Wednesday, December 20, 2006

 

Traders Ignore Inflation, Thai Crisis

The Associated Press reports on the currency markets. "The euro held steady against the U.S. dollar Wednesday amid sentiment that the European Central Bank would continue its rate hike campaign into 2007 The 12-nation euro bought US$1.3193 in afternoon European trading, up marginally from US$1.3192 in New York late Tuesday, after ECB President Jean-Claude Trichet said conditions remained in place for euro-zone economic growth in 2007 and in 2008."

"Supporting the dollar, the U.S. Labor Department reported a 2 percent increase in wholesale prices, the biggest gain in more than 30 years."

"In other trading, the British pound was unchanged at US$1.9682 from Tuesday and the dollar steady at 118.19 yen."

From MarketWatch. "Gold futures fell Wednesday to close under $625 an ounce following a more than $7 gain in the previous session, while rising supplies pushed copper prices to their lowest level in six months. 'Increased volatility due to the holiday season will keep the metal vulnerable to sharp downward movements,' said James Moore, an analyst at TheBullionDesk.com."

'Gold for February delivery closed down $1.10 at $624.30 an ounce on the New York Mercantile Exchange. On Tuesday, the contract closed up more than $7 an ounce, marking its first winning session in four."

"'Gold recovered well before the euro did against the dollar because of a fundamental tide of favorable factors outweighing the recent fund selling,' said Julian Phillips, an analyst at GoldForecaster.com. 'With some more consolidation expected before the next direction is clear, what is clear is gold's attractiveness to investment demand in this area of consolidation, whereas previously this demand was seen only when gold prices rose,' he said."

"Overall, 'traders and investors appear to be ignoring the report that wholesale prices jumped in November by the largest amount in 32 years, led by increases in energy prices and new vehicles,' said Jon Nadler, at bullion dealers Kitco.com. 'They also seem to be paying little attention to the unfolding Thai financial crisis although there surely must be significant gold buying going on internally in that country in the wake of a 20% drop in the stock market,' he said."

"Phillips points out that last week, the metals market saw a 'much larger-than-usual amount of gold sold into the market by two of the signatories of the Central Bank Gold Agreement.'"

"The sale of 27 metric tons that week, instead of the usual 5 or so, means that 'less than 500 tonnes of gold remains to be sold by the C.B.G.A. signatories for the rest of the agreement, which has 2 years, 9 months still to run,' said Phillips."

"He notes that the annual ceiling of sales is set at 500 metric tons a year. So 'with less than 100 tonnes sold in this -- the third of the five-year agreement, if they try to reach that 'ceiling' of 500 tonnes they will have 100 tonnes of gold of the announced sales only to sell in the remaining two years of the agreement,' he said."

"'If they continue to sell at this pace, they will run out of gold to sell in this the third of the five years of the agreement,' he said."

"Elsewhere in metals trading, March silver lost 6.5 cents to settle at $12.645 an ounce, giving back part of the more than 1% gain it saw in the previous session. January platinum rose $7.50 to $1,126 an ounce while March palladium was down $1.50 at $327.75 an ounce."

Comments:
I'm not sure how much credence I give to the CBGA simply because I have a hard time seeing it as a "hard ceiling". While I would love to see gold spike after the 500 ton threshold is reached, I'm not convinced that the CB's won't just agree to raise the ceiling whenever they want to. Why would they stick to a policy of their own creation if that policy no longer served their interests? (ie: protecting the value of their respective currencies?)
 
IMO most governments won't want to be famous for selling their gold horde as inflation rages and currencies fall. The agreement ceiling will give them cover for not selling more in the next two years.
 
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