FYI | Feb 22 2007
By Greg Peel
Once again we are faced with this difficult relationship gold enjoys with its denominated currency of US dollars.
Last week gold rallied when Fed Chairman Bernanke told Congress inflation fears were abating. Now, gold is meant to be a hedge against inflation, but it also tends to (mostly) trade adversely to the US dollar on the basis that one or other is the preferred safe haven currency. So if a rate rise is unlikely, the dollar falls, and gold rallies.
Overnight, the US CPI figure for January came in at a 0.2% rise instead of the expected 0.1%. Not exactly terrifying, but a bit of a surprise nevertheless. Despite a fall in oil prices, medical care, food and airline tickets kicked the number along.
This, in theory, should reignite concerns of a rate rise, strengthen the US dollar, and weigh down on gold. But gold is an inflation hedge, so such fears can also be positive for precious metals.
Every now and again gold will “decouple” from the US dollar. This implies gold can rally even if the US dollar rallies. This last occurred in late 2005 when gold went berserk, and is usually linked to strong inflation fears and/or geopolitical fears. Last night we saw a return to inflation jitters, and we also saw a return to geopolitical jitters.
For a long time FNArena has bleated that the Iran situation has not gone away. It was because of Iran’s nuclear ambitions that the oil price hit US$78/bbl. Oil rallied back over US$60/bbl last night, and most observers suggest it will not head to great heights this time given the supply situation, but that doesn’t mean gold can’t return to focus as a safe haven in a troubled world. As Iran once again ignores UN demands, tensions heighten.
And so we had a US$20 rise in the gold price overnight, rebounding from yesterday’s weakness to shake out those profit-takers and close strongly at US$678.20/oz. All precious metals posted strong gains.
As too did base metals once again, with copper up 4%, nickel 1.5% and zinc 3.5%.
While all eyes have been focused on the oil price lately – and its relationship to inflation – food prices have not received as much attention. Corn hit a new record high last night. Even if the oil price does not return to great heights, ethanol production is still surging, and demand for Western foods is only on a solid upswing in the East. In the meantime, Australia suffers through a potentially long term drought.
Food has the potential to be a significant global contributor to inflation. There are few pundits who aren’t arguing that gold will head to US$700/oz soon. Technically the metal looks very strong.
Hewlett-Packard had already dampened the Dow last night before the inflation news came in. the DJIA finished down 48 points to 12,738, although the NASDAQ still managed a rally to a new 2007 high.
The SPI Overnight fell 6 points, and we will open on the local bourse this morning torn between US inflation and commodity price strength. Notably, the uranium price has finally seen a settlement at US$85/lb – US$10 higher than its previous price.
