Gold Climbs First Day in Five as Dollar Falls, Silver Declines

Gold on Tuesday edged slightly higher for the first day in five as the U.S. dollar faltered along with crude-oil prices. Silver, platinum and U.S. stocks finished lower on the day as well.

In New York precious metals trading futures:

• Silver for September delivery fell a penny, or 0.1 percent, to $14.345 an ounce.

• Gold for December delivery gained 70 cents, 0.1 percent, to $947.60 an ounce.

• October platinum declined $5.80, or 0.5 percent, to $1,245.10 an ounce.

Notable bullion quotes of the day follow:

"The teeter-totter between the buck and gold continues as gold balances between dollar stability," Ralph Preston, a Heritage West Futures Inc. analyst in San Diego, was quoted on Bloomberg.

"Following its worst slide since March, gold bullion tried for a day of recovery on Tuesday," wrote Jon Nadler, senior analyst at Kitco Metals Inc. "Coming to its assistance, were a 0.11 drop in the US dollar index and at least initially, a small gain in crude oil against a background of recovering Asian equity markets." [Click to read Nadler’s full commentary].

In London bullion, the benchmark gold price was fixed $2.25 lower to $942.75 an ounce. Silver dropped 12 cents to $14.355 an ounce. Platinum was fixed $5.00 higher to $1,247.00 an ounce.

Gold, considered a hedge during times of high inflation and economic uncertainty, tends to follow oil and move opposite to the U.S. dollar. A rising greenback makes dollar-denominated commodities, like bullion, more expensive for holders of other world currencies.

Oil and gasoline prices

Oil futures fell Tuesday "as falling U.S. stocks and expectations of rising supplies encouraged traders to sell crude," wrote Polya Lesova of MarketWatch.

"Your bearish pressures are still there," Bill O’Grady, chief market strategist for Confluence Investment Management in St. Louis, was quoted on Bloomberg. "The recession probably ended in June, but it’s going to be a slow global recovery, and these prices are probably pretty elevated."

New York crude-oil for September delivery declined $1.15 , or 1.6 percent, to close at $69.45 a barrel.

Prices at the pump rose two-tenths of a cent from Monday, according to AAA. The national average for unleaded gasoline climbed to $2.645 a gallon. The price is 8.4 cents higher than last week, 10.8 cents higher than a month back, and $1.17 lower than a year ago.

U.S. Stocks

U.S. stocks fell Tuesday "with a pummeling in bank shares and jitters ahead of a Federal Reserve announcement giving investors a reason to retreat," wrote Alexandra Twin of CNNMoney.

The Dow Jones industrial fell 96.28 points, or 1.03 percent, to 9,241.67. The S&P 500 lost 12.77 points, or 1.27 percent, to 994.33. The Nasdaq Composite declined 22.51 points, or 1.13 percent, to 1,969.73.

Gold, Silver and Metals: Prices and Commentary – Aug 11
by Jon Nadler, Kitco Metals Inc.

A Dollar Saved

Good Afternoon,

Following its worst slide since March, gold bullion tried for a day of recovery on Tuesday. Coming to its assistance, were a 0.11 drop in the US dollar index (down to 79.13) and at least initially, a small gain in crude oil (up to $71.02) against a background of recovering Asian equity markets. The greenback exhibited a bit of early pre-Fed jitters this morning, but any posturing by Mr. Bernanke vis-a-vis an eventual rise in interest rates could boost the US currency from current levels. Gold appears capped by the $955 and higher areas, whilst (hopefully) being able to draw buying support in the $935 to $945 zone.

Analysts at MF Global see a sea-change afoot in the US dollar however. Their take is that "the dollar’s ability to rally amid this improving economic environment is a major change and shows that the focus of dollar strength is shifting from risk-aversion to future interest rate hikes." For the moment, the currency markets remain the primary impact factor for bullion, but the change in the commodities vs. dollar game we witnessed last Friday has been favoring the dollar. This, in the opinion of Saxo Bank analysts.

Slight improvements in price were the theme in precious metals as the Tuesday session got underway. Gold opened with a $2.60 per ounce gain, quoted at $ $948.20 as traders watched crude oil climbing a bit. Later in the session, the tables turned, and a more sizeable drop in oil prices (off $1.23 to $69.37) managed to drag gold back into the red by the afternoon. At last check, the yellow metal was trading at $945.00 even, following a dip to $940.90 per ounce intra-day. All ears remained on the Fed, but nothing meaningful (aside from the constant second-guessing by speculators) is expected out of the trading day at this point.

Silver rose 7 cents on the open, starting off at $14.41 an ounce, but relinquished those gains to also turn negative –but only slightly. Spot silver was trading at $14.31, down three pennies as of this writing. Platinum climbed $4 at the open, but then ended up losing $8 and was quoted at $1237 an ounce. Palladium fell $1 to $272 per ounce, and stayed there. So, you might wanna buy a GM vehicle? If you are so inclined, and you want to strike a deal with a California dealer, look no further than eBay. Complete with the ability to haggle on price. This might just catch on. Imagine not having to look at the salesman’s white loafers, or his vintage 1979 gold chain. It’s all worth it.

Chinese economic news dominated the overnight market scene ahead of the start of the two-day Fed meeting. A mixed bag of statistics was on offer from Beijing overnight, where it was noted that China’s industrial output rose at the fastest clip in nearly one year. Conclusions are being drawn that the country is now irreversibly on the path of recovery. China has grown at ‘only’ a 7.1% rate during the first half of 2009.

However, the (in their officials’ words) "grave" global economic situation made for a sharp fall-off in July exports by the heavily export-oriented Chinese economy. Chinese bank lending was off by 77% last month, following June’s lending orgy aimed at the corporate sector. Corporate profits, however, show a wobbly state of affairs. Other areas show that urban fixed asset investment rose significantly, and that deflation is alive and well over there, as well. Consumer prices fell 1.8% in July, making for a sixth month of drops.

China is not alone in the vigil on deflation. The Bank of Japan was seen obsessing about the widening demand/supply gap and expressing worries about the accelerating drops in consumer prices in the country. At the same time, the country is grappling with a 5.4% unemployment rate – the highest in six years, and a near match for its postwar high of 5.5%. Back in the USA, whilst conditions are showing various green shoots still attempting to mature into branches which ought to support the low-hanging fruit of economic progress, there remain various undercurrents of worry as well.

The glowing pool of toxic assets that is still seen leaking dangerous radiation reveals that the TARP plan never really immunized US banks from their soured loans. Problem is, no one appears to be in agreement as to what really constitutes a ‘troubled’ loan. So-called level III assets (the hardest to value ones) amounted to two-thirds of a trillion dollars among the 19 ‘stress-tested’ financial firms this spring. In so many words, the economy is but one small turn away (in the wrong direction) from having these dark pools of lending spill over and infect the entire scene.

As things stand now, some 1.4 million US consumer bankruptcies are expected to be one of the ‘highlights’ of 2009. The percentage of US mortgages drowning in this pool may reach 30 this year. Finally, the TARP oversight panel believes that smaller US banks may now need to replenish their capital position. This recession is what really needs a ‘death panel.’ The sooner, the better. How about a small boost coming from the $473 to $999 expenditure per child among ‘back-to-school’ households? We’ll take anything. So will the US economy. The dollar, on the other hand…   Marketwatch’s Nick Godt reports –on this Fedspeak eve- that (and you are taking careful notes):

"With U.S. interest-rate hikes over the next year an increasing possibility, the U.S. dollar is expected to reverse to more normal behavior for a currency, such as rising on positive economic news that might eventually lift rates and the dollar’s yield compared to other currencies. That pattern hasn’t described the dollar’s behavior for most of this year.

"Over the past many months, traders could be excused if they have come to believe it’s carved in stone that good news is dollar negative […] and bad news is dollar positive," said Brian Dolan, chief currency strategist, at Forex.com  

As the Fed set interest rates close to zero in December and gave assurances they would remain there for the foreseeable future, currency markets began using the dollar as a safe haven. Investors piled into the greenback, driving it higher, as stocks around the globe sold off.

DXY   79.17,   -0.08,   -0.11%
SPX  997.75,  -9.35,   -0.93%

Then, as stocks on Wall Street began their huge rally in March amid hopes for a U.S. recovery, the dollar began to reverse, tumbling until the dollar index (DXY 79.17, -0.08, -0.11%) fell to its lowest level of the year last week.

"It’s been a bit of a paradox," said Steven Englander, chief foreign exchange strategist at Barclays Capital. "When good news comes out of the U.S., [the dollar] has had a tendency to depreciate. Normally it would tend to benefit from good U.S. news."

A change, however, seemed to surface last week when the dollar rallied after the key U.S. July employment report on Friday came out much better than markets expected, leading stocks to their highest level of the year.

"There were indications last week, especially after [the jobs report], that would suggest markets are playing with the idea that the Fed is thinking about raising rates," Englander said.

Economists at Barclays and other investment banks haven’t changed their views that the Fed will keep rates on hold at least well into 2010, but the futures market has started to price in odds that the central bank would make a move before the end of this year. With the economy showing increasing signs that it is, if not improving yet, at least deteriorating less quickly, the Fed is expected to put an end to the alternative measures it put in place to boost liquidity after taking rates near zero. http://www.marketwatch.com/story/fed-seen-ending-treasury-buying-as-recovery-looms-2009-08-07

Markets will tune in to the Fed’s policy announcement on Wednesday to see if it comments on its $300 billion Treasury-buying program, a hallmark of its efforts to pump more cash into financial markets. Bond dealers anticipate the Fed will allow the program to run out as signs of economic recovery make interventions into the private market less urgent. These measures, known as "quantitative easing," have helped depress the U.S. dollar, since increasing the amount of money in circulation makes existing dollars less valuable.

Plus, say analysts at BNP Paribas, the introduction of quantitative easing measures in March had taken the market’s focus away from interest-rates differentials between currencies, and towards what’s known as risk differentials. With an eye on risk, investors borrowed low-yielding currencies such as the dollar and the yen, and used the proceeds to invest not only in higher-yielding ones but also in commodities, in stocks on Wall Street and in emerging markets.

That trade is in the process of reversing, they say.

"Following a prolonged period of dollar weakness which led to the markets being positioned short, there are now strong signals the dollar is starting to develop strength," BNP Paribas strategists said in a note.

"As the economic outlook has stabilized, the relative yield and interest-rates differentials should regain their impact on foreign exchange," BNP Paribas said. While markets expect the U.S., perhaps along with Canada, to emerge from recession this year, other major industrialized countries are expected to take longer. Last week, the Bank of England actually extended its own quantitative easing program, leading to a sharp drop in the pound.

Meanwhile, zero-rates and quantitative easing had helped place the dollar at the center of a so-called carry trade, as investors worldwide borrowed cheap dollars to invest them in anything that provides higher returns — including commodities, emerging markets, or even U.S. stocks.

"This is the most popular trade around the global at the moment," said Sebastien Galy, currency strategist at BNP Paribas. "Sell dollars and buy commodities or stocks."

The term carry trade, when applied only to currencies, refers to the practice of borrowing a low-yielding currency — i.e., from a country where interest rates are very low — in order to lend or invest in a high-yielding currency, at a higher interest rate. If the borrowed currency suddenly appreciates, however, that rise can boost the cost of returning the borrowed money.

In the dollar’s case this year, the carry trade was used to directly buy high-return assets, doubling the risk as losses can be incurred both in currency terms and in the value of the assets. With Wall Street rallying along with global markets since March, volatility has fallen sharply and the dollar carry trade had taken off, BNP’s Galy explains.

"As volatility falls, this encourages more and more risk-averse people to invest," he said. "And it’s mostly [gone] into stocks, emerging markets, and commodities." But many strategists now believe that Wall Street’s rally, which has seen the S&P 500  (SPX 998.76, -8.34, -0.83%) index rally more than 50% since its March lows, is long in the tooth.

The perception that stocks are ready to drop, combined with a possible shift in monetary policy at the Federal Reserve could combine into a double-boost for the dollar. It could benefit both from expectations of higher interest rates, and from investors pulling out of equities and back into dollars, BNP Paribas says."

Thus, we will have to wait (and wait) for that putative final dollar collapse to get underway and make radical gold bugs happy. Then again, we will also have to wait (and wait) to obtain proof of the aluminium-clad allegation that ALL of the Bundesbank’s gold is being held hostage by the US (and being used for nefarious purposes).

Wait we will, as well, (and then wait some more) for the day when evil central banks make a confiscatory grab for your little stack of gold Eagles. These fairytales are making the REGB forum talk circuit right now, no kidding. Barely a few days after gushing tributes were written –by the same suspects- about the same official sector players when they agreed to curtail their annual gold sales to but 400 tonnes.

You just can’t win. It’s the routine.

Check out additional market resources at Live Bullion Spots, the Silver Calculator, U.S. Mint Collector Bullion Price Guide, and the Inflation Calculator.