-- Posted Tuesday, 27 May 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
May 27, a.m. (USAGOLD) -- Gold has retreated into the range as US markets reopen after the long holiday weekend. Recent gains prompted some profit taking early in the session. However, better than expected new home sales sparked an uptick in the dollar. This has added further selling pressure to the yellow-metal, bringing the 900 level back within striking distance.Today's option expiration may be playing a role in today's retreat in gold as well.
Despite the 3.3% uptick in Apr new home sales (above market expectations), the S&P/Case-Shiller home price index showed that prices dropped 2.2% in Mar.
US consumer confidence also fell to a new 16-year low of 57.2 (well below market expectations). A weak reading on the Richmond Fed's manufacturing index adds weight to the overall outlook for the US economy.
Brent spot crude slipped below $130/bbl on concerns that the worsening economy may finally be curtailing demand. Additionally, a new tax plan signed yesterday is likely to result in an increase in Russian oil output to 12 mln bbl/day.
However, renewed worries about Nigerian oil output, stemming from a militant attack on a Royal Dutch Shell flow station on Monday is seen as supportive to crude. Further support is offered by OPEC President Chakib Khelil's reiteration that the market is well supplied and the organization would not be increasing output.
With oil prices having more than doubled in the past year, the drag on the already floundering US economy is growing. Reports estimate that the rise in oil prices removes approximately $170 bln from the US economy, more than 1% of GDP.
GDP for Q1-08 came in at an anemic 0.6% and oil is up another 30% since the end of the quarter. With many estimates for US GDP in Q2 around +1% or less, the inflationary and recessionary implications of $130/bbl+ oil lends considerable credence to forecasts for a period of stagflation.
Stagflation is defined as a period of inflation combined with economic stagnation, generally including recession. Gold is particularly well suited for protecting ones wealth against this insidious combination.
The International Energy Agency (IEA) is reportedly preparing a study, slated for release in November, which will show that future supplies of oil will be tighter than previous forecasts. Speculation is that global supplies will peak at 100 mln bbl/day.
This figure is well shy of expected demand, which is anticipated to reach 115 mln bbl/day by 2030. The implications of a 15% supply deficit over the next 22 years are rather dire.
Relatively low oil prices during the 90s and early-2000s prevented oil companies from investing in exploration and development. At the same time, domestic oil drilling and expansion of our refining capacity were hobbled by our representatives in Washington -- often as a result of pressure from the powerful environmentalist lobby.
Similarly, cheap oil in the not too distant past provided little incentive for research and investment into alternative forms of energy, including nuclear. One might argue that we are now paying the price for our own inaction.
In hindsight, it's rather startling the absolute lack of progress toward energy-independence we've made since the oil crisis of the 1970s. Perhaps the pain this time around will be sufficient to result in meaningful action toward that cause.
In the meantime, energy-based inflation is likely here to stay. The impact on broader inflation will continue to be significant, which in turn will serve as an anchor to both the US and the global economies.
Prospects for a weaker economy are likely to weigh on the stock market. Recent tests in the DJIA back above 13,000 have proven unsustainable amid persistent worries about housing and the credit crisis.
If the stock market goes into full retreat this summer, gold is likely to rise as investors seek a safe-haven for their assets. Of course gold is also the classic hedge against a weak dollar and inflation.
As noted in our recent research piece, dips during the summer months have historically offered excellent buying opportunities in gold.
Gold Market Movers:
US S&P/Case-Shiller home price index -2.2% in Mar.
US consumer confidence for May fell to 57.2, a 16-year low. This was well below market expectations, versus a revised figure of 62.8 in Apr.
US new home sales for Apr rose 3.3% to 526k, above market expectations, versus revised 509k in Mar.
German GfK consumer confidence for Jun tumbled to 4.9 from a revised 5.6 in May. Well below market expectations.
German GDP for Q1 confirmed at 1.5%.
Recession still likely in US, says Greenspan
Decline in home prices accelerates in March
US consumer mood at 16-year low
Anchor away: Why inflation phychology has become unmoored
