Tuesday, March 29, 2011

Gold Keeps Slumping As Crude Keeps Dropping

There are still reports of trouble in both Yemen and Syria, but the crude market is focusing on a coming resolution in Libya. WTI crude had dropped to below $103, and was only a little above that price after a rebound. German consumer confidence is being impacted by inflation worries, as well as worries over the Middle East - North African trouble region, which suggests a constituency for the European Central Bank to raise its rate. The renminbi rose, anticipating further tightening by the People's Bank of China. OECD area inflation is up to 2.4%, the highest it's been since February of 2008. St. Louis Fed President James Bullard is warning about future inflation if the Fed stays easy for too long. Recent statements by he and other Fed figures could be just talk to placate anger at QE2, but it could be lobbying to do what they want to do but are barred from by political pressure.

Gold, following crude oil, dropped early this morning to as low as $1,410.50. After a step up when evening trading resumed, it sunk last night but didn't get below $1,415. Moving back to $1,420 by 2 AM ET, it then reversed when oil slid and sunk to that low which was reached around 6:00. The final part of that slump was prompted by the greenback fording upwards. Despite the drop, its low early this morning was higher than yesterday morning's. A later bounceback to $1,415 didn't hold as regular trading came up. As of 8:14, the spot price was $1,412.60 for a drop of $8.30 on the day. The Kitco Gold Index split the loss into -$5.30 for predominant selling and -$3.00 for a strengthening greenback.

The U.S. Dollar Index edged up yesterday evening but couldn't break above 76.25 then. Losing heart just before midnight, it turned downhill and slipped down to below 75.95. Then reversing, it climbed swiftly to surmount 75.35 as the oil-price drop finally kicked in. As of 8:23, it had pulled back a little at 76.32.

A Bloomberg article ascribes the overnight losses to recovery hopes and growing expectations of a U.S. rate hike.
“Prices are off slightly as the prospects of a sustainable economic recovery improve,” Marc Elliott, an analyst at Fairfax IS in London, said in a report. “Every positive economic figure emerging from the U.S. increases the prospect of interest rate rises.”...

“The more positive signs from the U.S. economy mean that the expectations of rate rises are starting to come back to people’s attention,” Darren Heathcote, head of trading at Investec Bank (Australia) Ltd. in Sydney, said today by phone. Higher rates “will inevitably take some of the shine off gold, decreasing its attractiveness to investors,” he said.
The article also notes that markets are now forecasting a 51% chance for the Fed to raise the Fed Funds rate by January of next year.

An earlier Reuters report said gold was largely steady before the morning slide because fears of rate hikes were balanced by safe-haven demand prompted by the current headline crises in the Middle East and Japan.
"Gold should stay rangebound between $1,410 to $1,440, with focus shifting to currencies," said a Singapore-based trader, adding that physical demand would emerge if prices dropped below $1,410.

Investors are still watching the ongoing Middle East crisis, as oil prices eased after Libyan rebels pressed forward against embattled leader Muammar Gaddafi.

"If Libya's situation stabilised, it would ease the fear on future inflation and dampen sentiment in gold," said Li Ning, an analyst at Shanghai CIFCO Futures.
A Japanese trader is also quoted as saying there wasn't much in terms of events to trade on right now. Holding of the SPDR Gold Shares Trust, in sympathy with the decline, dropped 2.12 tonnes yesterday to 1,211.84 tonnes.

The morning Wall Street Journal article said gold edged lower on expectations of further declines, but the losses were limited by some buying the dips.
"Unfolding events in the MENA [Middle East - North Africa] region and Japan have dramatically reshaped the risk profile across commodities, increasing the risk of pulling forward cyclically tight oil markets and pushing out cyclically tight industrial metals markets, while generating further upside risk to gold and agriculture," Goldman Sachs said in a report.

The investment bank said gold could see further gains in the months ahead "as demand for physical gold from gold [exchange-traded products] and government central banks continues to rise."
Although traders expect further slumps, they believe that such slumps would flush bargain hunters out to buy.

Starting with a decline, and with no news at 8:30 to either help or hinder it, gold started the pit session in a funk but shook the hesitation off to jump above $1,415. As of 8:40, the spot price had softened a bit at $1,416.70 for a loss on the day of $4.20. The Kitco Gold Index divided the lesser loss into -$1.60 for predominant selling and -$2.60 for greenback strengthening. The U.S. Dollar Index, after softening to 76.3, reversed its step-back and resumed climbing. As of 8:43, it has risen back to 76.35.

The overnight session was disappointing, but it largely knocked off the gains made yesterday. Regular trading today may be volatile, but the start of the pit session holds out hope that the overnight slide will be reversed. There's an outside chance that gold will reverse its string of losses and clock in with a modest gain.

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