Gold and silver fell after the Fed signaled more two interest rate increases and increased interest rates by a quarter of a percentage to 4.75%. Gold April future fell to a low of $560.90 while silver May future fell to a low of 1074.50 as I prepare this report. Crude oil and copper were unaffected by this rise. The US dollar gained mildly against the major currencies.
``Some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance,'' the Fed said in its statement after the meeting. ``The run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation.'' The new Fed chairman Ben Bernanke is trying to balance inflation and at the same maintaining the growth rates using interest rates. It remains to be seen the effect higher interest rates will have on the housing markets, consumer and business confidence. Higher interest rates by the Fed will result in a slow and gradual depreciation of the US dollar in the long term.
Japan's government bonds fell, pushing five-year yields to the highest since September 2000, on speculation inflation will cause central banks to raise interest rates in the world's two largest economies. The rise in global bond yields will result in reshuffling of portfolio by global investors wherein the proportion of investment in treasuries will increase. Treasuries have been so far neglected by an average investor as the returns do not even cover real inflation. Higher global interest rates, rise in treasury yields and reduction in global liquidity are the only bearish factor for gold, silver and other commodities.
Crude oil futures rose to the highest levels in 2006 at $66.14 ahead of the US weekly inventory numbers. In 2006 and 2007 crude oil prices are expected to remain firm.Higher crude oil prices have resulted in increased investment in alternative fuels. Ethanol is being used to drive cars, then there is bio diesel and now research is being done to use palm oil in cars. Crude oil futures are being manipulated by the oil refining companies to sell at higher prices. When these oil refining companies need to stock themselves up for the peak summer demand, these companies will push prices lower between $54 - $56 a barrel so that the same can be sold at higher levels to the consumer. Geopolitical threats will not end and has been factored in by the markets. Higher crude oil prices will support gold and silver prices as well.
GOLD
Gold needs to break $570.00 - $575.00 for $585.00 - $600.00. On the lower side $554.10 is the initial support with $547.80 as the key short term support.
SILVER
Silver needs to break $1100 and $1120. There is an initial support at $1063.00 and $1051.00. Silver has formed a higher support base at $1040.00 and as long as $1040 holds on closing basis the downside is limited. A consolidated fall below $1040 will result in $1018.00 as the next support levels.
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