-- Posted Monday, 19 May 2008 | Digg This Article
| Source: GoldSeek.com
May 19, a.m. (USAGOLD) -- Gold continues to set new 3-week highs, bringing the 916.82 objective within striking distance. The yellow metal continues to garner support from firm oil, but a weaker dollar tone emerged on Friday as well.
The dollar slipped back toward the midpoint of its 2-month range, weighed by poor preliminary consumer sentiment for May. The headline number for the University of Michigan's consumer sentiment tumbled to 59.5, the lowest reading since Jun-80.
The same report showed that inflation expectations surged to 5.2%, the highest reading since Feb-82. The long-term (5-10 years) inflation forecast jumped to 3.3%.
The combination of a 28-year low in consumer confidence and a 26-year high in inflation expectations is fairly compelling evidence that the US economy may enter a period of stagflation. When the economy slows and yet prices continue to rise, gold shines especially bright as a means to preserve wealth.
With the economy still looking rather vulnerable, it's going to be difficult for the Fed to raise interest rates to address the inflation issue. Fed funds futures continue to favor steady policy over the next several months, but the market is now showing about 50-50 odds of a 25bp rate hike by year-end.
The Fed is likely to address short-term risks to growth with continued liquidity injections. However, I wouldn't completely rule out further rate cuts if a worsening economy sparks a slide in equity prices.
We should start getting a better feel for the impact of US stimulus checks over the next couple of weeks as well. Ours went in the bank, to be spent later this year on a planned trip to China. Although, we have made some purchases over the last couple of weeks.
We recently bought a bike for our young son and a patio set. Both items were gently used and found on Craigslist. I suspect we could have easily spent our entire stimulus check on a new patio set, but we found something really nice for less than a third of what we would have paid for new.
My wife paid $20 for my son's bike, which appears darn near brand new. I had priced similar bikes anywhere from $160-$200.
Our purchases won't show up in any future retail sales data, although we may have provided some stimulus for the families we made our purchases from. I wonder how many others will be turning to secondary markets such as Craigslist and eBay in an effort to stretch their beleaguered dollars a little further. What I really should do now is take the $900 we saved and buy another ounce of gold.
Oil remains well bid, despite President Bush being able to secure an increase in output of 300,000 brl/day from Saudi Arabia. The fact that President Bush will not oppose a suspension in the build of US strategic oil reserves has not had an impact on prices either.
The disconnect has to do primarily with expectations for crude, with the market still focused on recent projections toward $200 brl. Last week, Goldman Sachs raised their forecasted average oil price for H2-08 to $141 brl.
We've also heard additional reports that funds are returning to the gold market after having been distracted by oil for the past month. We've seen the gold/oil ratio rebound more convincingly above 7, which bodes well for continued gains in gold relative to oil.
Commodities such as oil and gold are going to continue to benefit from expectations of higher prices and also from hedge flows seeking to find shelter from a weak dollar.
The dollar index fell to pressure the lows for the month in earlier trading. The 72.30 level marks the halfway back point of the corrective rally from the all-time low at 70.70 (14-Mar) to 73.90 (08-May high). If this level gives way, considerable credence will be returned to the long-term downtrend in the dollar.
That should help drive gold back into the 936.60/952.80 zone over the short-term. Further out, scope is seen for renewed tests above the $1,000 level.
Platinum continues to track back toward its record high at $2,290, spurred by this morning's release of Johnson Matthey's Platinum 2008 market review.
Johnson Matthey is the world leader in platinum distribution and the sole marketing agent for Anglo Platinum, the world's largest producer of platinum. Their platinum report showed that the market had a deficit of 480koz in 2007.
Additionally, the report shows that supplies of platinum fell by 4.1% in 2007, while demand from the autocatalyst sector rose by 8.2%. Jewelry demand was only down marginally.
Investment demand for platinum was up sharply last year, boosted by two new European ETFs. Two new platinum ETNs (exchange traded notes) were launched in the US just over a week ago.
A recent Reuters survey of analysts suggests that platinum prices are poised to rise another 50%. The positive outlook for the white metal should continue to be supportive to the gold market as well.
Gold Market Movers:
US leading indicators for Apr at 10:00 EDT. The market is expecting -0.1%, versus +0.1% in Mar.
Gold may rise for third week on demand for inflation hedge
Johnson Matthey releases "Platinum 2008" industry review
Platinum prices 'set to rise 50%'
UK Rightmove house price index for May +1.2% m/m.
Stock index futures suggest a neutral open on Wall Street
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