Gold Bounces as Dollar Stumbles; Deflation Trade in US Bonds & Euro Ignores Cost of Financial Bail-Outs
Gold Prices rose steadily overnight Friday in Asia and London, bouncing 2.8% from yesterday's 11-month low to touch $758 an ounce as world stock markets also ticked higher.
Crude oil struggled above $102 per barrel despite Hurricane Ike strengthening as it heads for the oil-rich Texas coast.
The US Dollar continued Thursday's swoon on the forex markets, meantime, taking the Euro back above $1.41 even as European finance chiefs met in Nice, France to address the "serious...far-reaching...[and] weakened economic environment."
Industrial production in the 15-member Eurozone shrank a further 0.3% last month from July.
"Merrill Lynch chief domestic economist David Rosenberg points out that the benchmark 10-year Treasury note has returned 9.5% in the past 12 months," reports Barron's magazine, "as its yield fell to 3.6% from 4.7% – all in the face of rising concern over the consumer price index hitting a 5.5% annual rate.
"That shows the bond market is looking ahead to deflation...[a] trend equally evident in Gold, which has fallen more than $200 to $750 an ounce since mid-July."
Short-term US Treasuries continued to rise in price early Friday, but longer-dated T-bonds slipped ahead of this weekend's much-touted rescue of America's fourth-largest bank, Lehman Brothers.
Cash incentives from either the Federal Reserve or US Treasury are expected to form a key part of the sale, adding to the Fannie-and-Freddie rescue costs already weighing on America's sovereign balance-sheet.
The US government's operational deficit ran to $111 billion in August, almost 6% ahead of Wall Street forecasts.
One-year US bond yields this morning stood eight basis-points below last Friday's close, offering 1.99%. Ten-year yields recovered this week's dip as prices fell, rising back to 3.66% – and even after stripping out "volatile" food and energy prices, consumer-price inflation in the United States was last pegged at 2.5% per year on the official measure.
Last month the Bureau of Labor Studies felt it necessary to defend its methodology after accusations from respected economist John Williams – creator of the "pre-Clinton" and "Experimental" CPIs at ShadowStats – that the Consumer Price Index "has been politically mauled" to reduce the headline rate.
"From a fundamental point of view I would expect Gold Prices to be stronger over the coming months due to high demand," said Eugen Weinberg, an analyst at Commerzbank, to Reuters earlier.
"But from a technical point of view there are reasons to believe they may go even lower."
Thursday's plunge saw Gold drop through the three-year uptrend – begun in July 2005 – that took it from $425 to more than $1,000 an ounce in spring '08, retreating to an 11-month low.
Platinum futures traded in Tokyo ticked higher today, but still closed out their worst weekly losses in 19 years, dropping more than 13% from last Friday.
Palladium also bounced, but held near this week's three-year low.
"I'm just amazed at how far and how fast some of these commodities have dropped – platinum, palladium, oil, Gold," said Jonathan Barratt, head of Commodity Broking Services in Sydney, Australia, to Bloomberg today.
"Dollar appreciation just devastated those markets."
Early Friday the US Dollar lost ground against all other major currencies, letting the Swedish Krona end its worst losing streak since 1975.
The Norwegian Krone rose for the first session in six, while the British Pound jumped to its best level since Monday, recovering half that day's five-cent sell-off and capping the Gold Price in Sterling below £439 per ounce.
"[There's] a desire to hoard liquidity in a hazardous environment and heightened aversion to taking on unsecured credit exposures," said Paul Tucker – executive director of the Bank of England in a speech in London today. "Banks are, in consequence, deleveraging their balance sheets [and choosing to] raise extra capital and shrink their balance sheets.
"The balance sheet shrinkage is reducing the supply of credit to households and firms."
"If the consumer balance sheet starts to unwind quickly," believes Mohammed El-Erian –co-CEO of Pimco, the world's biggest bond fund – "you'd get another disinflationary force and then the Fed would be brought back into play with lower rates."
Next week's Federal Reserve meeting is expected to keep rates on hold, some 3.5% below the rate of inflation. But interest-rate futures now put the odds of a further cut by December at one-in-three, according to Bloomberg data.
Even so – and with European Central Bank staff repeating all week their "vigilance [against] upside risks to inflation" – the sudden collapse in the Euro/Dollar exchange rate may run all the way down to $1.30 by Christmas, believes Takeharu Miki at Bank of Tokyo-Mitsubishi UFJ.
The gap between prices to sell Euro options and prices to buy them – the so-called "risk-reversal premium" – has now shot higher to a five-year record.
Today's ongoing "slowdown in the greenback's momentum [has] contributed to oil price volatility" meantime, writes Manqoba Madinane for Standard Bank.
Thursday saw the US commodity-market regulator, the CFTC, "enforce enhanced control over dealer's positions," he adds, "mandating transparency on their positions in futures contracts.
"This could keep oil prices trending sideways as investors digest the new regulatory environment [and] this should limit precious metals' ability to take advantage of the greenback's uncertain tone."