Thursday, March 17, 2011

Gold Stumbles, Then Recovers; Greenback Stumbles

Despite some signs that the emergency workers at the Fukushima Dai-ichi nuclear plant are starting to get the crippled reactor under some sort of control, fears about nuclear power are spreading. The government of China has announced a stop-construction policy and safety checks of extant nuclear reactors in the country. Anti-nuclear-power activists are having their day in the sun. There's a run on potassium iodide tablets, claimed to help offset radiation damage.

In the U.K., inflation expectations have risen to 4%; that's the highest level in two and a half years. It's also well above the Bank of England's inflation target. Desite those expectations, there's little seeking of wage increases. About two-thirds of those surveyed said they would support a Bank of England rate hike. Expecting a repeat of the 1970s, the BoE and the Fed are likely to see current inflation as a blip because of little wage pressure.

On the Libya front, the United States government is beginning to get excited. They're pushing the U.N. to enact a no-fly zone, and there's some lobbying about more aggressive anti-Gadaffi actions by the enforcement wing of the proposed zone. President Obama seems open to the idea of outright air strikes to help the rebels.

That inflation news did help push up gold, as did a recovery in equities, but the U.S. Dollar Index had an influence too. Gold's last-minute run-up was induced by a surprise tumble of the greenback, but the currency climbed back up. That influence, along with more panic about the reactor, got gold itself tumbling once the overnight session began. From $1,402, the metal bounded down to $1,387 in the first two hours as the greenback recovered. Its decline spent, gold then meandered in the low 1390s until the greenback began sliding in earnest. Support for a no-fly zone also added to the upward pressure on gold, or at least didn't halt it. Breaking $1,395 around 3:30 AM ET, the metal climbed fairly steadily until it surmounted $1,400. As of 8:13, the spot price was $1,402.80 for a gain of $1.30 on the day. The Kitco Gold Index attributed -$4.70 to predominant selling and +$6.00 to weakening of the greenback.

As noted above, the U.S. Dollar Index at first recovered from its flash stumble just before 5:15 PM yesterday. Climbing from below 76.3 to just below 76.7, it double-topped last evening and then slid down to fluctuate between 76.4 and 76.5 as night turned into morning. Breaking definitively below 76.4 around 3:00, it slid below 76.0 and came to rest between 75.9 and 76. Rather than being yen-dominated, the Index also fell against the Euro. As of 8:20, it was marking time at 75.92.

A Bloomberg article credited the nuclear crisis for spurring safe haven demand, as well as the drumbeats in D.C. for military aid to the rebels.
“The situation in the Middle East and North Africa is discouraging people to go short on gold and the situation is rather delicate in Japan,” said Bernard Sin, the head of currency and metal trading at MKS Finance SA, a bullion refiner in Geneva. “There’s no other alternative really to gold.”
The article also mentions the seemingly unstoppable momentum for a no-fly zone at the U.N.

An earlier Reuters article said the nuclear crisis encouraged selling last night, although premiums in Tokyo rose, but cited rising ETF holdings as a sign that bargain hunting is showing up.
"There are mixed views with respect to the catastrophe in Japan. Few sections of investors believe that demand may see a surge in the coming sessions which could take gold to fresh record highs," said Pradeep Unni, senior analyst at Richcomm Global Services in Dubai.

"At the same time there is a view that Japanese retailers or banks may sell gold to raise immediate cash. Banking is completely impossible and cash in hand is either burnt or washed away. This makes gold vulnerable to a sell-off, if situations do
not improve."
Evincing bargain hunting, holdings of the SPDR Gold Shares Trust grew by 4.55 tonnes to reach 1,217.295 tonnes.

A Wall Street Journal report took a day's view, saying gold was little changed overall with trading being cautious.
"No one quite knows what is going to happen next..." a London-based precious metals trader said.... "If stocks weaken further, gold will be sold as a source of liquidity, which could send it much lower. But then the outlook for gold should be somewhat bullish, with expectations that problems in Japan and around the world will keep monetary policy loose for the time being."

Two well-watched reports were released at 8:30. The weekly initial jobless claims report showed initial jobless claims declining to 385,000, a little below expectations. Above expectations was the core CPI for February. Although the raw rate's rise of 0.5% was in line with expectations, the core rate rose by 0.2%; expectations were for 0.1%. In spite of that data, gold fell after regular trading resumed and kept falling after those items were released. The inflation news had no effect on the decline, which reversed around 8:40 after reaching $1,398.50. As of 8:45 AM, the spot price was $1,401.00 for a loss of $0.50 on the day. The Kitco Gold Index assigned -$5.40's worth of change to predominant selling and +$4.90's worth to a strengthening greenback. The U.S. Dollar Index continued meandering, but bumped up against 76.0. As of 8:48, it was exactly 76.00.

Gold did managed to recover its overnight losses, but again it's not responsive to news that would normally encourage it. Today's regular trading may again see a morning decline as the gold market tries to figure out how recent disasters and events should be interpreted. That uncertainty should keep the metal in its current funk for now.

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