider range of loans, from auto and credit cards to small business loans.
It seems that recent suggestions that the worst of the subprime/credit/liquidity crises is over may have been premature. A growing number of bank failures would likely drive gold significantly higher as people seek to protect their assets. Gold does indeed offer solid protection against systemic risks in the banking system.
Gold Market Movers:
EIA crude oil stocks for the week ended 18-Apr +2.4 Mbl. Gasoline inventories fell by 3.2 Mbl.
MBA mortgage index for the week ended 18-Apr -14.2%. Purchase index -6.4%, refis -20.2%.
Canadian retail sales for Feb -0.7%, much worse than the market was looking for.
Eurozone industrial orders for Feb +0.6% m/m, better than market expectations.
Eurozone manufacturing PMI for Apr falls to 50.8, below market expectations.
Norges Bank raises policy rate by 25bp to 5.50%.
Riksbank steady on repo rate at 4.25%.
US regulator fears wave of bank failures
Gold may climb for six years, TheBullionDesk.com says
Holding gold is the best investment these days
Oil hits fresh high as biofuel rethink looms
Ambac swings to 1Q loss as it takes $3.06 billion in charges
