Friday, June 15, 2007


The Attack On $700

The Associated Press reports on currencies. "The dollar slid against the euro Friday after U.S. data showed easing inflation, but it reached a fresh high against the yen as chances diminished for an interest rate hike in Japan. The euro rose to $1.3378 in late New York trading from $1.3307 the day before."

"The dollar climbed to 123.46 yen from 122.97 yen after the Bank of Japan left its benchmark lending rate unchanged at 0.5 percent and suggested a July rate hike was unlikely. On Thursday, the dollar broke through its December 2002 high of 123.13 yen ahead of the expected rate decision."

"The dollar weakened after the U.S. Labor Department reported that its Consumer Price Index shot up in May at the fastest pace in 20 months, while gas prices jumped. The reading eased concerns about an interest rate hike, fueled last week when the benchmark 10-year Treasury note passed 5 percent for the first time since last summer."

"In other economic news, the U.S. Commerce Department said that the current account deficit, the broadest measure of foreign trade, increased to $192.6 billion (€144.66 billion) in the January-to-March period from $187.9 billion (€141.13 billion) in the fourth quarter — slightly below what analysts expected."

Also Friday, the dollar bought 1.0685 Canadian dollars, barely changed from 1.0684, and 1.2428 Swiss francs, down from 1.2468. The British pound rose to $1.9751 from $1.9694 late Thursday."

From MarketWatch. "Gold's moves have been tormenting traders even more than usual lately. For the optimists, $700 is just a stone's throw away. To the pessimists, however, it would require quite a powerful throwing arm."

"The August contract for gold futures climbed past $700 nearly nine weeks ago, and, while that prompted renewed calls among some observers for $800 and beyond, gold has failed at every attempt since to return to that level."

"And a week ago the price touched a three-month low under $649 an ounce. 'Right now, the time window has shifted for the price to move past the $700 barrier,' said Peter Spina, an analyst at 'I would not feel comfortable betting against gold at these levels, although it does appear the rally will take a summer vacation.'"

"Gold sales from central banks, a seasonal decline in demand, strengthening in the U.S. dollar and a rise in Treasury yields are some of the factors that have come into play, putting pressure on gold prices, analysts said."

"'The seasonal influences alongside a bout of heavy gold selling from the Spanish central bank capped gold at a high point in the annual pattern of demand for physical gold,' said Julian Phillips, an analyst at, a sister site to 'Investment demand retreated in the face of this situation, so stunting the attack on $700,' Phillips said."

"And the metal's market has suffered amid 'dramatic upside moves in U.S. Treasury yields,' said Zachary Oxman, a senior trader at Wisdom Financial. 'With bond rates pushing through resistance on the long end of the yield curve, gold has seen strong liquidation across the board from futures traders, funds and investors in GLD shares,' he said, referring to the StreetTracks Gold Trust exchange-traded fund."

"Add that to the fact that Fed officials have been suggesting of late that there will not be a rate cut later in the summer, 'and you have a fairly negative tone to gold and the metals overall,' Oxman said."

"There has been a liquidation recently of more than 180 metric tons of gold sales by central banks -- likely in the past three months, said Oxman."

"Gold's momentum about eight weeks ago was 'crushed by a huge wave of central bank gold sales,' said Spina. 'Had this event not occurred, we may well be trading over $700, but the event has caused a delay in the next run higher.'"

"Besides, 'the volume of central-bank selling cannot be maintained and will soon subside, leading to the next stage of this secular gold bull market,' said Mark O'Byrne, a director at Gold & Silver Investment Ltd. in Dublin."

"Meanwhile, slower growth of ETFs in the first quarter of 2007 as compared with a year ago resulted in a decline of 26% in gold-investment demand, in tonnage terms, though jewelry demand was up 17%, according to a World Gold Council report released last month."

"The StreetTracks Gold Trust ETF 'dumped' 31 metric tons of privately owned gold into the market in May, according Jon Nadler, an analyst at Kitco Bullion Dealers. 'May was a critical month. It showed that the ETF is not a one-way street,' he said. Before that, it had been a 'one-way accumulation load.'"

"'Investment demand has to be up. It's been the single most important driver [for gold] since 2001,' he said. But, overall, 'demand has been lackluster thus far this year.'"

"And, he said, supply is growing, with the $22 billion that has been 'plowed into exploration' over the past five years now starting to pay off. More than 50 operations will come into being between 2007 and 2012, with a combined annual output of about 450 metric tons, he said. 'That, in a 3,300 metric-ton total market supply, is 13% incremental supply.'"

Gold has had a major bull run in the last six years, and it takes a one-year "pause to refresh" and everyone gets impatient.

The roaring 90's didn't go straight up. If gold had continued its hot run from the summer of 2006 and it would be way overdue for a correction.

The good news is that we are one year into a nice consolidation phase. The fact that the Gold ETF has been a net supplier of gold to the market is no surprise. It is a vehicle for the retail investor, and the retail investor is not known for their patience.

The real watershed moment to watch for is when the precious metals begin rallying in the face of declining equities. Currently, the commodity market is viewed as a barometer on the economy; once they become inversely correlated, commodities will continue their bull rally.

History doesn't repeat itself, but it sure does rhyme.

Mark Rhymes
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