Friday, January 19, 2007


Oil Prices "Recalibrate The Equation"

MarketWatch reports on the US dollar. "The dramatic 17% decline in oil prices at the start of the new year may have spelled trouble for commodity traders, but it's proved a blessing for the dollar. Crude-oil futures slumped to a 20-month low of $49.90 a barrel on Thursday, pressured by sluggish demand as a result of the mild weather and buoyant crude supplies. Oil prices have fallen a full 36% from their peak levels reached last summer."

"In contrast, the U.S. dollar has rebounded nicely since the beginning of the year, climbing over 2% against both the euro and yen, leading some analysts to rethink their previous forecasts for a downward trend. The greenback rallied to a four-year peak against the yen on Thursday and a seven-week high against the euro last week."

"The sharp reversal in oil prices 'has recalibrated the [foreign-exchange] equation in so far as bolstering expectations of a U.S. consumer-led stability to act as a stabilizer to housing's downside risks,' said Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York."

"The dollar has also rebounded as a more optimistic outlook for the U.S. economy 'has considerably diminished chances of' an interest rate cut by the Federal Reserve by March, he said."

"Indeed, back in late 2006 when the dollar appeared to be starting a precipitous slide amid fears of a sharp U.S. slowdown, central bank reserve diversification, and a lack of liquidity around the Thanksgiving holiday, some currency watchers were forecasting that the greenback would retain a soft tone in the early months of this year."

"'Each $10 drop in [the oil] price adds 0.5% to GDP,' said Kathy Lien, chief strategist at FXCM. 'The lower the price of oil, the more stimulative it is for the U.S. economy.'"

"A study released early this year by the Federal Reserve Bank of New York estimated that oil-exporting countries received oil-export revenues of about $970 billion in 2006, up from just $300 billion in 2002. The study found that the U.S. has been the single biggest recipient of investment from oil-exporting countries in recent years, suggesting that the petrodollar windfall ultimately found its way back into the U.S."

"'Although it is difficult to determine where the funds are first invested, the evidence suggests that the bulk are ending up, directly or indirectly, in the United States,' the study concluded. 'The recycling of petrodollars into the U.S. financial markets has supported activity here by allowing for higher consumption and investment spending than otherwise would have occurred.'"

"Gold futures climbed more than 1% Friday, prompting the benchmark contract to score a gain of more than $9 an ounce for the week as the precious metal took its cue from higher energy prices. Gold for February delivery closed up $8.30 at $636.40 an ounce on the New York Mercantile Exchange. It closed at $626.90 a week ago, so it ended the latest week up $9.50, or 1.5%."

"'The gold price is rallying higher with energy,' said Peter Spina, chief investment strategist at Also, Federal Reserve Chairman Ben Bernanke 'brought some focus back to the deficit problems the United States is facing, and this is giving investors some renewed interest in the metal,' he said."

"'A range has developed here and it will take a breakdown in oil below $50 to bring gold back down to the low $600s or another rally in the U.S. dollar to keep gold from moving back to $650, where it faces some stiff resistance,' he said."

"Gold 'could still be subject to a number of brief sell-offs in the near future,' said Jon Nadler, an analyst at 'Support remains quite decent just under $620 for the moment.'"

"One long-term positive for gold is the tone with which Bernanke spoke Thursday of the potential impact of the massive twin deficits on the U.S. economy in the coming years, said Nadler. Bernanke urged the U.S. Congress to take 'early and meaningful' action to put the budget on a sustainable path."

"'It appears that the very debacle that gold's advocates have been pointing to for quite some time now is looming on the immediate horizon -- and it is not a mirage,' said Nadler."

"Other metals rose Friday, with March silver leading the gains, up 23.5 cents to close at $12.92 an ounce, up just 4 cents from the level it closed at last week.
March copper added 2.5 cents to end the day at $2.517 a pound. But after falling on Thursday to its weakest level since April, the contract was 3.3% lower for the week."

"April platinum closed unchanged at $1,168.50 an ounce while March palladium added $1.50 to finish $344.90 an ounce. Both contracts ended above their week-ago closing levels."

"It appears that the very debacle that gold's advocates have been pointing to for quite some time now is looming on the immediate horizon -- and it is not a mirage,' said Nadler."

He makes it sound like it's 11:30 PM, April 14, 1912.

Most investors are still imbibing away in the First Class Wall Street Saloon.
Faber interview with Puplava on FinancialSense is very interesting.
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