Wednesday, February 21, 2007


A Gold Rally As Central Banks Lose Credibility

MarketWatch reports on the precious metals. "Gold futures rallied to a seven-month high on Wednesday, after data showed consumer inflation rising at a faster-than-expected pace in January, boosting the lure of gold as an inflation hedge. Gold for April delivery closed up $23 at $684 an ounce, its highest close since July 7, on the New York Mercantile Exchange."

"'A powerful reversal lifted gold out of its Tuesday slump and values closed today's session at levels not seen since last spring,' said Jon Nadler, an analyst at bullion dealers 'Spot gold ignited on the heels of core CPI [consumer price index] statistics and after Tehran's outright refusal to halt uranium enrichment and the pursuit of nuclear power,' Nadler said."

"Last week, Federal Reserve Chairman Ben Bernanke told lawmakers that the Fed expects core inflation to drift lower, but cautioned that the Fed is poised to raise rates if necessary to contain inflation"

"Generally, when people think the Fed's going to raise rates, gold goes down, said Peter Schiff, president of Euro Pacific Capital. Today's rally in gold 'might be an indication that the Fed and Bernanke are losing credibility and that the Fed is all talk and no action,' Schiff said. 'The Fed is afraid of raising interest rates, but it can't let the market know that. Gold's saying we don't believe you. You're still on pause. The Fed wants to maintain the illusion that they're going to raise rates, because the economy can't stand it,' Schiff said."

"A recovery in crude-oil prices also boosted gold. Crude futures rose sharply to trade back above $60 a barrel as traders eyed developments in Iran and braced themselves for weekly data on supplies. Crude for April delivery was up $1.25 at $60.12 a barrel on its first day of trade as the front-month contract on the New York Mercantile Exchange."

"Other metals prices also rose on Nymex. March silver futures rose 44.3 cents to $14.273 an ounce, April platinum surged $14.10 to $1,233.20 an ounce and March palladium was up $4.40 at $344.15 an ounce."

"William Adams, analyst at, said that 'the precious metals have been pushed higher in recent weeks by aggressive investment interest. The market may not have to wait too long to see sentiment turn bullish across the board,' Adams said. 'Don't forget that the January-February period last year was relatively subdued, and it wasn't until March that the rally took off.'"

From Reuters. "The yen fell against the dollar and euro for a fourth straight day on Wednesday, after the Bank of Japan raised key interest rates for the first time since July but suggested further tightening would be gradual."

"That left investors still willing to fund carry trades using yen, where investors borrow in Japan where rates are low and then sell the yen to buy higher-yielding currencies. That strategy will remain appealing as long as Japanese monetary policy remains predictable and financial market volatility stays low, strategists say."

"A key measure of U.S. inflation that showed prices rose at a faster pace than expected in January also supported the dollar as it reinforced the view that U.S. interest rates will not fall any time soon."

"This view was reinforced by the minutes of the January 30-31 meeting of the Federal Open Market Committee, which suggested policymakers were uncertain inflation was firmly on a downward path. 'We got a bit of a boost from the higher CPI numbers this morning,' said Ronald Simpson, managing director of global currency analysis for Action Economics. 'We've got the BOJ behind us and they raised rates, but again, going from 0.25 percent to 0.50 percent isn't going to scare away too many of those accounts interested in the carry trade,' he said."

"'(Federal Reserve Chairman Ben) Bernanke has a dovish tone, so I'm not sure that the market is confident we would see a (rate) hike before a hold or even a cut,' said Peter Rosenstreich, financial market strategist at HedgeStreet."

"In other trading, the yen fell to a one-month low against the New Zealand dollar, the highest yielder among major currencies, as the carry trade returned into focus. The kiwi also hit seven-week highs versus the greenback."

IMO, Schiff is right. Look at the BOJ move. The markets just shrugged off their tiny rate hike. And the US economy will crater if the Fed moves rates up significantly. The markets may be calling Bernankes bluff.
Man, things are getting exciting again!

Unlike last year's rally, we really have an economy on the edge of the abyss now. The housing bust is fully underway and carrying over into the credit and job markets. IMO the energy market has bottomed and will start pinching people again, too.

Ben, what do the technicals suggest are gold & silver's new base values? Got to adjust my sights for future buys...
There is enormous pressure on Japan now. Europe is very unhappy at the sliding yen, and with Europe set to raise rates again the yen pressure will increase. Europe is pushing them to sell reserves and buy yen; an event that could cause the great unwinding of the carry trade, and push PMs to incredible levels.
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