-- Posted Friday, 25 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 25, a.m. (USAGOLD) -- Gold probed deeper below the $900 level in overseas trading on Friday, but the previous corrective low at 872.25 (01-Apr) remains intact. A rebound in the dollar has weighed on the yellow metal this week. Oil is in the process of retracing earlier downticks, which has bolstered gold as well. A move back above 900.00/906.35 would ease short-term pressure on the downside, further reinforcing the 872.25 support level.
Further redemptions in the gold ETF on Thursday kept the yellow metal on the ropes. ETF selling has been attributed to hedge funds, utilizing momentum strategies. As upside momentum waned throughout Apr, sell signals were triggered resulting in the recent run of redemptions. The funds do tend to move as a herd and these types of moves can get exaggerated.
A general increase in risk appetite, particularly for equities may also be playing a role here. The pause in the gold uptrend has sparked some profit taking in order to fund new equity positions. This stems in part from growing expectations that the Fed's easing cycle may be coming to an end.
The stock market seems to be viewing the anticipated pause in Fed rate cuts as a signal that the worst of the credit crisis is over, resulting in renewed interest in equities. A 25bp rate cut is still very likely next week, but the market will be watching the policy statement very closely for some indication that the Fed is likely to pause and gauge the results of recent policy moves.
Growing inflation worries will certainly be a hot topic at the FOMC meeting and will undoubtedly be factored into the decision to pause or not. However, the Fed's primary concern has been, and will continue to be risks to growth.
There have been plenty of indications in recent weeks, both here in the States and overseas, that the subprime, credit/liquidity and bond insurance crises still have plenty of life in them. It is likely that the recessionary impact on the broader economy has barely begun. One can be fairly certain that the Fed will be quick to move with further rate cuts at the first sign of further deterioration in the economy, or sharp losses on Wall St.
The anticipated pause in the Fed's easing cycle has understandably led to a rebound in the dollar as this would lead to a stabilization of interest rate differentials. However, flows in the $3 trl a day FX market follow yield. It is likely that as of Thursday next week, Europe's benchmark interest rate will be exactly twice that of the US's, 4% versus 2%.
Despite all this talk of a higher dollar, it remains confined to the range that was established in March. The Mar highs in the dollar index at 72.84/73.16 are well protected at this point. Similarly, the previous corrective low in the EUR-USD rate at 1.5511 (03-Apr) has not been threatened, leaving more important support defined by the 1.5342 low (24-Mar) out of play.
If the Fed does indeed pause after this next easing, it may actually give the ECB the breathing room it needs to actually raise interest rates. Unlikely the Fed, the ECB's primary mandate is price stability. Inflation is running well above their comfort zone, but the downtrend in the dollar and the negative impact it has had on Eurozone exporters has prevented the ECB from hiking rates to address rapidly rising prices.
Weaker than expected Eurozone sentiment indicators released earlier in the week suggest that their economy is slowing as well and one might expect price pressures to mitigate naturally. However, the nightmare German inflation of the 1920s is never far from the thoughts of Europeans, including ECB council members.
Oil has rebounded intraday as BP announced that it would shut down a crucial North Sea pipeline on Saturday in reaction to a planned two-day refinery strike in Scotland. The Forties Pipeline system carries approximately 700,000 brl of oil per day, about 40% of UK production. Additionally, militants staged yet another attack on a Royal Dutch Shell pipeline in Nigeria.
Expectations of tighter supplies have pushed Brent spot crude nearly $3 off the intraday low. The inability of oil to sustain corrective downticks leaves the dominant uptrend highlighted. Gold is the classic hedge against energy-based inflation and the intraday rebound in oil leaves the low end of the yellow metal's range protected.
Gold Market Movers:
US Michigan sentiment for Apr (final) fell to 62.6, a downward revision from the preliminary figure of 63.2 and well below the Mar reading of 69.5.
UK Q1 GDP +0.4% q/q, 2.5% y/y.
Japan core CPI for Mar +1.2% y/y, highest in a decade.
Oil rises on BP plan to shut North Sea pipeline, Nigeria blast
Commodity price surge could match increase of 1970s
Fed weighs pause after next rate cut
