Wednesday, October 04, 2006


Gold Sell-Off Continues

MarketWatch reports on the precious metals trading. "Gold futures fell almost $15 an ounce Wednesday to mark a four-session loss of over 7% as recent weakness in oil prices and strength in the stock market helped pull the precious metal's benchmark contract to a more than six-month low."

"Gold for December delivery closed down $14.80 at $566.70 an ounce on the New York Mercantile Exchange after reaching $563.50, an intraday level the contract hasn't seen since mid-March."

"Dale Doelling, chief market technician, said he expects to 'see some kind of washout in the precious metals and a subsequent capitulation in the financial markets and stocks specifically. When that does occur, it will be time to buy the metals and sell the stock index futures in a big way.'"

"For now, 'industry insiders remain cool-headed and [are] using this pullback as an opportunity to add at discounted levels,' said Peter Spina, chief investment strategist at, emphasizing that investors are being given 'one heck of an opportunity to still get in at extremely attractive levels.'"

"'As we approach some very strong technical support, the market can quite possibly reverse quickly and in a blink of an eye, gold may be right back above $600,' he said."

"Either way, what happens in the next few sessions will go a long way toward determining gold's direction for the rest of 2006, said Peter Grandich."

"A steep decline seen recently in energy prices has eased inflation worries and in turn reduced safe-haven demand for the metal. Crude futures climbed Wednesday, but not before touching a nearly 16-month low. These factors 'have been reflected in the recent shift in investor capital,' said James Moore, analyst at As gold and other commodities have fallen sharply, equities have rallied."

"Grandich laid out both bullish and bearish cases for gold. 'Holding above September's low around $570 and then closing above $610 should clearly indicate the bull market remains intact and new highs are on the offering,' he said. 'However, a close below $570, and a test of the May lows of $540 and even ultimate support at $500 is quite possible.'"

"Rounding out the action in the metals pits Tuesday, December silver fell 25 cents to close at $10.795 an ounce after a nearly three-month low of $10.65, while January platinum dropped $47.50, or 4.2%, to end at $1,082.40 and December palladium lost $9.80 to close at $296.65 an ounce."

From Business Day. "The European Central Bank will disclose later today whether the signatories to the Central Bank Agreement rushed to sell their full allocation of gold just before the deadline of September 26. If the signatories, some of the world’s biggest holders of gold, sold considerably less than they were permitted under the agreement, it could indicate a fundamental shift in key governments’ attitudes towards gold as a store of value."

"Central banks origi-nally agreed to limit yearly gold sales because of concern about the destabilising effect of uncoordinated sales and fears of substantial central bank selling on the gold price. The first five-year agreement covered 1999 to 2004 and the second Central Bank Agreement runs from 2004 to 2009."

"It limits signatories’ total sales of gold to 500 tons a year for a five-year period, or a total of 2 500 tons. The signatories included the ECB and the central banks of Portugal, Greece, Italy, Germany, France, Belgium and Ireland."

"In past years the signatories sold close to the full allocations each year. But latest figures from the ECB covering the year to September 22 showed total sales by central banks had reached only 398 tons."

"According to Numis Securities analyst John Meyer, European central banks, particularly Germany, had decided to retain some gold reserves. 'This is an indication that banks in developed economies see a need to hold back on gold sales, perhaps to protect against economic risk or for higher price levels,' he said."

The Associated Press. "The euro dropped against the dollar Wednesday, even after reports on U.S. manufacturing and services provided new evidence that the economy may be slowing there. The euro bought US$1.2687 in afternoon European trading, down from US$1.2727 in New York late Tuesday. The British pound slipped to US$1.8834 from US$1.8872, while the dollar was up to 118.02 Japanese yen from 117.89 yen."

"Slowing growth has convinced most economists that the Federal Reserve will hold U.S. interest rates unchanged for the rest of the year. Rising interest rates elsewhere also may weigh on the dollar."

"The ECB is widely expected to lift its key interest rate when it meets Thursday. It would be the fifth such move since the bank started adjusting rates in December 2005."

The Ottawa Business Journal. "The Canadian dollar dropped further Wednesday morning. Economists are speculating that the U.S. Federal Reserve will increase the benchmark lending rate in order to restrain inflation. Federal Reserve Bank of Kansas City President Thomas Hoenig, said late yesterday in Albuquerque, New Mexico that core inflation is high and needs to be reduced."

"'Inflation, honestly, right now is too high' according to Hoenig, inflation is a 'major challenge' for the Fed. Inflation in August excluding food and energy increased to 2.5 per cent compared to the year before whereas Fed's chairman, Ben S. Bernanke, categorizes the rate of one to two per cent as his comfort zone."

So the market went through the June low today. It's worth looking at Grandichs comments again:

'Grandich laid out both bullish and bearish cases for gold. 'Holding above September's low around $570 and then closing above $610 should clearly indicate the bull market remains intact and new highs are on the offering,' he said. 'However, a close below $570, and a test of the May lows of $540 and even ultimate support at $500 is quite possible.'

There was this from Daily FX:

'Interest rate cuts are good for the consumer because it reduces mortgage rates and credit card payments but at the same time, it can be very negative for the US dollar. For those watching the currency markets, trading has been extraordinarily quiet. Everyone is sitting on the sidelines waiting to jump into the next big trade.'

'The Federal Reserve has kept interest rates on hold since August and recent economic data has warranted no further changes to interest rates for the time being. However, if consumers can no longer carry the burden of the rising housing costs, then the Federal Reserve may need to cut interest rates.'

'One reduction is usually followed by more and in a world where money shifts from country to country in seek of high and growing yield, a rate cut by the Federal Reserve could lead to a mass exodus out of US dollars. This could come to the benefit of currencies such as the Euro, British pound and Japanese Yen.'

'Realistically though, we do not expect the Federal Reserve to sweep in and save day until next year.'

Remember that the Bank of International Settlements and the G7 have been warning that they intended to 'mop up' liquidity around the globe with rate hikes. But if the Fed tries to bail-out the US consumer with a rate cut, the US$ could fall hard and fast. Interesting times!
Opps, here is the link.
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