Money and Metals

Bloomberg looks at the US dollar. "The bear market in the U.S. dollar is back, some of the world's biggest money managers say. The U.S. currency dropped against the euro and yen last week as a government report showed the economy expanded less than analysts had forecast in the second quarter and reduced the chances the Federal Reserve would raise interest rates."

"'Once the Fed is out of the picture, you are going to see the dollar weaken,' said Paul Barrett, chief currency trader at J.P. Morgan Private Bank, which manages $332 billion in New York."

"'Geopolitical events don't have a sustainable impact on the dollar,' said Ryan Shea, a currency strategist in London at State Street Global Markets, custodian for $10.7 trillion of investor assets. Investors 'seemed to get over the panic point quite quickly.'"

"The dollar has weakened 7.8 percent against the euro this year and 3.1 percent versus the yen, putting it on pace for a fourth annual drop in five years. The U.S. currency rallied about 14 percent against both last year as the Fed raised interest rates. 'The odds are it's the start of a bear market for the dollar,' said John Taylor, chairman of a New York firm that manages $12 billion in currencies. He predicts the dollar will return next year to its record low of $1.3666 per euro sent in December 2004."

"Gold futures closed slightly lower Monday, to end July with a gain of about 3%, with metals traders remaining cautious about developments in the Middle East and hashing over what to expect from next week's Federal Reserve monetary-policy meeting.
Gold futures closed down 60 cents at $634.20 an ounce after trading in a range of $627 to $635.80 an ounce."

"Peter Grandich said he expects Aug. to be the month in which gold breaks above key resistance between $640 to $660, pushed there by dollar weakness, global political concerns and strong demand."

"Silver closed up 0.1 cent at $11.37 an ounce, and gained 4% on the month. Platinum rose $7.30 to $1,241 an ounce, but lost 0.1% on the month. Palladium rose 3% to close at $317.15, for a 2% decline on the month."

"Harry Schultz's latest letter arrived Sunday night. He offers this acid assessment of the recent rally: 'There is a paradox in market prices as I write. We have gold, U.S. dollar, oil and most stock market indexes all showing a readiness to move up. It is an illogical combo. It may be a temporary fluke or it may be there's manipulation of the indexes going on.'"

"Schultz, never afraid of a radical idea, takes manipulation seriously. He says: 'It is fairly easy to manipulate stock indexes via just three or four blue chips, and the multinationals appear in several indexes. We've seen it before. Most stock markets were in virtual free fall and suddenly reversed into reverse head-and-shoulders buy patterns."

"This is a rarity. The U.S. dollar index may also be subject to manipulation.'
His diagnosis: 'Some governments are getting desperate re some market action in the face of elections. Painting the tape is an old game.' His diagnosis: 'Monitor all these key market charts to see if something breaks rank and reveals a more 'logical' picture.'"

"Schultz's macro analysis continues to be dark: 'The world is on a knife edge between inflation, which often suddenly gets out of control when it passes point X, and deflation, when monetary liquidity suddenly falls behind the X-factor point to keep economies afloat (or triggered by a major debt default or by stock market implosions, e.g. South east Asia markets a few years ago). Being wrongly invested when a 'flation-tsunami' hits, can (and often does) slash a portfolio's value by 40% in 72 hours.'"

"Fortunately, says Schultz, gold protects against both 'flations,' 'though it is usually 'relative' in deflation.'"

"Schultz thinks there's a 40% chance the US will go into recession in early 2007, 50% if the Federal Reserve raises interest rates to 6%.'"

The Canadian press reports on why the greenback fell today. "The U.S. Commerce Department's report sent the greenback tumbling on currency markets. The report showed the economy improved by an annual clip of just 2.5 per cent in the latest quarter, falling below market expectations for a three per cent improvement. That reading was only about half of the 5.6 per cent annual rate clocked in the previous January-to-March quarter."

"'It was quite a bit weaker than the market was expecting,' said George Davis, technical analyst. 'What was really a drag on the number was the business investment component. And what we saw right after the number came out was basically the U.S. dollar weakening across the board.'"

"An end to the Federal Reserve's rate tightening is gloomy news for the U.S. dollar, which may extend its decline until next year. Steady rates mean returns from buying U.S. debt will be limited, which would chill demand from foreign investors. And if the U.S. economy is moderating, that means companies won't be seeing such robust growth, making them less attractive as well."

"Furthering the situation is that fact that central banks around the world are bumping up interest rates in response to inflationary pressures. 'Japan is going to continue raising rates, as will Europe,' said Jack Ablin, chief investment officer of Harris Private Bank. If U.S. interest rates level off, 'that spread is going to draw interest from the United States and into those markets.'"

"Gold futures posted modest gains Friday as a report of a slowdown in second-quarter GDP growth triggered a fall in the dollar. Gold for August delivery settled up $2.30 at $634.80 on the New York Mercantile Exchange, a gain of 2.4% on the week."

"Silver edged down 2.5 cents at $11.365 an ounce, platinum dropped $8.30 at $1,233.70 an ounce and palladium declined $6.30 at $314.15 an ounce."

"'With today's action putting the dollar in significantly oversold territory, there's a pretty good chance of a turnaround in the dollar near-term,' said Dale Doelling, market technician. 'If this occurs, it will most likely put pressure on the metals complex as August gold has moved up near trend-line resistance with today's rally.'"

From Reuters. "An International Monetary Fund staff assessment of the U.S. dollar has estimated it is overvalued by 15 percent to 35 percent. 'The real exchange rate appeared significantly overvalued, especially given the projected deterioration of U.S. net foreign liabilities,' IMF documents said on Friday that detail annual economic consultations with U.S. officials."

"'A staff assessment using macroeconomic fundamentals estimated the overvaluation in the 15-35 percent range,' the documents say."

The Street.com has this on the markets. "A frenetic day in the metals markets saw gold prices soar Thursday as a credit-rating upgrade for China weakened the dollar and an Al Qaeda call-to-arms spurred interest in so-called safe-haven investments. 'The currency news about China is putting pressure on the U.S. dollar,' says Randy Diamond at Miller Tabak, adding the threat of more terrorism only helped gold's case. 'People are very sensitive and are definitely not blowing it off.'"

"The spot price for gold was trading around $634 per ounce in London, up $16.45 compared to the previous day."

"Standard & Poor's upgraded China to A from A-, according to a release Thursday morning by the rating agency. The news comes as investors are increasingly confident the Federal Reserve will not hike interest rates at its Aug. 8 policy meeting in the light of more evidence of a U.S. economic slowdown."

"The combination weighed on the U.S. dollar, which was recently trading at 115.88 yen vs. 116.33 late Wednesday."

"The bullish news wasn't, however, enough to save the gold miners that were suffering after Newmont Mining reported disappointing second-quarter earnings of 36 cents a share vs. expectations of 47 cents. Shares were recently trading down 4.7%. Barrick Gold, AngloGold Ashanti and Freeport-McMoRan Copper & Gold were being pulled down by investor disappointment in Newmont."

From Reuters. "Spot gold traded at $633.50/634.25 in the New York afternoon, up from $621.80/622.55 late on Wednesday. It had dropped as low as $623.75 during Asian trade. The dollar was weaker across the board for a second day as traders remained sceptical that the U.S. Federal Reserve will raise interest rates next month. It had hit a two-week low against the euro earlier in the session."

"Other metals prices were mixed. Silver settled up 31 cents at $11.345 an ounce, platinum rose $1 at $1,242 an ounce and palladium gained 45 cents at $320.45 an ounce."

DAily FX reports on what moved currency markets. "Rarely is the Beige Book report as market moving as it was today. At a time when traders are scrambling to figure out whether the Federal Reserve has enough evidence to raise interest rates again in August, the clarity of the Beige Book was exactly what dollar bears needed to hear."

"According to the Fed districts, there have been continued weakness in retail sales and except for 'only scattered exceptions' activity in the housing market is also slowing."

"Even though the report is clearly more supportive of a pause than a hike, do not be mistaken, the report indicates that economy is still growing. Whether today’s dollar weakness can be sustained will be dependent upon tomorrow’s durable goods and new home sales reports."

"Gold futures surged Wednsday as the dollar dropped against major currencies. Gold for August delivery ended up $3.90 at $621.90 an ounce on the New York Mercantile Exchange."

"The downward trend in the dollar was the main reason for gold's positive close, said trader Charles Nedoss. 'I don't think things are getting any better in the Middle East,' Nedoss added. He said that gold will experience resistance around $627, but if the Mideast situation continues to worsen and the dollar keeps falling, then gold might trade higher for the rest of the week."

"Silver edged up 13.5 cents at $11.08 an ounce and platinum rose $4.90 at $1,234.40 an ounce. Palladium dropped 10 cents at $316.90 an ounce."

"Peter Grandich said there appears to be a heavy 'short' presence in gold, 'based on the fact that gold has been hit hard on several occasions of late, shortly after the second London fix, when European physical buying is over. I believe these sellers are exhausting themselves and a short squeeze is near,' Grandich said."

"New Zealand's central bank Governor Alan Bollard kept the benchmark interest rate at a record-high 7.25 percent and said 'it will be some time' before he considers cutting rates because inflation is accelerating."

"Inflation reached 4 percent in the year through June and is likely to persist near that level for 'several quarters,' Bollard said in a statement released in Wellington today. Annual inflation won't return to the central bank's target range of between 1 percent and 3 percent until late next year, he said."

"'The Reserve Bank is signaling a sustained period of slow growth over the coming two years,' said Cameron Bagrie, chief economist at ANZ National Bank Ltd. in Wellington. Still, 'interest rates are not going to come down in a hell of a hurry.'"

MarketWatch has this report on the US dollar. "The dollar rose against major counterparts Tuesday after stronger-than-expected housing and consumer-confidence data fueled expectations that the Federal Reserve will increase interest rates in August. The greenback reversed early losses, which were triggered by renewed speculation that China may diversify its currency reserves. That, in turn, reignited concern about the U.S.'s long-term ability to finance its swelling deficits."

"'U.S. data [this week] as a whole will help determine expectations for the Fed meeting, which is coming up,' said researcher Ronald Simpson. The dollar rallied to the top of its recent range as the federal-funds-futures market is pricing in a slightly better chance of a rate rise in August, he said."

"Late in New York, the euro stood at $1.2578, compared with $1.2627 late Monday. The dollar changed hands at 117.19 yen, compared with 116.77 yen. The British pound traded at $1.8393, compared with $1.8502. The dollar was at 1.2529 Swiss francs, compared with 1.2461 francs. The euro was fetching 147.43 yen compared with 147.47 yen."

"China's National Bureau of Statistics, in a report Tuesday, said the country should speed up diversifying its $941 billion foreign-exchange reserves because of the risk that the U.S. dollar will continue to decline. The statistics agency is not responsible for managing the reserves."

"'The [statistics] bureau has no real say over currency policy, and hence the remarks do not carry that much weight. And besides, the government has said that it will not diversify existing reserves' but clearly can diversify new reserves, said Steve Barrow, chief currency strategist at Bear Stearns, in a note."

"Gold rose for the first session in four on speculation fuel costs will remain high through August, boosting the precious metal's appeal as a hedge against inflation. 'Higher energy prices tend to drive gold higher because of inflationary concerns,' said Mike Sander, a commodity broker. 'I'd rather be bullish on gold than bearish with more problems in the Middle East.'"

"Gold futures for August delivery rose $4.80, or 0.8 percent, to $618 an ounce on the Comex division of the New York Mercantile Exchange. The metal touched $602.50 yesterday, the lowest since June 30."

"'The oil-price outlook is still going to be quite firm,' said Stephen Platt, a commodities analyst. 'It's going to provide a firm tone to the inflation outlook. You're going to see buyers looking at gold as an asset with value.'"

"A stronger U.S. dollar helped limit gold's gains. Gold generally moves in the opposite direction of the dollar, which rallied today as a report showed U.S. consumer confidence unexpectedly rose in July."

"Silver added 2.50 cents at $10.945 an ounce and palladium edged up 95 cents at $317 an ounce. Platinum rose $20.20 at $1,229.50 an ounce."

"China's National Bureau of Statistics yesterday called on the country to 'speed up' the pace of diversification of its vast foreign exchange reserves away from the dollar to help reduce the risk of capital losses. 'The US dollar may continue to weaken, increasing the risk of foreign exchange losses in our currency reserves,' the bureau said."

"The comment was the latest from Chinese officials calling for a shake-up of Beijing's reserves, at $941bn the largest in the world and growing at $20bn a month. About 80 per cent are believed to be in dollars. 'The dollar is likely to continue to be a driver of gold prices,' said Michael Martin, a trader and analyst."

"Some analysts put greater onus on the statisticians' words. Simon Derrick, head of currency research at Bank of New York, said the sheer weight of such comments emanating from China indicated a desire to reduce the stock of dollars, rather than just continue to shift a greater slice of new reserves away from dollars, as most analysts believe is happening."

"'At the very least this suggests that there will continue to be an active demand for the euro against the dollar in the months ahead,' he added."

"Tony Norfield, global head of FX strategy at ABN Amro, said the statement, following mooted Middle Eastern reserve diversification and a move by the Asian Development Bank to develop a local currency bond market, could help reduce global overdependence on the dollar. In particular, he said the statisticians had gone further than many previous commentators in calling for a shift out of US assets per se, rather than just US Treasuries."

"'We can presume the Chinese will use periods of dollar strength to offload some dollars,' he said. 'This casts a shadow over the longer term picture for the dollar.'"

Reuters has this report out recently. "Call it the weapon of financial destruction. There is so much cheap financing sloshing around the global economy, despite simultaneous interest rate tightening at the world's three major central banks, that some analysts warn that financial bubbles are bound to keep building."

"This could threaten a robust global economy, and it would take a gradual global slowdown and higher central bank interest rates for quite some time to avert the problem, say financial and investment analysts."

"'Monetary authorities have lost control of money,' said Brian Reading, director at Lombard Street Research, a London macroeconomic forecasting company in a research note."

"His statement is provocative, and few economists are willing to go quite that far. But there is widespread concern that global liquidity conditions remain very loose despite a bout of central bank tightening. The Bank of Japan this month joined the European Central Bank and the Federal Reserve in hiking official rates, marking the first time in many years that central banks in the world's largest economies were tightening policy simultaneously."

"Yet Claudio Borio, head of research at the Bank for International Settlements, estimates that global liquidity conditions remain very generous. Borio calculates that the official policy rate charged by the G3 central banks, adjusted for consumer inflation, is about two percentage points lower than the average real G3 policy rate over the last 15 years."

"Additionally, growth in broad money and in credit to the private sector have grown by about 26 percent since 1995 relative to nominal GDP while inflation remained quite stable. 'It is hard to find a period in the post-war era in which inflation-adjusted interest rates have been so low and monetary and credit aggregates have expanded so much without igniting inflation' against a backdrop of strong global growth."

"'One might even call this the Great Liquidity Expansion puzzle,' Borio wrote."

"Gabriel Stein at Lombard Street estimates that lending outside the banking sector for major economies grew at its fastest rate in a decade, or by 10 percent year on year in March. He calls this growth rate destabilizing and blames central banks for starting to tighten rates too late. 'Money and credit growth are still too rapid. We are not talking yet about any serious tightening of monetary policy,' he said."

"Thomas Mayer, European economist at Deutsche Bank, also finds monetary conditions quite loose, despite simultaneous credit tightening by G3 central banks. He estimates that global broad money surged in 2001 and 2002 to a 14 percent year-on-year rate as central banks slashed rates to clean up after the high technology bust. That has left a monetary overhang that still has not been mopped up."

"These still-generous financial conditions leave a number of economists worried that the global liquidity boom is feeding a new asset-price bubble in real estate, and that just like the high-technology bubble of 1999-2000, it could end in a nasty financial meltdown, even global recession."

"To prevent that, Morgan Stanley's global economist Stephen Roach said in a recent research note that central banks need to be willing to keep on tightening. 'The deeper question is whether central banks truly have the will to stay the course that they appear to be on,' he said."

"Lombard Street Research has dubbed this cycle a weapon of financial destruction. 'Every time you inflate a bubble with cheap money, you trash someone's balance sheet,' said Stein. 'First corporate balance sheets, now the households and next the public sector. Where do you go to inflate the next bubble? And they bigger they get, the more difficult it is to get back into financial shape.'"

The US dollar made gains in trading today. "The U.S. currency increased its earlier gains against the Canadian dollar during New York trading Monday. The greenback fetched a 3-month high against the loonie amid the release of lower-than-anticipated Canadian retail sales data for the month of May. Shortly after touching its multi-month high against the Canadian dollar, the greenback reversed some of its gains."

"This came as investors found safety in the U.S. currency amid continued violence in the Middle East."

The Dow Jones Newswire. "Comex gold futures were knocked down to a three-week low on Monday at the New York Mercantile Exchange amid fund liquidation and a firmer U.S. dollar, however, they did recover some losses by the close."

"At settlement, the benchmark August contract was down $7.00 at $613.20 an ounce. The contract got as low as $602.50 during the session after data from the Commitments of Traders Report showed that speculators had built up their long positions during the prior week of trade. Speculators were 107,374 net long as of July 18 versus 101,929 net long the week prior, the CFTC reported late Friday."

"Dave Meger, director of metals trading at Alaron in Chicago, said Monday's fund liquidation was sparked by a rise in the dollar versus the euro. 'The gold market was prime for liquidation,' he said."

"Bernard Hunter, a director at Scotia Mocatta, said the first half of the trading day was a continuation of the fund liquidation seen in the marketplace over the past few sessions. But he added that people's expectations of rising conflict in the Middle East had softened, which led to profit-taking."

"However, late in the session, once the $600-an-ounce level was not breached some short covering appeared and took gold off of its lows. 'It was a good bounce off the lows of around $10-$12,' said Hunter, adding that Monday's close was not far off from Friday's levels although the downward momentum remains in place."

"In the silver market, futures managed to match the moves of gold but did settle higher on the day after dropping to a weekly low of $10.68 an ounce, basis the September contract. The contract later settled up 7.5 cents at $10.920. One trader noted that the turnaround in the copper market late in the day may have helped silver to push off its lows and move into positive territory."

"The platinum group metals complex settled mixed on the day. October platinum settled down $11.20 at $1,209.30 an ounce and September palladium ended $4.25 higher at $316.05 an ounce."

From Reuters. "'People are still nervous of it on the downside,' Simon Weeks, director of precious metals at ScotiaMocatta, said. 'If we can hang in here for a couple of days, I would expect some bargain hunting and small physical demand to come in. But at the moment it is relatively quiet,' he said."

"'The market could not break out on the upside level. I think that has sent bearish signals to the market,' said a dealer in Hong Kong, referring to the heavy selling after gold touched around $636 an ounce last Friday."

"Physical trading was slow in parts of Asia, with dealers expecting the gold price to head lower. But trading picked up in India, the world's largest gold consumer, ahead of the busy festival season that starts in a couple of weeks."

Bill Fleckenstein has this editorial today. "Despite the July heat, there was lots of tough-Fed shivering last Wednesday, at least initially. Fed Boss Ben Bernanke told Congress: The Fed must be mindful of past rate increases. 'Moderation' in economic growth now seems to be under way. The Fed must be 'flexible' and 'ready to adjust.'"

"I continue to believe that worrying about the Fed being tough is exactly the wrong thing to worry about. This, after all, is the Fed that precipitated a stock bubble, and then a housing bubble to address what ensued. The Fed only knows how to do one thing, which is to print money and bail out whatever problem it previously created."

"TIf one wants to worry, one should worry about the consequences of Fed recklessness: The fact that our economy is entering a post-housing-bubble recession, given (a) how levered up the consumer is, and (b) the fact that our financial system is held together with baling wire, in the form of derivatives, credit-default swaps and other sorts of financial 'dark matter.' It is this beneath-the-surface reality that comprises the real threat."

"Some folks are beginning to rethink the notion of loans against homes as impregnable assets. In my opinion, any company that has profited by aiding and abetting the housing ATM is in trouble if it has a leveraged balance sheet with its assets being loans to houses. And I'm sure that lots of unusual business practices have gone on that we have no knowledge of. Just as we didn't find out about Enron, WorldCom, options-backdating, etc. until the tide went out, we have yet to discover what borderline, if not outright criminal, behavior occurred in the housing mania."

"When the stock market begins to connect the dots and that recession looms, all hell is going to break loose. Exactly when that occurs, I do not know, but it's coming."

A pair of reports look at interest rates and currencies. "What only a few days ago seemed like a done deal is now rife with uncertainty. We are referring of course to the possibility of the Fed rate hike rate at the August FOMC meeting. Chairman Bernanke’s guarded testimony continue to resonate throughout the currency market. With the Fed signaling a more neutral rather hawkish posture, currency markets continued to sell dollars as US rate hike expectations are pared down."

"In tonight’s trading no currency has been the bigger beneficiary of this change in sentiment that the Japanese yen which up to now was the biggest victim of interest rate spread speculation. The yen fell to multi year lows against the British pound and near all time lows against euro earlier in the week but tonight yen appreciated materially with USD/JPY tumbling more than 100 points breaking the 116.00 level for the first time in five days."

"The move downward occurred despite statements by BOJ Deputy Governor Toshiro Muto that Japanese rates are likely to remain low for an extended period of time as the central bank tries to gradually normalize monetary policy to ensure that the ongoing Japanese economic recovery is not damaged in the process."

"In the currency markets however, it is not the absolute value of the carry that matters but the future direction of the interest rate spreads. If the US rate hike cycle will indeed come to a halt at 5.5%, as many market players now anticipate, while the BOJ proceeds, albeit slowly, to push rates higher yen should continue to strengthen against the greenback. Tonight’s price action may be a signal that the USD/JPY up move is finally exhausted, as traders cast their eye to the future of shrinking interest rate differentials between the two currencies."

From Bloomberg. "Federal Reserve Chairman Ben S. Bernanke's congressional testimony accentuated a split among economists about where interest rates are headed after next month. Goldman, Sachs Group Inc. expects the Fed to raise borrowing costs one more time in August, to 5.5 percent, and then stop. 'I'm very comfortable with the growth-deceleration story,' said Jan Hatzius, the firm's chief U.S. economist. By the end of next year, the firm expects the Fed to cut the benchmark rate to 4 percent."

"At Lehman Brothers Holdings Inc. in New York, chief U.S. economist Ethan Harris doesn't buy it. 'The Fed has a very optimistic view about inflation, and I think they will find out they are wrong and will have to tighten more,' he said. Lehman estimates the central bank will push its benchmark rate to 5.75 percent by year's end, from 5.25 percent currently."

"If Bernanke proves to be right in his forecast, Harris said, it would be 'the first time in history' that the Fed stopped inflation 'without imposing pain on the economy.'"

Some reports on the days' currency and metals trading. "The dollar continued its slide against the euro on Thursday as minutes from the Federal Reserve's last policy meeting showed policy-makers saw 'significant uncertainty' about the path of interest rates. On Wednesday, Bernanke told the Senate Banking Committee that U.S. inflation was likely to ease in coming quarters as the economy slows, and he repeated that message Thursday to the House Financial Services Committee."

"Bernanke 'painted a less hawkish picture than in the past and as a consequence people are betting that we are near the top in rates and that the dollar should fall a bit,' said John McCarthy, director of foreign exchange at ING Capital Markets in New York."

"Also Thursday, European Central Bank governing council member Nicholas Garganas said inflation risks were worsening in the euro zone. The remarks failed to add much to the euro's climb, though, as markets have largely priced in another rate hike from the European Central Bank when it meets in August."

"Further monetary tightening by the mainland government to rein in China's runaway economy cannot be effective unless interest rates are freed from exchange rate constraints, according to a senior Credit Suisse economist. Monetary tightening is inevitable given the economic data released Tuesday by the National Bureau of Statistics Tuesday, Dong Tao said."

"'For fear of hot money inflows, yuan interest rates have been kept low ... But the [low] interest rates have become a barrier to the efficiency of the monetary policies,' he said. 'If the above situation doesn't change, the increasing loans growth and over-investment cannot be resolved.'"

"China's economy grew 11.3 percent in the second quarter, the fastest in more than a decade, driven by spending on factories and real estate."

"Canada's dollar rose from a three- month low on speculation a pause in U.S. interest-rate increases will make the Canadian currency more attractive. 'You're having a little change in sentiment after the release of Fed minutes,' said Jonathan Gencher, vice president of foreign exchange sales at BMO Capital Markets in Toronto. 'People are expecting the interest-rate differential between the U.S. and Canada isn't going to change much going forward.'"

"Gold futures dropped Thursday, continuing their recent volatile trend, as traders consolidated prior-session gains. Gold futures closed down $10.30 at $632.50 an ounce on the New York Mercantile Exchange. Silver dropped 6 cents at $11.065 an ounce, platinum dropped $11.20 at $1,226.30 an ounce and palladium declined $6.05 at $312 an ounce."

"'It's a knee-jerk reaction after yesterday,' said Charles Nedoss, sat Peak Trading Group in Chicago. 'You didn't have any more bullish news. You just saw some people take profits.'"

"'The small children managing money for hedge funds have been spinning their wheels,' said Ned Schmidt, editor of the Value View Gold Report. '[They] bought gold on Lebanon and sold it Monday on Lebanon. [They] bought gold on Bernanke's mumbling testimony on one day and are now selling it due to Bernanke's testimony.''

"It took until noon for the gold market to wake up Thursday, after the bonanza Ben Bernanke party on Wednesday. But when the market did awaken, traders got a hangover, with August gold prices hitting the skids. The precipitating factor, which came after a morning of ultra low volume of about 5,400 contracts, were some careless words by the Federal Reserve chairman during his House testimony."

"Apparently traders were spooked by the fact that Bernanke says the economy is 'in balance,' according to Jon Nadler. Such an economy could handle more rate hikes, which are presumably bullish for the dollar and bearish for gold, Nadler explains."

"In the futures markets, the next week will see commodity funds selling off their long positions in near-term, or August, gold contracts in favor of ones for December delivery. 'The roll is happening,' says Jeff Christian, managing director at CPM Group. 'By late next week you should see August open interest down under 1 million.'"

"He notes that open interest in the August contract has dipped from 17.4 million ounces on July 10 to 14.8 million currently. For December the figure is currently 8.6 million ounces, and this will likely rise in coming days."

"'The result of the "roll,' says Christian, is that there will be a depressing effect on spot prices and a likely lifting effect on December contract prices, which were trading at $646 an ounce, down $9.70. He also notes that the market is very nervous with traders looking for "equilibrium" and for news from which to take direction, and when combined with the summer vacation season, this results in low volumes."

The markets reacted to the Fed chairmans' appearance today. "Federal Reserve Chairman Ben Bernanke soothed investors with his view that economic growth seems to be moderating and inflation remains contained. To be sure, some observers felt the market was hearing everything positive Bernanke said and ignoring his many caveats. While he laid out the conditions that would make the Fed pause its rate hikes, it isn't clear the economy currently meets those prerequisites, as the day's inflation numbers made clear."

"The Labor Department said the Consumer Price Index rose by 0.2 percent in June, the smallest increase in four months. But core inflation, which excludes energy and food, rose by 0.3 percent in June, higher than the 0.2 percent Wall Street expected. That increase left core inflation rising for the past three months at an annual rate of 3.6 percent, far above the Federal Reserve comfort zone of 2 percent or less."

"The dollar fell the most in three weeks against the euro and weakened versus the yen after Federal Reserve Chairman Ben S. Bernanke said 'moderation' is under way in the economy. 'The dollar is finding selling pressure across the board,' said Matthew Kassel, at ING Financial Markets. 'The market is pricing out another rate increase in August.'"

"The dollar weakened against all 16 most actively traded currencies except for the New Zealand and Taiwanese dollars. 'The market had expected a more hawkish statement from Bernanke than the market received,' said Firas Askari, head currency trader at BMO Nesbitt Burns in Toronto. 'Support for the U.S. dollar collapsed for now.'"

"'There are a couple of headlines on growth and the market took it to sell the dollar,' said Jeffrey Young, head of currency research at Citigroup. 'It seems to be a very, very narrow reading on the statement. I am not convinced about the whole story.'"

"The euro may have gained support from a German government report today showing producer price inflation in Europe's largest economy was faster than expected in June, backing the case for the European Central Bank to raise borrowing costs next month. The ECB boosted rates three times since December to 2.75 percent."

"Gold futures closed higher Wednesday, strengthened by the falling dollar after Federal Reserve Chairman Ben Bernanke signaled that the end of the rate-hiking cycle may be closer than many expected. Gold for August delivery ended up $13.30 at $642.80 an ounce on the New York Mercantile Exchange, pulling back up from an overnight low of $618.90."

"'Gold bullion and equities took off at drag-race speeds, immediately after Mr. Bernanke confirmed that he sees plenty of signs of a slowing U.S. economy,' said Jon Nadler, analyst at Kitco.com. 'Once again, gold can refocus on the geopolitical drivers that have lent it support in past weeks.'"

"Silver added 60 cents at $11.125 an ounce. Platinum rose $2.90 at $1,237.50 an ounce and palladium added $3.80 at $318.0 an ounce."

"Gold may now regain some of its safe-haven allure. Dale Doelling, chief market technician at Trends In Commodities, said that gold will likely rise further in the next few days. 'The longer-term outlook isn't as clearly defined and it will take consecutive closes above the recent high at $677.50 to get the momentum players back into the market,' Doelling said."

"The remarks caught many in the market by surprise, a trader said. 'It's completely wrong-footed the market,' he said. 'People were looking to test the downside and had taken short positions, but the Fed caused quite a rally. The markets are very whippy and the reaction was exaggerated, which is a reflection of the illiquidity of the market and the size of some of the positions in it,' he said."

"'I still feel that the geopolitical arena is underpinning it. It's certainly providing support and it has the potential to blow up,' Darren Heathcote, head of trading at Investec Australia in Sydney, said. 'If it escalates to Syria and Iran, I guess there's a potential for gold to probably push through recent highs again, to break back through $670s if that should happen,' he added."

A quick look at the days numbers and then some technical stuff. "Gold tumbled late on Tuesday as aggressive selling was triggered by a rising dollar and speculation about another U.S. interest rate increase by the Federal Reserve to head off inflation, analysts said. Spot gold plummeted to its lowest level since July 11, at $628.90 an ounce. It was last quoted at $630.30/631.30 an ounce, way below Monday's late New York quote at $650.30/651.80."

"In other precious metals, silver fell to $10.48/10.58, from $11.02/11.12 previously. Platinum fell to $1,217/1,223 an ounce from $1,237/1,242 late Monday, while palladium declined to $308/313 an ounce."

Here is the Elliott Wave short-term forecast for Gold and silver, after trading ended last night. "Today’s strong downward reversal in August Gold, coming on the heels of two significant non-confirmations (XAU/Gold ratio and Silver, see Friday’s Update), along with a test of a Fibonacci retracement area and satisfying a Fibonacci time relationship, strongly suggests that wave 2 or B up is complete."

"In Friday’s Update we showed two charts of the significant divergence between the XAU/Gold bullion ratio and gold, plus the non-confirmation between gold, which pushed to a high today, and silver, which topped on July 12. These two bearish signals alone suggested that gold was in the very latter stages of its upward correction from the June 14 low ($546.40)."

"When one adds in the fact that prices pushed to a Fibonacci retracement area, and a Fibonacci time relationship exists whereby wave 1 or A down unfolded in the exact number of days as wave 2 or B up, 34 (-1), the odds are very strong that a significant turn down is starting right now."

"Today’s outside-down day is a good trading pattern to kick off this move. Prices should not revisit this morning’s $677.50 high again if the top is in. The target for this leg lower is $450-$500, the upper end of which is close to the point where there would be two equal legs down from the $739.20 peak (May 12)."

"The odds are that Silver’s upward correction from the $9.38 low of June 14 (basis spot) is over. Prices should be in the very early stages of a decline that draws silver to the next target of $6-$7. Prices have no business being above this morning’s $11.83 high again, so this is the 'risk' for a bearish stance at this juncture. While not expected, any push above $11.83 would mean the upward correction was extending. Next Update: Wednesday, July 19, 2006."

Dow Jones Newswire has the metal trading numbers. "Gold futures did an abrupt about-face Monday, hitting seven-week highs in overnight screen trading before turning sharply lower largely on profit-taking, traders and analysts said. August gold settled down $16.10 to $651.90 an ounce on the Comex division of the New York Mercantile Exchange."

"Several analysts suggested some traders were exiting flight-to-safety positions since the Israeli-Hezbollah fighting has not become even more widespread, as some may have feared. Other catalysts, they added, were a stronger dollar, softer crude oil, caution ahead of Federal Reserve Chairman Ben Bernanke's congressional testimony this week, and chart-based factors."

"'We're seeing some profit-taking,' said Paul McLeod, vice president for Commerzbank. 'However, the markets were quite thin. I think the moves were exaggerated, given the volumes that were traded. It certainly wasn't a big rush to the exit doors.' Some of the long liquidation may have been because the Middle East situation doesn't 'look particularly worse than it did on Friday,' said McLeod."

"Other traders also cited dollar strength as a gold-bearish influence, as the
euro slid as far as $1.2512 from $1.2652 late Friday."

"Person listed other factors that may have been weighing on gold besides the
Middle East situation. 'On Friday, we saw a lot of gold stocks down, which was something a little bit eerie,' he said, noting that gold-mining equities sometimes lead the commodity."

From Reuters. "Revaluing International Monetary Fund gold reserves to shore up its financing to make up for reduced demand for emergency loans is not appropriate, U.S. Treasury Under Secretary Tim Adams said on Monday. 'We, the U.S., do not think that gold is an appropriate option. For us, it is not an option,' Adams told Reuters in an interview."

"Two years ago the largest shareholders in the Fund flirted with the idea of revaluing its more than 100 million ounces of gold reserves. The complex process involved the IMF selling a total of 12.9 million ounces of gold to Mexico and Brazil, both of which had financial obligations coming due to the fund."

"The 2004 proposal ran into resistance from Group of Seven rich industrialized countries and gold-mining powerhouse South Africa. Some national treasuries of IMF shareholder countries would have had to book the entire write-down in the year of sale, creating an accounting headache. Others were concerned about the likely bearish impact on precious metals markets and some feared a permanent reduction in IMF assets."

The Associated Press. "Worried that China's sizzling economic growth could ignite a financial crisis, the country's leaders have raised interest rates and imposed regulatory controls. But they have avoided the step that Washington most wants: a sharp rise in the value of China's currency. And China gives no sign it will let the yuan rise significantly any time soon."

"'China will forthrightly continue to push forward the reform of the flexibility of the renminbi exchange rate,' said Finance Minister Jin Renqing, quoted by state media. 'But we will not blindly follow demands by other countries to correct global imbalances.'"

The Bangkok Post. "The baht is expected to strengthen further following the appreciation of Asian currencies against the weakening US dollar, currency experts say. The baht could rise as high as 37 to the US dollar if China decides to adjust the yuan's trading value and if the Japanese yen tests a level of 105 to the dollar."

"The Bank of Thailand is likely to leave its benchmark interest rate unchanged at 5% when its Monetary Policy Committee meets tomorrow, according to Satian Tantanasarit, financial markets management executive of TMB Bank. The reason, he said, was that the spread between local and US rates was currently narrow at 0.25 percentage points."

"'The upward interest-rate trend is a global issue. The Bank of Japan raised its rate last week by 25 basis points after freezing it for six years. Rumours that China would soon do something with its currency also have a correlation with our exchange rates,' he said."

With a dicey week ahead for the markets, an editorial from US News and World Report. "A discouraging word is beginning to be heard on Wall Street: the 'R' word, as in recession. After 17 straight interest-rate hikes by the Federal Reserve Board over the past two years, many now fear that the economy is cooling down rapidly. Merrill Lynch economists, for example, believe there is a one-third chance that the U.S. economy will slip into recession sometime next year."

"The June labor market report, which showed a worrisome drop in the number of new jobs created, only fueled fears that consumers, already strapped by rising gas prices and higher interest rates, will pull back even more. 'The blocks are in place for a recession in 2007,' says James Stack, editor of the InvesTech Market Analyst newsletter."

"One key indicator is that treasury notes and bonds are now yielding less than the federal funds rate, which is what banks charge one another on overnight loans. Today, the federal funds rate, the shortest form of debt, stands at 5.25 percent while 30-year bonds were paying just 5.11 percent last week. While not a perfect predictor of pending recession, this type of yield-curve inversion 'is a strong signal that growth is going to slow measurably,' says economist Mark Zandi. Zandi, though, does not predict a recession, noting strong corporate profits."

"In the past quarter century, treasury bond yields have slipped below the Fed funds rate only four other times. 'And each of these preceded either a downturn in the economy, a major financial strain, or both,' says David Rosenberg, North American economist for Merrill Lynch. The last time treasury bonds were all yielding less than the federal funds rate was March 2000, just before stocks fell into a grisly bear market and about a year before the 2001 recession."

"Ironically, it was as recently as May that economists were fretting about inflation, not recession. But history shows the economy can go from too hot to too cold in a hurry. Since 1920, the time between the last in a series of Fed rate hikes aimed at slowing the economy and the first in a series of rate cuts to spur growth has been just 5.5 months, according to Ned Davis Research."

The Telegraph picked up on the Fed paper that has everyone talking. "The United States is heading for bankruptcy, according to an extraordinary paper published by one of the key members of the country's central bank. According to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, by some measures, the US is already bankrupt. 'To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors,' he asked. "

"According to his central analysis, 'the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.'"

"Prof Kotlikoff, who teaches at Boston University, says: 'The proper way to consider a country's solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country's policy will be unsustainable and can constitute or lead to national bankruptcy.'"

"'Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke.'"

"Experts have calculated that the country's long-term 'fiscal gap' between all future government spending and all future receipts will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars. The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters."

"Prof Kotlikoff said: 'This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc.'"

"The scenario has serious implications for the dollar. If investors lose confidence in the US's future, and suspect the country may at some point allow inflation to erode away its debts, they may reduce their holdings of US Treasury bonds."

"Prof Kotlikoff said: 'The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century.'"

Nervous markets pushed up gold and oil today. "Gold rose to a six-week high as crude oil surpassed $78 a barrel for the first time as concern mounted over escalating violence in the Middle East. Crude oil for August delivery rose 30 cents, or 0.4 percent, to $77 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures touched $78.40, the highest since trading began in 1983."

"Gasoline futures rose by 2.36 cents to settle at $2.3249 a gallon, the highest level since late September of last year, when U.S. refinery output was sharply curtailed by hurricane damage. In London, Brent crude futures gained 58 cents to settle at $77.27 a barrel on the ICE Futures exchange."

"'We've reached a level where we've put all the scare premium into the market that we can,' said James Cordier, president of Liberty Trading in Tampa, Fla. 'At this point, we have to have a disruption to move smartly higher from here.'"

"Gold for August delivery finished up $13.60 at $668.0 an ounce on the New York Mercantile Exchange, its highest closing level since May 23. The yellow metal gained 5.2% this week. 'The bonfire that the Middle East has now become has put the gold bullion into hyper-drive and gave the market a very strong close,' said Jon Nadler, an analyst at Kitco.com."

"'Fast approaching the $670 target, gold now stands poised to spring to $680 and $700 in short order, should any single geopolitical trouble spot erupt into a larger or more serious conflagration,' Nadler said."

"'With no sign of a let up in geo-political tensions and oil prices potentially looking to test $80 a barrel, I think there is now scope for gold to test $680,' said James Moore of TheBullionDesk.com."

"Other metals prices also posted gains. Silver added 4.50 cents at $11.530 an ounce and copper rose 3.60 cents at $3.7125 a pound. Platinum was up $3.50 at $1,267.50 an ounce and palladium settled up 45 cents at $334.50 an ounce."

"'Silver, platinum and palladium are industrial metals first, and are stores of value secondarily, if at all,' said Dennis Gartman in The Gartman Letter. 'Gold, however, remains the currency of choice during periods of political instability. It is such again.'"

"Richard Bernstein, chief investment strategist at Merrill Lynch, said that this week's flaring of violence around the world, especially in the Middle East and India, reinforced his expectation that global political instability will only grow in the future. 'It is unfortunate, but defense stocks (both in the US and Europe) and small gold positions still look attractive to us,' Bernstein said."

Bloomberg reports on the BOJ meeting. "The Bank of Japan raised interest rates for the first time in almost six years, forecasting sustained growth in the world's second-largest economy and an end to a decade of deflation. Governor Toshihiko Fukui and his policy-board colleagues increased the benchmark overnight rate between banks to 0.25 percent from almost zero, the bank said in Tokyo today."

"The central bank is raising rates, still the lowest among the Group of Seven nations, to avoid the excesses of the 1980s bubble economy that was followed by a collapse in land prices and three recessions. Bonds rose and the yen fell as the central bank said it may keep rates 'very low' to support growth driven by the fastest pace of corporate spending in 16 years."

"'Maintaining the zero-rate policy could cause large swings in the economy and prices in the future,' Fukui said. 'Future adjustment of interest-rate levels will be made gradually' with consideration to the economy and prices, which the bank expects to keep rising, he said."

"The government opposed the bank's last rate increase in August 2000. Seven months later, the bank had to cut rates back to almost zero as an Internet-led global economic boom faltered. The central bank today said it will keep buying 1.2 trillion yen in government bonds from commercial banks, a policy tool that has been used to provide funds to the banking system and which has helped avoid gains in bond yields."

The Associated Press has the currency news. "The dollar rose slightly against the euro, but fell against the other major currencies Thursday after data showed a jump in the number of Americans filing new claims for jobless benefits. The euro bought $1.2692 in afternoon New York trading, down from $1.2699 in New York late Wednesday. The British pound rose to $1.8442 from $1.8343."

"The dollar fell to 115.33 yen from 115.52 yen as the Bank of Japan held a meeting that was expected to result in its first interest rate rise in nearly six years. In other trading, the dollar bought 1.2290 Swiss francs, down from 1.2337 late Wednesday, and 1.1296 Canadian dollars, down from 1.1348."

From USA Today. "Escalating tension in the Middle East sent oil prices near $77 a barrel. Many on Wall Street worried that the day's headlines signaled a worst-case scenario. Continued gains in energy prices could prompt the Federal Reserve to keep lifting interest rates to contain inflation, but the recent spate of downbeat earnings news suggested that economic growth was already moderating."

"Investors fear higher rates in a cooling economy could lead to a recession. 'At this point in the cycle, you have questions about how much inflation is rising, what the Fed will do and how much growth will slow,' said Scott Wren, senior equity strategist at A.G. Edwards."

From MarketWatch. "Gold futures closed higher Thursday, as escalating violence in the Middle East sent oil prices to record levels. Gold for August delivery closed up $3.20 at $654.40 an ounce on the New York Mercantile Exchange. The metal has gained 15.2% in the last month."

"Silver dropped 7 cents at $11.485 an ounce and platinum declined $3.60 at $1264.00 an ounce. Palladium rose $4.10 at $334.05 an ounce."

"'Record oil prices have failed to propel gold and the other precious metal through the highs seen yesterday, as dollar-driven profit taking continues to cap the market,' said James Moore of TheBullionDesk.com. 'For now, traders seem happy using rallies to lock in profits,' Moore said. 'However, given the rather unstable political picture globally, further safe-haven driven price spikes can't be ruled out.'"

"'It seems that oil is destined to hit $80 before the end of July and maybe even higher should tensions erupt abruptly,' said Kevin Kerr, editor of a newsletter published by MarketWatch. Kitco's Jon Nadler said: 'Nobody wants global chaos, but how else can they currently look at the gold market but from the long side? If $76 or $80 oil is in the cards, then why not $680 or $700 gold?'"

And Reuters looks at the US consumer. "The U.S. leisure sector's recent spate of bad news could be an early warning of a wider deterioration of U.S. consumer confidence, which analysts fear could spread to other parts of the economy. 'Consumers are slowing down,' said Tim Conder, an analyst at A.G. Edwards. 'They've tapped their home-equity lines of credit. Rates have gone up. They're paying more at the gas pump. They're tapped out.'"

"On Thursday, Polaris Industries Inc., a leading U.S. builder of all-terrain vehicles, motorcycles and snowmobiles, said quarterly earnings fell 29 percent and cut its full-year revenue outlook, blaming higher interest rates and gas prices for weaker sales. The warning was the latest sign that highly leveraged U.S. consumers are pulling back from discretionary spending in the face of rising interest rates, higher energy prices and a slowing housing market."

"Earlier on Thursday, Fleetwood Enterprises, a maker of recreational vehicles, posted lower-than-expected earnings. And on Wednesday, Brunswick Corp., the world's largest maker of recreational boats, cut its yearly outlook. During a conference call with investors on Wednesday, Brunswick Chief Executive Dusty McCoy warned: 'We believe the marine business is not alone in experiencing weakness.'"

"Bob Simonson, an analyst at William Blair & Co., agreed and said the pullback by consumers was moving beyond the drop in demand for pricey adult toys like boats and RVs. 'We're on the verge of something that, if it isn't a recession, is going to feel like one when we're done,' Simonson said. 'It's going to spread like a cancer to other businesses. It's the most discretionary and higher-priced items that go first. They're the canary in the coal mine.'"

Once again, geopolitical problems are moving the metals market. "Gold futures rallied Wednesday, closing at their highest level in more than a month, as political instability in the Middle East, India and North Korea fuelled safe-haven demand."

"Gold for August delivery ended the session up $8.10 at $651.20 an ounce on the New York Mercantile Exchange, its highest closing level since May 30. Silver added 0.5 cent to $11.555 an ounce, platinum rose $13.60 at $1,267.60 an ounce and palladium was up 95 cents at $329.95 an ounce."

"As long as there is no resolution in the crises in Iran, Iraq, Gaza, and North Korea, 'gold will keep drawing safe-haven buyers under its protective wing,' said Jon Nadler, an analyst at Kitco.com. 'The seasonal factors one could usually count on to slow the action in the trading pits are now taking a back seat to the anxieties created by aggravated world conditions,' Nadler said."

"Dale F. Doelling, chief market technician at Trends In Commodities, attributed the latest gains in gold prices to the underlying strength of the market. 'These events can cause brief periods of market volatility, but certainly this event alone will hardly have any long-term affect on the markets,' Doelling said. 'It will be interesting to see how much more is left in the current rally as the market has retraced about 50% of the decline and is back in overbought territory.'"

"The dollar rose sharply against the yen, boosted by a smaller-than-expected U.S. trade deficit in May and growing uncertainty about Japanese monetary policy. Oil prices closed near $75 a barrel."

"The dollar gained across the board after the U.S. government said its trade deficit widened in May to $63.84 billion, below an expected $64.9 billion shortfall. Its biggest advance came against the yen, already weaker overnight after remarks from Japan's finance minister about lingering deflation cast doubt about an expected Bank of Japan quarter-percentage-point interest rate hike on Friday."

"'The (Japanese) finance minister put the fuel on the fire and the trade number got the fire more heated,' said Brian Taylor, chief foreign exchange dealer with Manufacturers and Traders Bank. But Nihon Keizai Shimbun, Japan's biggest financial daily, reported in Thursday's edition that the BOJ is 'leaning toward' raising rates by a quarter percentage point when a two-day policy meeting ends on Friday."

"Late afternoon, the dollar was up 1.1 percent at 115.49 yen. The euro fell 0.56 percent to $1.2699."

Business Week looks at the US jobs picture. "U.S. retailers are no longer the job-creation engine they were, suggesting that consumers may finally be crying 'uncle.' Execs are concerned about weakening sales, which they expect to decline by 4% to 6% over the next fiscal year. 'We have to work hard to keep our labor and hiring in check given our outlook in same store sales,' says Mike Marchetti, Finish Line's executive vice-president of store operations."

"Around the country, retailers are echoing similar sentiments, and many are holding off on their hiring plans. Their actions coincide with a surprising third consecutive month of job losses in the retail sector, according to last week's job numbers. The U.S. Labor Dept.'s job report on July 7 showed that retailers had shed 7,000 jobs in June, after a loss of 71,000 jobs in the previous two months combined."

"It's unusual that retailers are trimming their workforces when the rest of the economy is growing. Now, the concern is that retailers, who are positioned to detect the pulse of consumers more quickly than many other types of companies, are sensing trouble ahead."

"'Something is screamingly wrong with consumers, and retailers are reacting,' says Richard Hastings, economic advisor and a senior retail analyst."

"Retailers, from home-furnishing stores to large discount chains, are skittish that the prospects could get even worse. They worry that consumer spending may suffer from the pile-up of adverse affects. With home prices flat or on the decline, fewer consumers will be able to take out home equity loans to finance other purchases."

"And consumers are finding it tough to avoid spending more on gas in the short term, since it's difficult to switch quickly to a more fuel-efficient car or shorter commute. Instead, they may trim expenses elsewhere, at restaurants or department stores, so they can fill up the tank."

"The world's largest retailer, Wal-Mart Stores, has been one of the most outspoken on the issue. Sales at its stores open at least a year rose 1.2% for the five weeks ended June 30—its smallest gain in more than a year, despite discounts to lure customers. 'Traffic was down during the month,' says Tom Schoewe, executive VP and CFO of Wal-Mart."

"Wal-Mart continues to see customers consolidating their trips, and its research of shoppers shows increasing concern over the rise in gas prices. 'In June, we reinforced Wal-Mart's low prices and value throughout the store by highlighting rollback prices on approximately 500 products,' says Shoewe."

"Starting in June, national grocer chain Albertsons started shutting down the first of the 100 stores it plans to close this year. Also starting in March, Federated Department Stores, the parent of Macy's and Bloomingdale's, started the process of eliminating 6,200 jobs as part of its takeover of the May Department Stores Company. Radio Shack is also in the process of closing up to 700 underperforming stores around the country."

"Right now, the most worried retailers are the discount store chains, because consumers with lower incomes tend to be the first to pull back when tough times hit. Discount store operator Family Dollar Stores, reined in its expansion plans this year to 350 new stores, from its typical 500. Other dollar-store chains are also wary. 'We continue to be concerned about the impact the current economic pressures are having on our customers, particularly high gasoline prices, increasing interest rates, and rising personal debt,' says David Tehle, CFO of Dollar General Corp., which has 8,000 stores in the U.S."

"Spokeswoman Elise Hasbrook says that Finish Line is staffing stores with fewer people and will be doing less hiring in the back-to-school season, which starts next week and runs through Labor Day. Consumers may just have to help themselves when they go shopping in the coming months—if they decide to make a trip to the store at all."

Marketwatch looks at what moved the metals market today. "In a clear display of their safe-haven allure, gold futures closed higher Tuesday after seven explosions ripped through evening rush-hour commuter trains in Mumbai. Gold for August delivery closed up $17 at $643.10 an ounce on the New York Mercantile Exchange, its highest level since June 5."

"The train blasts in Mumbai, India's financial center, resonated on the gold market since the country is one of the biggest buyers of physical gold. 'Every time you have a terrorist-related violent act, there'll be a bounce in gold, because it's a move to safety,' said Amaury Conti, equity trader at Austin Calvert-Flavin."

"'We've seen spikes in the gold price every time you have such an event,' Conti said. 'If gold closes above $640, that would be very positive.'"

"Other metals prices also posted gains. Silver added 44 cents at $11.55 an ounce, platinum rose $23.30 at $1,254 an ounce and palladium was up $5.30 at $329 an ounce."

"In another political development, Iran said Tuesday it wouldn't meet a mid-July deadline to respond to an incentive package that western nations designed to deter the country from enriching uranium."

"On the currency markets, the dollar little changed against major currencies. Brien Lundin of the Gold Newsletter said the dollar is losing favor as a 'long-store value. There's a growing consensus that the trend for the dollar is down over the long term.'"

From Bloomberg. "The Canadian dollar dropped to the lowest in more than two months and bonds rallied after the Bank of Canada kept its benchmark interest rate at 4.25 percent, ending a streak of seven increases since September. The currency fell to 88.34 U.S. cents at 3:23 p.m. in Toronto, from 88.95 U.S. cents yesterday. One U.S. dollar buys C$1.1321."

"Canada's dollar earlier touched 88.14 U.S. cents, the lowest since 87.78 U.S. cents on April 25. It weakened against all 16 primary currencies tracked by Bloomberg News. Canada's dollar declined for a fifth day, the longest losing streak since a six-day retreat during a period ended March 10. The currency reached 91.44 U.S. cents on May 31, the highest since 91.47 U.S. cents on Jan. 4, 1978."

"Core inflation rose 2 percent in May from a year earlier, the fastest since December 2003. Overall consumer prices rose 2.8 percent, Statistics Canada said June 20. The country's trade surplus unexpectedly narrowed in April to the smallest since January 2005, shrinking to C$4.07 billion from C$5.34 billion the month before, as exports of cars and trucks dropped."

"Canada lost 4,600 jobs in June, the first decline this year, according to StatsCan on July 7. Economists surveyed by Bloomberg News expected a gain of 10,000 jobs after the creation of 96,700 positions in May."

The Korea Herald. "On widespread anticipation that the Bank of Japan would raise interest rates on Friday, analysts are divided over the fallout of the central bank's decision on the local financial markets."

"Many global traders expect the central bank to raise its benchmark interest rate by 0.25 percentage point for the first time in almost six years when a two-day policy meeting concludes on Friday."

"The focal issue would be whether the BOJ's decision to abandon the ultra loosened monetary policy would increase the value of the Japanese yen, prompting more investors to close yen carry trading."

"What's worrying is that the BOJ's move could accelerate capital outflow from emerging markets including Korea. With the continued selling spree that began early May, foreign ownership in the local bourse fell below 40 percent compared to 44.14 percent in April 26, according to the Korea Exchange. The rising geopolitical risk along with worsening corporate profitability has already dampened investor's sentiment, particularly affecting overseas investors."

"Ending the carry trade, however, could boost demand for the Japanese currency and consequently increase the value of the yen against the U.S. dollar. The won and other Asian currencies are expected to follow the suit."

"That could be an additional factor in increasing market fluctuations, analysts say. 'Yes, it's not entirely unexpected but still it's too big a news to ignore,' said Hwang Kum-dan, a market strategist at Samsung Securities Co."

Bloomberg has this on currency reserves. "Syria, under fire from the U.S. for the alleged support of terrorism, plans to end its currency peg to the dollar by year-end to reflect closer trade ties with Europe, central bank Governor Adib Mayaleh said. The Central Bank of Syria has already converted half its foreign-exchange reserves to euros, Mayalmi said. Syria's reserves, including gold, totaled $4.1 billion at the end of 2005, according to the U.S. Central Intelligence Agency."

"'We want to have a currency peg that will reflect our external trade,' Mayaleh said yesterday. The European Union is Syria's largest trading partner, taking half of its exports, he said."

"The country may instead link the Syrian pound to a weighted group of currencies including the euro or loans from the International Monetary Fund that are known as Special Drawing Rights, Mayaleh said. SDRs comprise the euro, dollar, yen and British pound."

"Most Middle East countries, including the six oil-producing Persian Gulf monarchies and Jordan, peg their currencies to the dollar. Egypt and Iraq manage floated currencies. The Syrian pound is pegged at 52.2 versus the dollar, according to data compiled by Bloomberg."

"Central bankers from Kuwait, Qatar, the United Arab Emirates, Russia, Sweden and Finland have this year indicated they aim to diversify their reserves away from the dollar."

Reuters South Africa has the days trading numbers. "Gold pared losses in afternoon trade on Monday after falling 1.6 percent on profit-taking, with investors keeping an eye on currency and oil markets for leads. A marginal drop in oil prices and a recovery in the dollar against the euro kept the market under pressure, dealers said."

"'It will stabilise at around $620 an ounce, but we are going to need some bullish news to galvanise the market higher,' said James Steel, analyst at HSBC Bank, adding prices were unlikely to collapse given long-term dollar weakness."

"Spot gold hit a high of $632 an ounce before falling as low as $620.00. It was quoted at $625.40/626.90 by 1446 GMT, compared with $629.80/631.30 in New York late on Friday. Platinum dropped to $1,219/1,225 an ounce from $1,228/1,233 in New York. Palladium fell to $314/320 an ounce from $321/326. Silver was down at $11.14/11.24 an ounce from $11.29/11.39."

"'We do not expect any further gains until the Fed has clearly finished, or at least paused, from its rate hiking,' said John Reade, precious metals analyst at UBS Investment bank. UBS lifted its short-term forecast for gold prices to $600 in one month from now and $650 in three months, from $550 and $580 respectively. It saw silver at $10.80 and $12.50 after one month and three months and platinum prices at $1,200 and $1,300."

"'Gold looks under pressure,' Stephen Briggs, economist at SG Corporate and Investment Banking, said. 'The broad longer-term direction is upwards because commodities are still very fashionable, but it needs to take a bit of pause at the moment.'"

"'The big picture continues to depend on the geopolitical situation, the moves of the dollar and the oil price,' said Wolfgang Wrzesniok-Rossbach, head of precious metals marketing at Germany's Heraeus. Oil prices edged below $74 a barrel, extending the previous session's 1.4 percent fall on expectations of progress in talks on Iran's nuclear programme."

Business Week looks at central bank policy and deflation. "Inspired by Japan, some of the best minds in economics have looked at the question of deflation in recent years and have come to two conclusions. The first: There are various measures financial authorities can take to pull an economy out of the sort of corrosive slide in consumer prices that has hurt Japan over the past decade. The second: It makes sense to avoid succumbing to deflation in the first place."

"Japan has isolated itself from this discussion. Having fallen into deflation a decade ago, the Bank of Japan (BOJ) rejected the more-radical and imaginative solutions, apparently because the outcomes were unpredictable [unlike the predictable damage of deflation]. Instead, from 2001, the central bank pushed short-term rates to zero and flooded the money markets with liquidity that no one wanted."

"Now the BOJ seems to reject the possibility of having a too-low inflation rate. Most inflation-targeting central banks around the world aim for consumer price rises of around 2%. However, the BOJ's view is that price stability means inflation averaging just 1%. And if you take out the effect of fuel prices, inflation amounts to just 0.1%. The central bank seems ready to raise rates for the first time since 2000 as early as July 14, at the end of a two-day BOJ policy board meeting."

"After a decade when falling prices meant that real interest rates were too high, due to the inability to cut nominal interest rates below zero. This 'liquidity trap' contributed to a decade of poor performance by the Japanese economy, but the BOJ is taking the risk of a recurrence."

"Why does the BOJ feel so afraid of inflation? The most persuasive explanation: that the bank's officials are still suffering nightmares from the real estate bubble of the late 1980s, and fear a repeat. The current policy framework gives them the freedom to raise interest rates even when no inflation exists if they believe that asset price increases are potentially destabilizing. No matter that land prices in major cities fell by three-quarters from the bubble peak and have since risen by just 4%."

"Despite its regrets about the late-1980s bubble, the BOJ appears to accept no responsibility for the damage to the economy from the persistent deflation of the past decade. Meanwhile, the politicians don't seem to care too much. We are seeing criticism of the BOJ, but this may be politicians shifting accountability, so if anything goes wrong over the coming year, they can escape the blame. Appointments to the BOJ board show that the government does not have a problem with its hawkish bias."

"What is worrying is that the BOJ is unnecessarily increasing the downside risks. There are plenty of external candidates to deliver a shock to demand at the moment; the U.S. housing market, policy tightening in China, commodity prices, global epidemics bringing the danger of temporary recession and return to deflation in Japan. In that light, prudent policy would argue for a pro-growth stand with a positive inflation bias."

"The downside risks are all the greater because in the event that external factors turn bad, it's going to be very hard for the BOJ to admit it made a mistake. Self-preservation would probably lead the BOJ to hope for the best and enter a state of denial. As a result, any policy reversal would be delayed, with further costs to the economy. Even a return to zero interest rates would prove less effective the third time around."

"In a world where central banks of most major economies are tightening policy, it is overly dramatic to lay the blame for financial market weakness at the door of the BOJ. Moreover, the conservative stance of the BOJ does not come as a great surprise, considering its behavior over the past decade. Nevertheless, there is the unnecessary risk of periods of renewed deflation in the future because of the decision to try to stabilize the inflation rate at such a low level."

Bloomberg reports on what moved the currency markets this morning. "The U.S. economy added fewer jobs in June than economists forecast, reducing the urgency for further Federal Reserve interest-rate increases even as wages rose the most in five years. Treasury yields and the dollar declined as traders speculated the report reduces the chance of a tightening in August."

"At the same time, investors still judge a move more likely than not, because wages are climbing and inflation is picking up."

"'The Fed is going to zero in on the wage component,' said economist Stuart Hoffman. In spite of the 'disappointing payroll number, this still adds up to a 25 basis point increase in August,' he said."

"The U.S. currency dropped to a four-week low against the yen and euro after a government report showed U.S. job growth in June fell short of economists' forecasts. The dollar dropped to 114.04 yen at 5:11 p.m. in New York from 115.11 yen yesterday, reaching the lowest since June 9. It weakened to $1.2810 per euro from $1.2782 yesterday, touching the lowest since June 6."

"'The days of 'rate support the dollar has enjoyed are near an end,' said Samarjit Shankar, director of global strategy for the foreign exchange group at Mellon Financial Corp. 'The focus is going to shift' to expectations for rate increases by central banks in Japan and Europe, he said."

"Yen gains started in Asian trading as China's currency climbed to its strongest since last year's revaluation. 'It's a superstitious market getting twitchy about the possibility of a major yuan development,' said Shahab Jalinoos, head of Asian currency strategy at ABN Amro Bank NV in Singapore. 'All Asian currencies will gain in this scenario, including the yen.'"

"China's currency climbed today on speculation the nation's central bank will hold an emergency meeting to discuss widening the yuan's trading band."

"The dollar has fallen 7.6 percent against the euro and 3.2 percent against the yen this year in part on speculation central banks in Europe and Japan will raise interest rates more than the Fed. 'The Fed is going to stop raising rates long before the ECB does,' said Jack McIntyre, part of a team that oversees $15 billion of international debt at Brandywine Global Investment Management in Philadelphia. 'That does put some risks in the U.S. dollar.'"

"Gold futures closed lower Friday, as traders locked in some of the metal's recent gains, shrugging off a disappointing June nonfarm payrolls report that sent the dollar sharply lower against major currencies. Gold for August delivery closed down $1.50 at $634.80 an ounce on the New York Mercantile Exchange. Despite the losses on Friday, gold gained 3.1% this week."

"Silver ended down 18.0 cents at $11.405 an ounce, platinum was down $5.90 at $1,243.7 an ounce and palladium dropped $1.70 at $329.15 an ounce."

"Gold and the other precious metals didn't find 'significant upside traction with initial gains in both running into end-of-week profit taking,' said James Moore of TheBullionDesk.com. 'Chart resistance around $635 is proving a tough nut to crack for the moment and could suggest some further base building is required before pushing higher,' Moore said."

From Forex TV. "Federal Reserve vice chairman Donald Kohn said the US central bank must heed the lessons of the 1970s by keeping inflation and public expectations about inflation in check. Kohn said the US central bank had a key role to play in reassuring the American public that their spending power would not erode 'unexpectedly.'"

"'As long as inflation expectations remain contained, relatively faster growth of the prices of imported goods for a time would be associated with only a temporary bulge in inflation and would result in a needed change in relative prices,' Kohn said, in remarks released by the Fed in Washington."

"'The lesson from the 1970s, however, is that an unchecked or permanent increase in inflation would only feedback adversely on demand for dollars,' Kohn said. 'Such an unmooring of the anchor of price stability could only elevate the odds on abrupt changes in interest rates and asset prices, instability in the US economy, and disorder in global adjustments,' he said."

Forbes leads off the currency news. "The dollar fell against the euro Thursday after the European Central Bank's president promised 'strong vigilance' on inflation, interpreted as a likely sign that an interest rate increase is coming. Also on Thursday, the Bank of England kept its interest rates at 4.5 percent, leaving the cost of borrowing unchanged for the 11th consecutive month."

"The British pound rose to $1.8380 from $1.8347. The dollar also fell against the Japanese currency, dropping to 115.37 yen from 115.71 yen."

From Bloomberg. "Brazil's currency gained for the first day in four as exporters took advantage of recent declines to exchange dollars on the local market. The real weakened 2 percent in the previous three sessions after the central bank purchased U.S. dollars on the spot currency market in a bid to replenish foreign reserves. The real also fell yesterday after missile tests by North Korea prompted investors to seek safer assets such as the U.S. dollar."

"'The news on missile tests by North Korea spooked the market yesterday, and today exporters are taking the opportunity to sell dollars,' Mario Battistel, foreign-exchange director at Corretora Novacao SA said in Sao Paulo. 'Exporters have been largely responsible for the real's strength right after days of crisis over the past couple of months.'"

"Gold futures closed at their highest level since June 5 as tensions between North Korea and the West continued to escalate after Pyongyang threatened Thursday to test more missiles. After a weak opening, gold for August delivery reversed course midmorning and closed up $6.60 at $636.30 an ounce on the New York Mercantile Exchange."

"Other metals prices also posted gains. Silver added 17.20 cents at $11.507 an ounce, platinum edged up $1 to $1,249.60 an ounce and palladium rose $3.15 at $330.85 an ounce."

"'The resolve and bravado coming from Pyongyang has caught many complacent market (and political) analysts off-guard,' said Jon Nadler, investment-products analyst at Kitco.com. 'Gold quickly reaffirmed its role of the safe harbor for one's wealth as soon as the geopolitical skies turned to a menacing shade of grey,' Nadler said. He added that there might be some volatility ahead."

"Gold is holding above $600, looking stronger than most expected, said Julian Phillips, an analyst at GoldForecaster.com. 'The gold market is evolving out of itself into part of the global money scene,' Phillips said. 'This means investment funds are coming in on the dips.'"

Reuters has these comments from Jim Rogers. "Oil prices will soar to well over $100 a barrel and stay high as part of a sustained commodities bull run that has another 15 years to run, U.S. celebrity investor Jim Rogers told Reuters in an interview."

"One factor that could bring down the price would be a bird flu epidemic, which would send all asset classes plummeting, he said. 'We're going to have high oil prices for a very long time. The surprise is going to be how high it goes,' Rogers said."

"U.S. light sweet crude hit a new record of $75.40 a barrel on Tuesday."

Geopolitics dominated the Wednsday trading action. "Gold and silver futures closed Wednesday at their highest levels in a month as news that North Korea tested at least seven missiles created safe-haven demand for the precious metals. Gold for August delivery rose $13.70, or 2.2%, to close at $629.70 an ounce on the New York Mercantile Exchange after peaking at $631.90. The contract hasn't traded or closed at levels this high since June 7."

"The standout among the metals was September silver, which tacked on 49.5 cents, or 4.5%, to close at $11.415 an ounce. This followed a session high of $11.46, an intraday level the contract hasn't seen since June 9."

"Gold's safe-haven status in the wake of the missile tests only embellished the strength it's enjoyed over the last week, Kevin Kerr noted. 'Gold's more vocal detractors of late are being muted by the realization that that the yellow metal is a true 'flight to quality' instrument and that's piled on top of the recent strength we have seen in gold anyway after the FOMC announcement' last week, he said."

"'In the meantime, those that doubted gold's strength are getting yet another lesson of how worldwide geopolitical uncertainty can drive investors into the yellow metal in a heartbeat, and the big loser at least for now is the dollar and yen,' said Kerr."

"Other metals were higher. September palladium closed up $4.20 at $327.70 an ounce and October platinum finished at $1,248.60 an ounce, up $6.90."

"Meanwhile, indexes that track the metals-mining stocks closed lower, taking their cue from a broad decline in the stock market. 'Even though gold jumped on the North Korea missile tests, gold stocks are down due some profit taking, given their strong move over the last week (about 11% in the last 6 days),' said Amaury Conti, an equity trader."

From Bloomberg. "Commodity prices are unlikely to drop back to their historic averages because of the influx of money from investment funds, JPMorgan Chase & Co. said. The 'boom-bust' scenario 'is not dead, but the old mean- reversion levels are,' John Normand, global currency and fixed income strategist, said at the Commodity Investment Summit in London today."

"The commodities bull market is in its fifth year, with oil, copper and zinc advancing to records in 2006. Hedge funds, banks and other institutions, with between $90 billion and $130 billion invested globally in commodities, have had a greater impact on prices than demand for the underlying raw materials from China, India and other emerging markets, Normand said."

"Crude oil touched a record $75.40 a barrel today in New York. It has averaged $67.24 so far this year, compared with $22 a barrel in the five years to 2002."

"Between 1970 and 2000, rallies in commodities markets lasted about three years, with prices rising 45 percent, Normand said. Slumps would last the same period of time, with prices falling 42 percent. The current rally in prices has lasted 51 months with prices rising 171 percent, he said."

"'Demand shocks have been prevalent in all commodities while supply shocks have only affected prices for gold and refined oil,' Normand said."

A short trading day for money and metals. "The dollar fell to a more than three-week low versus the euro, but rose against the yen Monday, with many traders sidelined ahead of the Independence Day holiday. The greenback lost strength against the euro after government reports showed weaker-than-expected manufacturing and construction-spending activities."

"In New York trading, the euro stood at $1.2806, compared with $1.2791 late Friday. It rose as high as $1.2821, the highest level since June 7. The dollar changed hands at 114.72 yen, compared with 114.42 yen. The dollar was at 1.2235 Swiss francs, compared with 1.2222 francs."

"'The dollar has largely held onto Friday's losses, and really further direction here may not be forthcoming until we see the non-farm-payroll data for June,' which is scheduled for Friday July 7, said Andy Cottrill, a foreign-exchange trader. This reading 'will be instrumental in deciding whether or not the Fed breaks with rate hikes at the August meeting.'"

"Overnight, the yen initially strengthened on the back of bullish results from the Bank of Japan's quarterly tankan survey of business sentiment. But the gains fizzled.
The tankan survey showed the benchmark large-manufacturer business-sentiment index rising to 21 from 20 last quarter."

"'The release removed all doubt that BoJ will have to lift its zero-interest-rate policy in the near future, but it did not resolve the question of whether the move will happen in July at next week's BOJ policy meeting, or will be delayed until August as Japan continues to grapple with the fallout from the Fukui scandal,' said Boris Schlossberg, currency strategist."

"Gold rose to its highest price in nearly four weeks on Monday, tracking strong gains in New York and gathering support from firm oil prices, dealers said. 'Gold is still benefiting from the rally late last week, resulting from a less hawkish Fed statement and the accompanying dollar weakness,' said Yingxi Yu, precious metals analyst at Barclays Capital."

"Spot gold hit a high of $620.50 an ounce before easing to $619.35/620.35 by 0944 GMT, higher than $612.60/613.60 last quoted in New York on Friday. Platinum rose to a four-week high of $1,242 an ounce before retreating to $1,241/1,246, up from $1,224/1,234. Palladium rose to $323/328 an ounce from $314/320. Silver hit a three-week high of $11.20 an ounce before falling to $11.17/11.23 , versus $10.96/11.06 in New York.'

"Analysts noted reports suggesting that some central banks should buy gold. A senior government economist said China should take advantage of any weakness in bullion prices to build up its official gold holdings as part of a strategy for diversifying its foreign exchange reserves."

"The United Arab Emirates said the central bank was sticking with plans to convert up to 10 percent of its currency reserves into euros and could convert up to 10 percent into gold."

"China should take advantage of any weakness in bullion prices to build up its official gold holdings as part of a strategy for diversifying its foreign exchange reserves, a senior government economist said Monday. Xia Bin, head of the financial research institute of a think tank under the Cabinet, also proposed that Beijing allow the yuan to fluctuate within a wider range against the dollar."

"'It is practical for China to increase its holdings of gold by choosing an appropriate time to buy, because compared with other big trading countries the percentage of gold in China's reserves is seriously low,' Xia said."

"The yuan is allowed in theory to rise or fall by 0.3 percent against the dollar on a given trading day, but in reality it has fluctuated by only a fraction of that each day since the currency was freed from a dollar peg last July."

"Xia said that even if China increased its exchange rate greatly, the United States would still have a large trade deficit because part of the Sino-US trade gap would be replaced by those between the United States and other southeast Asian nations."

# posted by Ben Jones @ 12:04 PM 9 comments