Wednesday, March 30, 2011

Gold Recovers Somewhat, Helped By Rise In Oil

For the previous two days, gold had been pulled down in the early-morning part of overnight trading. This morning, the chain was broken. Helped by a rise in the price of WTI crude to well above $104, with news from Libya encouraging rather than damping morale of gold bulls, gold rose in overnight trading although not by that much. It seems that Hong Kong and London traders have seen the partial reversals in North American trading, squared it with events in Libya, and adjusted accordingly.

With respect to the tsunami-stricken Fukushima Daiichi Nuclear Power Station in Japan, Tokyo Electric Power announced that it's scrapping the first four reactors and is likely to scrap all six of them. Although doing so means a multibillion dollar write-off for the company, it would make for resolution of the crisis. A U.S. Treasury official has ruled that the Libyan rebels can sell oil from rebel-held oil fields, but not through any Gadaffi-linked company. They're currently having trouble holding on to the oil fields they've captured. If they prevail and start selling licit oil, those sales would tend to depress the crude price. One of the reasons why oil shot up on the Libyan civil war is because of interdiction of oil supplies from that country, which the U.N. resolution forbidding Gadaffi-linked exports adds to.

Gold's re-start yesterday evening was a muddle. At first hesitating, it briefly sunk to $1,415 before recovering a little at midnight ET. Then, it got its footing and started climbing. Worry about mainland Chinese inflation helped it upwards in Hong Kong trading. (As an example of that worry, the government is cracking down on large price hikes that have caused panic buying. Said panic buying shows inflation psychology in miniature.) In four hours, it reached its early-morning peak of $1,424.00. Its subsequent relapse didn't bring it as low as last night's stumble; it reversed course again, and climbed back to $1,420 before picking up the pace. As of 8:13, the spot price was $1,424.70 for a gain of $6.00 on the day. The Kitco Gold Index attributed +$7.60 to predominant buying and -$1.60 to a strengthening greenback.

The U.S. Dollar Index continued its late-afternoon slump yesterday evening, troughing at 76.075 before turning on a dime and striding upwards. Within an hour and a quarter, it had reversed the entire afternoon decline and touched 76.35. Its subsequent journey was ragged, with a spill in early morning; the overall direction was downwards. As of 8:20, it was recovering from a skid at 76.20.

A Bloomberg report said gold was gaining traction from the Libyan fighting, as the rebels are being held back, and lingering worries about Eurozone sovereign debt.
“It is certainly the geopolitical factors which are still playing a role,” said Peter Fertig, owner of Quantitative Commodity Research Ltd. in Hainburg, Germany. “The situation in Libya is quite open and far from over. There is uncertainty” on Europe’s debt issues, he said.
The article also notes that the fighting in Libya is now the most violent it's ever been.

An earlier Reuters report said that the Libyan fighting plus firmer equities in Asia helped gold with a push, although gains may be capped from the recovery trade and increasing hawkish talk from both Federal Reserve officials and the European Central Bank.
"You've got to ask yourself, how bad is inflation? I think, really, you've got to get the economy moving before anything happens," said Jonathan Barratt, managing director of Commodity Broking Services in Melbourne.

"I think the market itself will probably get a little bit headstrong if, in fact, we continue to get concerns in the Middle East. I think gold is really being played out by what's happening in the Middle East and risk aversion trade."
The article also mentioned Syrain President al-Assad setting up a counter-demonstration to show support for his regime. A Hong Kong dealer noted that buying pressure was being largely offset by selling. Dealers in Singapore noted that there's some buying from Indonesian sources. Holdings of the SPDR Gold Shares Trust were unchanged yesterday at 1,211.84 tonnes.

A Wall Street Journal article said that buying pressure was subdued despite gold's gains. Central bank hawkishness means gold market skittishness.
"Gold's downside is still well supported by uncertainty over Libya and Japan, but there is no demand drive on the upside," said VTB Capital analyst Andrey Kryuchenkov....

"While the Fed is not saying that monetary tightening is necessarily going to happen immediately, the focus seems to be firmly on managing inflation," said Mr. Kryuchenkov. "This means that opportunity cost of owning gold is going to increase, likely capping the metal's gains in the second half of this year."
Given that gold has become semi-mainstreamed in large part because of near-zero opportunity costs, that's how EU and U.S. rate hikes will be interpreted by the gold market - at least in the short term. Over the longer term, as noted by Deutche Bank, gold doesn't deteriorate unless real rates are at 3% or more.

The ADP payrolls report was released at 8:15, shortly before the pit session started. For March, as estimated by the payroll-processing firm, private-sector companies added a total of 201,000 jobs. That reading sqaured with expectations, but February's number was revised downwards from a gain of 217,000 to 208,000. The gold market liked the result, which tied in with optimism over the metal's overnight-trading gain. After breaking through $1,420 shortly before 8:00, the metal's climb accelerated until bumping against $1430. As of 8:46, the spot price was $1,429.60 for a gain of $10.90 on the day. The Kitco Gold Index assigned +$14.00's worth of change to predominant buying and -$3.10's worth to greenback strengthening. The U.S. Dollar Index recovered from its funk to best 76.3 again; as of 8:49, it was still climbing at 76.33.

Four days of declines was a long stretch, and it looks like that string is over starting today. Gold may give up some of its rise in later trading, but the metal seems assured of notching up a gain on the day. The funk is being shaken off.

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