The dollar received a boost of energy overnight as several external factors conspired to bring buyers back to its camp and lift it to near 78 on the trade-weighted index once again. The first agent to move the US currency was the news that China took a bit of an unexpected step and proceeded to curb lending. The country's leader, Mr. Wen, had stated on December 27 that the feverish growth in local lending had caused property prices to rise 'too quickly' (read: bubble-like), and that inflationary pressures were being caused by surging commodity prices.
Thus, the Chinese government 'guided' rates higher overnight, by raising bill yields - a prelude to tightening, in so many words. Rising yields are intended to curb growth in bank lending. The news from China sent equity markets sharply lower around the world, with the MSCI Emerging Markets Index falling the most in three weeks. The dollar was the recipient of at least part of the outflows from equity markets, in a classic 'safe-haven' play, and it also got favorable attention following the reported slump in US new home sales.
Next up, was the news from Japan that the newly appointed Finance Minister Naoto Kan said - in his inaugural speech (!) - that he "hoped the yen would correct some more" against the US dollar. The Japanese currency had reached a 14-year high against the greenback last November, and albeit it has undergone a correction in recent weeks, the emerging forex shop talk keeps alluding to an eventual 100 yen target as being but a matter of time.
Following that little currency jawboning bombshell, the US dollar spiked against the yen this morning, as traders took the Minister's words to the trading floors and translated it into exchange level reality. The yen was last seen at 93.33 on our currency tables. The dollar also managed a turn against the euro, after the latter failed to build on Wednesday's FOMC minutes content-induced gains that had brought it to just above 1.44 on the charts. All of the above, plus some profit-taking following a hot start to the new year converged to undermine gold's advance and caused it to sustain its biggest drop in a week.
The yellow metal failed to breach key overhead resistance near $1143 and fell back to near-term support at the 1130 area (which held up pretty well thus far) in early Thursday trading. More than 5.25 tonnes of bullion flowed out of combined gold ETF holdings yesterday as the metal was reaching the aforementioned resistance levels. Next time you hear someone making a huge news deal out of Sri Lanka buying 10 tonnes, or Mauritius buying 2 tonnes, why not put things in perspective and remind them that the ETFs can (and do) lose gold tonnage that is in the same ballpark, in a single day? Such news does not appear to make the 'pass' grade on various ultra-bullish sites or commentators' notepads, although it is freely available.
Also freely available are econometric studies that track gold values against the US dollar and against inflation. Some of these are also sitting around being blissfully ignored. There is a very strong case for gold's presence in a basket of assets, make no mistake about that. You already know we are strong advocates of a core 10% weighting, as an insurance policy against unexpected developments. Good enough for central banks, good enough for the average investor as well.
However, the recent build-up in speculative positions is in large part based on bets that did not pan out in the past. We have already covered the fact that if one bought gold solely as an anti-dollar bet, given historical correlations, such a bet would not be a winning one, in about 73% of the cases. Now comes evidence that, when it comes to inflation, unless it is Weimar-magnitude price hikes one is banking upon, the hedge offered by gold is less than the myth that goes with it. CNNMoney fills in the details of this particular aspect -inflation protection- on a list of myth-busting bullet points it has identified:
"The investment management firm Research Affiliates studied the last period of sharply rising prices -- the late 1970s -- to find out what was the best investment to own back then. The answer: not gold. In fact, the study found gold prices and inflation had very little correlation. Between January 1977 and April 1980, small-company stocks were actually the best-performing asset, outpacing gold and other commodities by 4 percentage points a year during that stretch. And over a much longer period -- since the end of 1974, when the federal government permitted U.S. households to own gold as an investment for the first time since the Great Depression -- even the S&P 500 index has whipped inflation by a wider margin than the metal has. One reason that gold may have been such a popular inflation hedge in the '70s was that there were few alternatives for small investors back then. Not only was that before the rise of low-cost stock index funds, it was decades before Uncle Sam came out with a class of bonds -- Treasury Inflation-Protected Securities, or TIPS -- that are guaranteed to keep pace with rising prices."
New York spot metals dealings opened with losses this Thursday, with gold falling $9.90 per ounce to a bid of $1128.20 as against a 77.90 reading on the dollar index, a 1.431 tick against the euro, and a near-$1 drop in crude oil. Silver declined 15 cents to ease back to $18.06, while platinum lost $18 to $1541.00 per ounce. Palladium also dropped, shedding $3 to $423, and rhodium remained steady at $2600.00 per troy ounce. Talk that Chinese car sales might not be as stellar in 2010 as had been expected, took a bit of the wind out of the noble metals' (recently) fully inflated sails this morning.
Players are now eyeing the release of US jobs data tomorrow and focusing on how the figures might be interpreted as regards subsequent Fed policy. The question remains what level of comfort with the numbers will eventually prompt the US central bank to start its mopping campaign. Bloomberg reports that: "A prospect of higher interest rates in the U.S., the world's largest economy, probably will strengthen the dollar further and may take "some of the wind out of the commodity markets' sails," said Royal Bank of Scotland Plc's commodity analysts, led by Nick Moore. The dollar may rally some 15 percent this quarter, they said."
Based on a Bloomberg survey of 74 economists, it is widely thought that US job destruction very likely came to an end in December. In fact, there is at least on e school of thought that envisions that jobs were added to the economy, making the transition away from the 'jobless recovery' to some other iteration of same. Marketwatch's similar survey has polled observers predicting a gain of about 10,000 jobs last month. Not everyone is convinced, however. Several observers have cautioned that as the effects of the economic epinephrine wear off in coming month, some other kind of energy-infused juice might be needed to keep things humming along. This morning's figures for initial state unemployment benefits showed an essentially flat situation, with but 1,000 extra claims hitting the caseworkers' dockets.
It may not turn out to be the quiet day one was hoping for, ahead of tomorrow's data. The bullish bent appears to remain manifest, and yet another try towards the 1141+ zone could be in the horoscope. It could also be that tomorrow's numbers may have already be baked into this cake and that some players came away with the conclusion that even if the numbers are terrific, the Fed will not use them as the trigger for an instant rate hike, Chinese-style. Perhaps a set (or two) more of such figures might do the trick...In any case, stay tuned. The next day and a half will be...interesting.
Jon Nadler is senior analyst for Kitco Metals Inc. North America.