FYI | May 11 2007
By Greg Peel
It’s been seven weeks since the last triple-digit down day in the Dow. In that time the only way has been up. As rises began to slow, it was almost a lay-down misere that one little bit of bad news would trigger some rapid profit-taking. And so it did.
The Dow was down 148 points or 1.1% last night. The Nasdaq lost 1.6% and the S&P 500 1.4%.
But it wasn’t just one little thing that set off the overdue pullback. Earnings season is now over, and thus economic data become the major driving force. There was much to pick from last night.
The US trade deficit blew out again – further than expected. The Council of Shopping Centers was expecting a poor April, given an early Easter and bad weather, but a fall of 2.3% in sales made it the worst April since the Council started tracking data. And at a rise of 1.3%, import prices were higher than expected.
There were no M&A deals announced last night.
The figures pointed to a US economy that was weaker than hoped. One would assume this would have a negative impact on the US dollar. But no, no, no. The dollar rallied strongly.
A lot of the US dollar weakness of late has been based on a weaker economy, but also on falling inflation fears, which got the market to thinking a rate cut might be around the corner. There was no great surprise when the Fed left rates unchanged on Wednesday, but there was some consternation when the rhetoric suggested inflation was still very much a concern. Thoughts started turning to a rate hike instead.
Last night’s import price increase only served to bolster that fear. There was also the release of US jobless claim figures, which showed a decrease. Employment rising – wage inflation – plus price inflation – the oil price is up again – oh dear. A rate hike might be not very far away. And if rates rise, so should the US dollar.
And so it did – from EUR/USD 1.3528 late Wednesday to 1.3466 last night. In a weakening economy, this was not what the gold market had expected.
The gold market had got itself very long. Every man and his dog was calling gold to break through US$700/oz as the US dollar bounce lost traction and central bank gold selling started to wane. When the US dollar rallied yesterday there was a slip. Last night there was a slide. Below US$675/oz lay a vacuum.
Gold fell US$14.20 or 2% to US$665.70/oz. Stop-losses were set off at US$675 and US$670. Gold is now resting precariously on a shelf – roughly a 50% retracement of the recent rally.
Adding to the problems have been large June Comex longs – over 220,000 contracts – which need to be rolled over in the next few weeks (gold futures trade mostly on quarterly roll-overs). This means selling the near month (June) and buying September, although not necessarily simultaneously. Market commentators suggested banks had started their rollovers yesterday and funds chimed in last night.
Adding to general fear has been the extent of central bank selling. While all and sundry had assumed the European central banks would ease off on their quotas in 2007, as they had done in 2006, the recent level of sales had started the market wondering.
Kitco bullion dealer Jon Nadler suggested the banks were simply showing a sense of good timing. What they didn’t sell last year at lower levels they are now selling at higher levels. However this still doesn’t answer the question of just how much they intend to sell. Either way, that US$690/oz figure remains formidable.
And there are always the accusations of gold loans, swaps and other derivative transactions being carried out every time gold looks like threatening US$700/oz – deals that ensure gold does not break out and the US dollar remains supported.
It hasn’t helped on the demand side that traditional Asian holiday periods – those in which it is customary to give gold as a gift – had come to an end. There were no hungry buyers stepping into the breach. Jewellery makers may, however, start looking at this lower level as a good price to buy ahead of the next round of gift-giving later in the year.
One thing is certain, and that is there won’t be a burst of gold supply coming out of South Africa. Last night figures showed gold production had fallen 9.5% in March from February, and 10.8% from March 2006. However, the new kid on the block is China, which is in the process of becoming the world’s largest gold miner in the next decade. New gold projects are opening up in China at a mere fraction of the cost of Western gold mining operations.
But China has also become the world’s largest consumer of gold, and that consumption increases as Chinese wealth increases. The Chinese central bank is also holding little gold, and has recently made noises about addressing that.
A fine balance indeed.
Perhaps the lesson from this recent collapse back from the brink – something that’s becoming all too regular – is that like a shy child, gold is not going to go barrelling through resistance when everybody wants it to. The day that gold breaks US$700/oz will most likely be when everyone is looking in the other direction.
Movements in other commodities were mixed last night. Oil eked up, aluminium and copper fell, while nickel and zinc rallied. The uranium futures price fell again – to US$130/lb – but without any movement in the (tiny) open interest position.
The SPI Overnight was down 73 points. Strap in.
