Monday, October 23, 2006


Gold Slides Back On Technical Weakness

The reports on the markets. "Concern that the Federal Reserve may reveal increased anxiety over inflation later this week buoyed the dollar and sent gold skidding Monday. Although investors will need to wait until Wednesday before seeing meaningful data, it's clear that no one is expecting that day's Federal Reserve Open Market Committee meeting to result in an interest rate cut."

"Meanwhile, some see the Fed getting religion on the need to tame inflation, thus postponing the likely date of a future rate cut. 'The data continue to bear out the conflict between Fed's dual mandates,' writes T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York. 'Inflation is at risk because core is not only above the Fed's comfort level but is also headed higher, while growth appears to be easing.'"

"Depending on the strength of the overall economy, however, a longer pause may turn into an actual hike. The fed fund futures market is priced for 12% odds of a hike at the Jan. 31 FOMC meeting, up from 6% on Friday, according to Miller Tabak. In early September, the market was priced for a 50% chance of a cut at the January meeting."

"Similarly, currency traders aren't betting on a cut, and they bid up the price of dollars. The greenback was recently trading at 119.275 yen, up from 118.69 yen late Friday. It was also stronger against the euro."

"The strength in the dollar sent contracts for December delivery of gold tumbling $13.50 to close at $582.90 an ounce on the Comex."

From Bloomberg. "Gold in New York fell the most in two weeks as a gain in the value of the dollar against the euro reduced the metal's appeal as an alternative investment. A drop in oil prices also reduced the metal's appeal as a hedge against inflation."

"'With the stronger U.S. dollar and lower oil prices, gold's going to have a problem holding on to $600,' said Mike Sander, a commodity broker at Altavest Worldwide Trading Inc. 'There's less of an inflationary risk.'"

"'The inflation outlook is fairly benign,' said David Thurtell, an analyst at BNP Paribas in London. 'Investor demand will not be as strong as it has been.' Gold has slumped 20 percent from a 26-year high of $732 an ounce in mid-May. Oil prices have dropped 25 percent from a record $78.40 in July."

"Hedge-fund managers and other large speculators reduced their net-long position in Comex gold in the week ended Oct. 17 to the lowest in more than a year, Commodity Futures Trading Commission data showed on Oct. 20. 'There seems little sign of investors and speculators wanting to rebuild long positions,' John Reade, an analyst at UBS AG in London, said in a report."

"Gold's liquidation occurred early in the day, when sell stops were hit. Other precious metals met similar fates. 'Friday's close was not good,' said Pat Lafferty, Commodity Trading Advisor with Fox Investments. 'We finally pushed through and closed above $600 on Thursday, after having bounced from it three or four days in a row. Then Friday's failure to close above $600 was very disappointing.'"

"Thus, selling set in Monday as the market remained below this key swing level, continued Lafferty. 'A lot of stops were getting hit,' he said. Many of these stops had been raised by traders on the heels of gold's recent uptick, Lafferty added."

"December silver settled down 29.5 cents at $11.67 an ounce. January platinum fell $7.70 to $1,074.40 an ounce. December palladium fell $9.15 to $321.35 an ounce."

From Reuters. "Japan's top financial diplomat said on Monday he was not expecting further declines in the value of the yen, and added that he saw Japan's economy staying on a solid recovery path. 'I see no reason for a further deterioration in the yen given the strength in the Japanese economy,' Hiroshi Watanabe, Japan's vice minister for international affairs, told reporters after a speech."

"The dollar slipped slightly against the yen after Watanabe's remarks, paring the day's gains, but was still trading up half a percent on the day at around 119.30 yen, not far off 10-month highs."

"Watanabe also said he did not regard the current value of the yen, which has slumped to its lowest in more than two decades on a trade-weighted, inflation-adjusted basis as weak. The currency has been battered by carry trades, in which investors sell the yen for higher-yielding currencies such as the U.S. dollar and New Zealand dollar."

"The size and impact of such trades, however, had been exaggerated, Watanabe said, and the volume of outstanding carry trades probably stood at 'several trillion yen, not trillions of dollars,' a small amount relative to the size of flows in the foreign exchange market."

"Watanabe reiterated his government's view that an end to almost a decade of deflation in Japan was in sight. Heartened by such signs the Bank of Japan raised interest rates to 0.25 percent in July, its first rate rise in more than six years."

"He also said the two big risks for the Japanese economy over the coming two years would be a revival of geopolitical tensions in Iran and North Korea, or a slowdown of the Chinese economy. 'We are very much cautious about China,' said Watanabe, saying he saw the risk of a 'readjustment' in the Chinese economy this year or next."

A serious move below the 200DMA today makes it look likely the market will test the $540 level. On the flip side, I have been thinking of buying a few yen, and the stronger US$ helps. Check out this $/yen 5 year chart; strong technicals for the greenback.
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