Thursday, February 15, 2007


Currency Values, Rates Tied To Housing

MarketWatch reports on the precious metals trading. "Gold futures fell Thursday following a gain of nearly $5 an ounce in the past two sessions, but prices managed to recoup much of the day's losses by the session's close as traders digested news of record gold demand in 2006, with a wary eye on the dollar's outlook and a mixed batch of U.S. economic data."

"'Gold prices have been testing and probing this $670-$675 per ounce level now for a week' said Neal Ryan, director of economic research at Blanchard. 'When you see gold test and retest a certain upside support over a week period, prices are eventually going to break one way or another and it's our believe that the break will be to the upside, especially in light of the methodical $70 increase we've seen in gold the last month since we called a bottom Jan. 5th,' he said."

"Gold for April delivery closed down 60 cents at $671.40 an ounce on the New York Mercantile Exchange, bouncing back a bit after reaching a low of $666.50 during the session. Other metals prices followed gold lower. March silver closed slightly lower at $13.962 an ounce. April platinum lost 20 cents to end at $1,216.90 an ounce, while March palladium dropped $3.05 to close at $342.80 an ounce."

"Looking ahead, 'the dollar, oil prices, inflationary pressures, Fed and ECB rate decisions, etc. will be what causes [gold] price fluctuations on a daily basis, but it's the new reality of a different supply/demand equation in the precious metals markets that will keep prices moving up from left to right on a long term chart,' said Ryan."

"Ryan points out that a report shows that gold production in Zimbabwe fell in 2006, down 50% since 2004. 'Zimbabwe isn't a particularly large producing gold country, but combine that with news from South Africa that has shown monthly year-on-year declines of 12.4% in December, 7.6% in November, 5.5% in October, and 5% in September, along with declines in Australia, Peru, Chile, Indonesia, etc. and you begin to get an appreciation for the larger picture,' he said."

"'Gold could go to $1,000 per ounce and these countries and companies couldn't pull one more ounce out of the ground than they are currently,' he said. 'I believe that we reached a peak production in the late 90s that will possibly be matched in some years, but never eclipsed.'"

"Meanwhile, demand for gold in 2006 was a record $65.3 billion, despite a fall in tonnage and reduced supply, according to figures released by the World Gold Council on Wednesday. 'Prospects for both jewelry and investment demand in the first half of the year are good, although any return of excessive price volatility could hinder jewelry purchases,' the World Gold Council said."

From Bloomberg. "Gold prices in New York fell from the highest in almost seven months as declining energy costs reduced the appeal of the precious metal as a hedge against inflation. 'Gold tried to very valiantly put a new high, but now we've taken $2 off on crude,' said Frank McGhee, head trader at brokerage Alliance Financial LLC in Chicago. 'We're just tracking' oil, he said."

"'Gold has moved too high, too quickly and, to be blunt, the wrong types of investors own it,' John Reade, an analyst at UBS AG in London, said in a report today. 'Large long positions on the futures exchanges are deterring longer-term holders from buying gold.'"

"Jewelry consumption dropped 16 percent last year and demand for gold bars declined 13 percent after gold soared to a 26-year high of $732 an ounce in mid-May, according to the London-based research company GFMS Ltd. Gold may fall to $650 an ounce over the next month, Reade said."

"Treasurys closed higher Thursday, pushing the benchmark yield to a 5-week low, after the latest Philadelphia Federal Reserve survey showed unexpected weakness in regional manufacturing this month and added to recent economic reports depicting the economy in a largely unfavorable light."

"Although Thursday's reports are important to the fixed-income market, other factors are driving trade, including heavy buying by Asian central banks and accounts that will be closed much of next week for the Chinese New Year holiday, according to Thomas di Galoma, head of U.S. Treasury trading at Jefferies & Co. In addition, there is a large amount of debt maturing Thursday that needs to be reinvested."

"Earlier the Treasury Department reported that monthly capital flows to the United States reversed in December to the first outflow in a year-and-a-half. The news is worrisome to bond investors concerned that foreign central banks may be scaling back their holdings in dollar-denominated assets."

"Federal Reserve Chairman Ben Bernanke, (who) spoke to a House panel on Thursday, said inflation will ebb over the next two years. House Financial Services Chairman Barney Frank asked Bernanke why a rate cut 'wasn't at least as likely' as a rate hike in coming months. In response, Bernanke said 'there were risks in both directions' with housing as a major downside risk, but strong spending as an upside risk."

"The New Zealand dollar may rise on speculation figures today will show house prices held near a record for a third month, suggesting the economy is expanding fast enough to warrant an interest rate increase in March."

"Growth in the housing market and increasing domestic demand made an increase in New Zealand's 7.25 percent official cash rate 'likely' at the central bank's monetary policy review on March 8, Reserve Bank Governor Alan Bollard said on Jan. 25."

"'Unless there is a substantial fall in house prices,' the New Zealand dollar will probably extend its gains, Michael Gordon, currency strategist at Westpac Banking Corp. in Wellington. Still, 'the market has pretty much priced in the risk of a rate hike so there won't be much further upside.'"

'The stock market sure seemed to love Ben Bernanke's optimistic testimony before a Senate panel yesterday. But when I checked out the Intrade betting market for the odds of a recession happening in 2007, I found that the chances of a downturn had actually crept up a bit from 19 percent to 21 percent. I think the reasoning behind the move can be found in this Fed analysis by David Gitlitz, chief economist at TrendMacrolytics:'

'The rally in gold, which traded above $670 during Bernanke's testimony, and the concomitant decline in the dollar, tell us that however overzealous the fixed-income response might have been, indications that the Fed's current inflation-biased pause might remain in place indefinitely were sufficient to further intensify the looming inflation risks. . . . The longer the Fed waits to restore monetary equilibrium, the more it will need to do and the greater the risk that significant economic damage will ultimately be incurred.'
FYI: Mish has a nice two-part post on currencies.
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