Monday, November 06, 2006


Markets Eye Elections

The Associated Press reports on the currency markets. "The 12-nation euro fell against the U.S. dollar on Monday, retreating ahead of the American midterm elections on Tuesday. In afternoon trading, the euro bought US$1.2712, down from US$1.2718 late Friday in New York. The dollar rose to purchase 118.69 Japanese yen from 118.01 in New York."

"David Jones, chief market analyst at CMC Markets, said the debate is again 'wide open' as to where the Fed will take interest rates. The Fed has kept rates unchanged at 5.25 percent for the past three meetings."

"Otherwise, Jones said, with little economic data due out of the U.S. until Thursday, the focus is on the midterm elections. 'Political gridlock, slowing legislation, many may take this as another opportunity to put the greenback under pressure, despite the prospect of strong yields keeping the currency attractive well into next year,' Jones said."

From Bloomberg. "Gold in New York fell from a two- month high because a gain in the value of the dollar reduced the metal's appeal as an alternative investment. 'The economy is still hot,' said Leonard Kaplan, president of Prospector Asset Management. 'The Fed is not going to cut rates, so gold heads lower.'"

"Chicago Federal Reserve Bank President Michael Moskow today suggested borrowing costs may have to rise because the risk of inflation outweighs slowing growth. Fed officials decided Oct. 25 to leave the benchmark rate at 5.25 percent for a third straight meeting."

"Traders said market sentiment remained bullish on healthy technicals and a struggling U.S. dollar. Silver closed near its own two-month high in New York, while platinum retreated after surging the past week on speculation that an exchange traded fund could be launched."

"December gold at the COMEX slipped $1.30 to settle at $627.90 an ounce. Spot gold bullion was trading at $623.70/4.70, down from the close Friday at $627.50/8.50. NYMEX January platinum went down $12.70 to $1,196.70, unwinding some of a $134 rally late last week to the highest since September 11. Spot closed at $1,190/1,195."

"December palladium rose 60 cents to $335.70 an ounce. Spot palladium last fetched $331/336 an ounce. COMEX December silver bucked early weakness alongside gold to rise 12.50 cents to $12.76 an ounce, reaching $12.80, the highest since Sept 8. Spot silver rose to $12.65/72 from $12.58/64."

"Technical buying by hedge funds, worries about the dollar, and rotation out of the U.S. equity and energy markets helped gold rally $52 since it broke higher on October 24. The price is up $64 from the four-month low on October 4 at $563.50. 'Some of the technical indicators have turned very strong,' said Michael Widmer, metals analyst at Calyon Corporate and Investment Bank."

"'With all the deceleration in U.S. economic growth, there could be further pressure probably on the dollar and that means that you should have further upward pressure on the gold price,' he said."

"Most investors seemed comfortable retaining their gold positions, believing the elections would have minimal, or indirect, impact on the market. 'It would depend on how the foreign exchange markets are going to react. If one of the houses changes hands I suppose you have got the prospect of gridlocked government,' said James Steel, senior analyst at HSBC."

From MarketWatch. "On a short-term basis, 'gold is overbought,' said Ned Schmidt, in his latest Value View Gold Report released over the weekend. 'Some rest is likely.' It's difficult to guess how much of the recent rise in gold prices is related to the U.S. election, he said."

"'Given the over bought condition and the U.S. election on Tuesday, some weakness in the latter part of the week would be reasonable,' he said."

The Standard. "The Hong Kong Monetary Authority said the Chinese yuan will soon test the 7.8 to the US dollar, the level at which the local currency is pegged to the greenback, chief executive Joseph Yam Chi-kwong said Monday."

"Yam, speaking at a meeting of the Legislative Council's financial affairs panel, said however, that the recent appreciation of the yuan had so far, not destabilized the local peg. Nevertheless, the psychological threshold of HK$7.80, will soon be tested as the yuan seems poised to break through further resistance levels. Hopefully, this rise will not destabilize the local currency system, said Yam."

"The yuan retreated to 7.8811 versus the US dollar Monday, down from Friday's close of 7.8716 on the over- the-counter market in Shanghai."

They are trying very hard to get a nice, slow, rebalancing of the gross imbalances. We've heard a number of them say it, even ol' Alan. What they don't want is a sharp correction. Therefore, they continue to talk, but not raise rates. Making people pay more for debt in a country situated like our's would be brutal.

They really don't have any other way to play it. For those who believe it, they'll be hurt. The dollar has to weaken to correct the unsustainable trends. Who is going to be left holding $s as they become worth less?
Here's an interesting take on base metal prices (PDF):

Thanks for the read. I tend to agree (mostly) that base metals will trend down with slowing expansion. Palladium and copper look incredibly overspeculated especially in light of increasing production. The article doesn't mention uranium, which I'd say is a big exception here.

As base metals slow I think we're going to see an investor migration to PM's -- the danger however is a general trend across all metals (PM's included) stemming from lackluster performance in the base metals. Let's hope the majority of investors can tell one from the other.
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