Rumours of Fed Emergency Rate Cuts To Avert Serious Economic Downturn
Commodities / Gold & Silver Jan 15, 2008 - 09:56 AM GMTBy: Gold_Investments
Gold's strong performance continued yesterday and gold was up $7 to $901.90 per ounce in trading in New York yesterday and silver was up 6 cents to $16.29 per ounce. Gold surged in Asian and European trading to new record highs at $914 per ounce before selling off in U.S. trading.
Gold has traded in a range between $900 and $910 per ounce in Asia and early European trading. The London AM Fix yesterday was at a new record high of $911.50 (up from $887.85 the previous day). The London AM Fix was at $904.75. Gold's resilience and close above the psychological $900 price level is bullish. Gold consolidated near record highs in other major currencies. At the London AM Fix gold was trading at £460.76 (up from £464.32 yesterday) and €609.05 (up from €612.16 yesterday).
Dollar weakness, oil and commodity strength and the continuing credit crisis were again driving forces in the gold market yesterday. The dollar hit a new low versus the Swiss franc yesterday and is near record lows against the euro (see FX below) as the credit crisis appears to be deepening in the U.S. Traders will be looking at important U.S. data today which includes January's Empire State Index, PPI and retail sales reports for December, as well as business inventories for November.
There are rumours of emergency rate cuts and even of a possible drastic full 100 basis point. A leaked client note by HSBC added fresh fuel to the rate excitement, suggesting that Fed may now have to slash a full percentage point by month's end to fend off a serious downturn.
However the Federal reserve is caught between a rock and a hard place. Commodities including base metals and soft commodities surged again yesterday and the CRB went up 5.07 to an all-time high of 370.22. Thus there are deepening fears of inflation and stagflation and this is leading to inflation hedging and safe haven buying of gold.
The Daily Telegraph reports in an article entitled 'ECB warns crashing dollar may stop Fed cuts' that rumours of an emergency rate cut over coming days by the U.S. Federal Reserve have swept the global markets, setting off a fresh plunge in the dollar. Lorenzo Bini-Smaghi, a member of the European Central Bank's executive council, warned that the tumbling dollar may now start to foreclose the option of U.S. rate cuts and force the Fed to keep monetary policy tighter than it would like. "I would not be so sure about the movements of the Fed. There is a serious problem with the dollar in America. We will see what margins they have for further rate cuts," he told Italy's La Republica newspaper. It is the first time that a top central banker has openly aired concerns that dollar weakness could constrain U.S. economic policy.
The FT reports that John Hill, an analyst at Citigroup in New York, said that gold prices were likely to test the $1,000-an-ounce level in 2008. Key gold traders such as UBS, Mitsui Precious Metals, Barclays Capital and The Bank of Nova Scotia expressed a similar view. "Prices could explode to multiples of these levels in the event of a full-blown U.S. recession," he added. David Holmes, head of precious metals at Dresdner Kleinwort in London, added that investors were already buying option contracts that would be profitable only if gold prices surged to levels above $1,000 an ounce to as high as $1,500 an ounce.
FX
A combination of carry trade unwinding and safe haven buying has seen an appreciation overnight in the low yielding Swiss franc and Japanese yen. Both of these currencies have retested the November 07 lows against the U.S. dollar, in Asian trading. The sharp appreciation of the Swiss Franc against the dollar is bound to create unease in the corridors of power at the SNB (Swiss National Bank) as their economy slows. Resistance at 107.20 in USD/JPY and 1.0880 USD/CHF, if breached could trigger another sharp move to the downside, and cause further carry trade unwinding against sterling, the euro and high yielding currencies.
The euro continues to appreciate against sterling closing at a new all time high of .7610 yesterday. While our medium term target of 0.7700 is still very much on the cards, this currency pair is well overdue a short term correction. Against the dollar, the single currency is hovering below its all time high of 1.4970, however yesterday it yet again failed to close above 1.4900 which would be required to maintain the bullish momentum and target 1.5000.
The continuing commodity price appreciation helped the Australian dollar reach a level not seen since November 07, closing just over 0.9000. Resistance remains at 0.9070 and a breach of this level opens up a retest of the all time high of 0.9400. If commodity prices continue to remain strong it is only a matter of time before this occurs, however any short term commodity price correction will keep this currency pair in check.
Support and Resistance
The psychological level of $900 has now been attained and while a correction and consolidation is likely and expected the market has a habit of doing what is least expected. Bernanke's likely aggressive interest rate cuts and further use of 'cheap money' despite inflationary pressures will likely support gold and result in any correction being short and shallow. The moniker 'Helicopter Bernanke' is looking more and more apposite by the day.
While gold's fundamentals remain sound and have indeed strengthened, in the short term we may be overbought and thus we could experience a healthy short term correction. Support is at previous resistance at around $840 to $850, below that at the 50-day moving average at around $820. However, traders and investors would be wise to continue to 'make the trend their friend' and would be wise to gradually assume positions and use all dips as buying opportunities. This is especially the case in the current macroeconomic and geopolitical climate where all portfolios should have at least a 10% allocation to gold.
Silver
Silver has continued to surge and rallied to $16.49/16.51 at 1130 GMT. Silver is now in unchartered territory from a technical point of view. Technicians will look to the nominal high in 1980 at $50 per ounce as a possible long term price target. Given the extremely strong supply demand fundamentals in silver we continue to believe that silver will likely outperform every other commodity and outperform gold and the other precious metals - http://www.gold.ie/Articles_of _Interest/AOI_08-05-07_Why_the _Silver_Price_Is_Set_to_Soar .htm .
PGMs
Platinum was trading at $1585/1590 as per above (1130 GMT).
Palladium was trading at $380/385 an ounce (1130 GMT).
Oil
Oil is largely flat in European trading and NYMEX light sweet crude oil (FEB08) was trading at $92.71 a barrel.
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