Money and Metals

Bloomberg reports on gold markets. "Gold rose for the fourth straight session, erasing earlier losses, as a rebound in the cost of energy boosted the appeal of the precious metal as a hedge against inflation. 'The gold market is taking its lead from energy,' said Michael Guido, director of hedge fund marketing at Societe Generale in New York. 'They've been moving tick for tick in September. The short-covering in crude has given back some to gold.'"

"Gold futures for December delivery rose 50 cents, or 0.1 percent, to $595.90 an ounce on the Comex division of the New York Mercantile Exchange after earlier dropping as low as $587.50."

"Prices may drop because gold failed to close above the 200-day moving average on Sept. 22, some analysts said. The metal has traded below that average since Sept. 12. 'A close above its 200-day moving average could bring some additional buying back to the market, but a failure to do so could send the market drifting lower,' said Jim Pogoda, an investor in Summit, New Jersey."

"Hedge-fund managers and other large speculators decreased their net-long position in Comex gold futures to the lowest level in more than a year during the week ended Sept. 19, U.S. Commodity Futures Trading Commission data show. Speculative long positions outnumbered short positions by 77,868 contracts, the lowest since Aug. 5, 2005, the agency said on Sept. 22."

"'Gold still looks defensive,' said William O'Neill, a partner at commodity research firm Logic Advisors LLC in New Jersey. 'Funds are shying away, and that is keeping rallies in check.'"

Th Street.com. "India is expected to import 10% more gold during 2006 compared with the 2005 total of 720 tons, according to a representative of the Gem and Jewelry Export Promotion Council."

"Weighing on the downward side was a slightly higher dollar against the euro, which was recently trading at $1.2762 vs. 1.2788 late Friday. The dollar was buying 116.525 yen, barely changed from 116.52 yen at the end of last week."

"This week traders will eagerly await data from the European Central Bank, scheduled for Tuesday release, showing the value of gold sales last week. Tuesday marks the deadline for central banks to fill their annual quota of bullion sales under the terms of a multilateral agreement."

A new ETF is launched. "Last week, a new currency ETF came to market with almost no notice: the PowerShares DB G10 Currency Harvest Fund. The fund invests in currencies of the G-10 countries: the euro, yen, Swiss franc, British pound, Norwegian krone, Swedish krona and the Canadian, Australian and New Zealand dollars, but not the greenback, because this ETF is primarily intended as a tool of diversification for U.S. investors."

"The strategy is to go long the three highest-yielding currencies leveraged 2-1 and to short the three lowest-yielding currencies with no leverage. The idea is that higher-yielding currencies attract capital at the expense of the lower yielders."

"Higher yields do tend to make a currency more attractive, but that overlooks an important point: Currencies whose interest rates are moving up tend to be strong. A currency starting from a low base interest rate that is headed higher is likely to be a strong currency, but it could be overlooked by the ETF's strategy."

"An example of this is the Swedish krona, which is a short position in the ETF. Sweden has raised rates several times this year, has better GDP growth and a lower unemployment rate than the eurozone, and a more conservative party won the recent national election. These factors are bullish for the krona, and indeed it has strengthened against both the U.S. dollar and the euro."

"The ETF is long the New Zealand dollar, but you may not want a bite of the kiwi. The overnight rate has been the highest of the bunch for several years now and there is visibility for it to stay high for a while still, meaning it could remain a long position in the ETF for some time."

"Last week, New Zealand reported a record current account deficit for the second quarter of NZ$15.15 billion ($9.9 billion), approximately 9% of GDP. The current account deficit has tripled in the last three years. This could result in a lower kiwi. The Reserve Bank of New Zealand may be painted into a corner of maintaining a high interest rate to defend a declining currency."

"This is not to say that the fund should not be bought. However, the strategy has its limitations, and understanding what could go wrong is important."