Thursday, July 20, 2006


"Knee-Jerk Reation' For Precious Metals

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."

Here is a report from a few days back on hedge funds and gold:

'A sudden surge in demand for gold options cashable at over $1,000 an ounce is the clearest sign to date that hedge funds and savvy traders are betting on a big rise in bullion prices. UBS said investors had begun to show keen interest in 'call' options to expire in December with strike prices of $1,000 an ounce and above.'

'The bank said buyers had even emerged for options dated late 2007 with a strike price of $2,500. John Reade, the bank's precious metals strategist, said: 'Clearly some options traders are positioning themselves for very large moves higher.'
I guess the Transport's rolled over today. Is this the last leg of our DOW theory? In 6-12 months will the correction be in full flight?

Curious as to what the poster's in here think.

$2500 options? I had no idea they went so far out of the money. Why leave so much on the table if you really expect gold to quadruple? The $1000s seem a better deal, though they are pretty far out of the money with just a few months to go.
Interesting options. Sounds like a very optimistic hedgie. Hope they're right.

oc: Theory only applies to a rational market. And the current market is clearly irrational.
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