Tuesday, October 24, 2006


Gold Trapped Between $570 And $600

Bloomberg reports on the US dollar. "The dollar halted its two-day advance versus the euro and yen, surrendering its early gains on speculation the Federal Reserve during tomorrow's interest-rate meeting may not highlight inflation risks as growth slows. 'There is a lack of a catalyst in the market to push the dollar above its recent highs,' said Tim Mazanec, senior currency strategist at Investors Bank & Trust Co."

"A government report this week may show the weakest U.S. economic growth since the last quarter of 2005. 'We expect third-quarter GDP figures will disappoint the market,' said Jonathan Cavenagh, a currency strategist in Sydney at Westpac Banking Corp., Australia's fourth-largest lender. 'This will damp the momentum we have in the U.S. dollar' and prompt a drop to $1.26 per euro by the weekend."

"'We expect significantly weaker-than-consensus GDP growth at 1.5 percent,' said Sebastien Barbe, a senior currency economist at Calyon in Hong Kong. 'The markets will come back to more dovish expectations of U.S. interest rates, which can translate into across-the-board dollar weakness.' The dollar may fall to $1.35 per euro and 112 yen by year- end, Barbe said."

"The yen may benefit after Japan's finance ministry said the world's second-largest economy is improving in all of its 11 regions as businesses and consumers spend more. Bank of Japan Governor Toshihiko Fukui has said the bank will boost interest rates 'gradually,' after its first rate increase in almost six years to 0.25 percent in July."

"The currency may also gain after Finance Minister Koji Omi said Japan is ready to take action on foreign exchange rates if necessary. Japan's currency has dropped 6.9 percent against the euro this year and reached a record-low 150.73 on Aug. 31."

From MarketWatch. "Gold futures closed higher Tuesday, scoring their first gain in three sessions with oil prices strengthening on the eve of U.S. supply data and the dollar slightly weaker as the Federal Reserve met to discuss interest rates."

"'For the time being, the market is still lacking momentum of its own and as such is at the mercy of external forces, primarily oil and the dollar,' said James Moore, analyst at TheBullionDesk.com."

"From a technical perspective, traders 'tried to take out stops down near $570 and failed, causing a short-covering rally,' said Peter Grandich, editor of the Grandich Letter. But 'gold continues to be trapped between $570 and $600.'"

"Gold for December delivery closed up $4.70 at $587.60 an ounce on the New York Mercantile Exchange bouncing off a low of $576, its weakest level since Oct. 12. On Monday, the contract lost more than $13 to tally a two-session loss of $19.60."

"'Gold must not just hold key support above $560, but it has to begin to hold its gains or a much deeper correction down to $540 is possible,' said Grandich."

"Meanwhile, crude futures climbed above the $59 a-barrel level as traders bet that U.S. data due Wednesday will show a third-weekly decline in distillate supplies. See Futures Movers. Gold could be 'falling into a position where it is lumped together with other commodities and ignored along with them for the time being,' said Jon Nadler, at bullion dealers Kitco.com. The market is left with 'Fed watching and OPEC watching,' he said."

"From here, 'investors will absolutely have to step up to the plate and show their true colors now that India festivals are concluding,' he said."

"Against this backdrop, other metals were mixed. December silver added 18 cents to close at $11.85 an ounce, recovering from an earlier low of $11.35. January platinum fell $11.30, or 1.1%, to end at $1,063.10 an ounce while December palladium added $1.65 to close at $323."

The market for gold will be poor if only the Fed and oil prices are the driver. I'm leaning toward the $540 test Grandich mentioned.

This exchange rate has been slowly weakening for the dollar, and if I recall, stands near the lowest ever:

'BEIJING (XFN-ASIA) - The yuan ended at 7.9025 to the dollar on the over-the-counter (OTC) market compared with 7.8991 yesterday, dealers said.'

'On the exchange-traded market, the yuan ended at 7.9020, compared with Monday's 7.8980. The People's Bank of China allows a trading band of 0.3 pct on either side of the midpoint.'

'On Jan 4, China launched an OTC system for the interbank foreign exchange market, allowing market participants to make currency trades on credit without the intervention of a third party.'
I think the elections are still a major pivot point that shouldn't be underestimated. There are lots of potential shake-ups ahead -- not just with political upsets, but with some major shifts in US foreign policy that have been postponed until after the election.

I think we'll see some rapid escalation on Iran in mid-November (I'm not saying war-drums, but certainly an escalation in rhetoric).

As far as oil goes, its not the stuff of "conspiracy theories" to suggest that oil is being kept low until the elections. The Saudi's were pretty open about a similar effort in '04. I think we'll see oil trend up shortly.

As to how the markets respond to a sweeping win by the Democrats (in both houses?) we'll have to wait and see.

IMHO the Fed decision is unlikely to surprise and is already priced in.

This is going to be an interesting month...
Read "America's Bubble Economy" last night. Dismisses talk of a current gold bubble, but fully expects a future one (just as I do). Lays out a nice case for the coming fiat currency crisis, too. Check it out!
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