We have been mentioning every now and then that the current unstoppable rise in commodity prices is due to higher surplus global liquidity. The first major liquidity reduction move has come for the bank of Japan. Gold April future fell to a low of $496.60 in Asian trade while silver March future fell to a low of $946.00 in Asian trade. Gold April future settled lower at $550.90 while silver March future settled lower at $946.70 yesterday.
Bank of Japan Governor Toshihiko Fukui said a seven- year bout of deflation has almost ended and the central bank will ``gradually'' raise interest rates from zero percent. The central bank will ``immediately'' reduce the amount of cash pumped into the financial system, a precursor to raising rates, when it is convinced of sustained inflation, Fukui told lawmakers yesterday in Tokyo. The yen climbed against all of the traded currencies. The BOJ, which has kept key rates near zero since 2001, is preparing to end its deflation-fighting policy after fourth quarter growth in the world's second-largest economy outpaced that of the U.S. and the dozen nations that share the euro. The Federal Reserve's key rate is 4.5 percent and the European Central Bank's benchmark borrowing cost is 2.25 percent.
We expect the Fed to be liquidity provider to world under Bernanke after June 2006 which will result in even higher US dollar carry trade that what is prevalent today. BOJ will soon begin pulling liquidity out of Asia's biggest economy. Once that process begins, there's no telling how aggressive the BOJ will be and what effect it will have on bond yields as well as commodity prices. There will be reduction in yen carry trade which was the foremost reason for the rise in gold and silver prices between October 2005 and December 2005.
What makes the carry trade so worrisome is that nobody really knows how big it is. For example, the BOJ has no credible intelligence on how many hedge funds, investors and companies have borrowed cheaply in ultra-low-interest-rate yen and re-invested the funds in higher-yielding assets elsewhere.
Nor are the Bank for International Settlements, Federal Reserve Bank of New York or the International Monetary Fund likely to know how much leverage this most popular of trades has enabled banks to build up. Same for regulators overseeing the dealings of portfolio mangers around the globe. But this mystery will be solved over the next few months.
Iran has offered U.N. inspectors information about a shadowy uranium-processing project that Western intelligence has linked to missile warhead design and tests with high explosives. The offer was made with the clock ticking toward a March 6 meeting of the International Atomic Energy Agency (IAEA) that could result in U.N. Security Council action against Iran for failing to clear up doubts about its nuclear program.
In the short term there will be a correction in gold and silver prices (unless there is a rise in geopolitical tensions in the Middle East and Iran). The fall in gold and silver will provide yet another opportunity for long term traders to enter the markets and buy gold and silver. However we do not expect a sudden knee jerk slide in commodity prices. The short term “cautious optimism” in favour of the bulls will continue.
GOLD
Gold needs to break and hold $560.0 to prevent a slide to $528.00. There are intermediate supports at $550.00, $539.10 and $534.20. On the higher side a convincing break of $568.00 will result in further gains to $578 - $585.00 zone.
SILVER
Silver needs to break and hold $962.00 to prevent a re test of $940.00 and key short term support at $924.00. A break below $924.00 will result in $915.00 and $903.50. On the higher side a convincing break of $962.00 will result in $974.00 as the next resistance.
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