-- Posted Monday, 21 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 21, a.m. (USAGOLD) -- Gold is edging higher as oil continues to set new record highs and the dollar retreats into the range. This leaves gold confined to its recent range as well, but the dominant trend, along with the underlying fundamentals remain bullish.
Oil set another new all-time high in overseas trading at 117.40 on news that a Japanese tanker was attacked near Yemen. Additionally, militants in Nigeria reportedly staged two attacks on pipelines there. While these incidents were isolated and fairly insignificant, they do reflect how edgy the market is when it comes to any hint of a supply disruption. One can only imagine where prices might go if there were any sort of true disruption.
At the International Energy Forum in Rome, OPEC's secretary-general reiterated that they were not likely to increase output. Mr. al-Badri suggested that oil prices were indeed likely to go higher, but that recent price gains had nothing to do with supply and demand. OPEC has maintained that oil is in adequate supply, but the declining dollar and market speculation is to blame for record oil prices.
The prospect of $120 bbl oil and gasoline prices over $4 per gallon as the summer driving season approaches, indicates that no relief is in sight from rampant inflationary pressures. As energy prices go up, they increase the cost of just about everything else.
The official measurement of US inflation shows a rate of just over 4% y/y. However, it is widely recognized that the real rate of inflation is closer to 10% and could be as high as 12%. Gold is the classic hedge against inflation, particularly energy based inflation.
As we suggested last week, CFTC data has now confirmed strong inflows into commodities. This has been particularly evident in the agricultural commodities, but if the funds are indeed reestablishing positions we can expect a broader spectrum of commodities to benefit from those flows as we move deeper into Q2.
Platinum is modestly lower today, but remains comfortably above the $2,000 level. It is likely that Japanese auto makers will return to the market to buy platinum in May. Securing supplies near $2,000 would be a relative bargain, but it remains to be seen whether the market will give them the opportunity.
The platinum market has been in deficit eight of the last nine years. The deficit is likely to widen to 400,000 oz this year, from 265,000 oz in 2007. Given the tight supply, we continue to look for platinum to give an early indication on the resumption of the bull trend in the metals.
The dollar index is back below 72.00, suggesting the greenback's rebound late last week was merely a bout of short covering within the range. The euro has moved back within striking distance of the all-time high at 1.5984 and we continue to call for a move above 1.6000. Such a move would shift focus to 1.6200.
There have been some indications that the threat of coordinated intervention has lessened and that the dollar will be allowed to fall as long as the decent is orderly. This is consistent with our opinion that all the implied threats heard in recent weeks regarding intervention were orchestrated to sow a seed of doubt in the market. That doubt has the effect of making dollar sellers a little more tentative, resulting in the orderly decline the G7 is hoping for.
While the dollar has been mostly consolidative for the past several weeks, the long-term trend remains decisively bearish. The Fed is expected to cut interest rates by another 25bp next week and continue efforts to inject liquidity into the market. In fact, there is another $50 bln TAF auction today. These measures will continue to debase the dollar, so there is little to suggest the dollar has bottomed.
Today the Bank of England has announced a £50 bln scheme to swap government bonds for riskier mortgage debt in an effort to mitigate the credit crunch. Sterling gains seen last week in advance of this announcement are in the process of being reversed out amid growing concern about the health of UK banks.
The steep drop in the Apr UK Rightmove house price index to 1.3% y/y from a 5.0% y/y in Mar is a strong indication that the housing market in Britain continues to deteriorate rapidly. This suggests that the value of the mortgaged back securities soon to end up on the balance sheet of the BoE will continue to deteriorate as well.
Société Générale Global Gold Hedge Book Analysis shows that the gold producer hedge book was 26.86 Moz at the end of 2007, the lowest level since 1992. Net producer de-hedging reached an all-time high of 14.34 Moz, surpassing the previous record set in 2004 by just over 8 tonnes.
De-hedging by the world's gold producer has accelerated in recent years and is expected to remain supportive to gold prices as producers either opt, or are forced to buy back their forward sales. This is further evidence that the basic supply/demand dynamics remain favorable for gold.
Gold Market Movers:
Fed conducts $50 bln TAF auction of 28-day funds.
Bank of America's profit drops 77 percent in first quarter
Britain unveils $100 billion credit crunch plan
UK Rightmove house prices for Apr -0.1% m/m, 1.3% y/y.
India may soon fix gold prices for global market
