Metals Steadyby Joe Battaglia
Posted: April 15, 2009
Gold and silver are both higher this morning, with gold leading the way, up $2.50 in early trading. Gold is doing an excellent job given the fact that the dollar is very strong, up 64 basis points at 85.29 on the index. The equity market is higher, but only by 12 points with the Nasdaq actually down 14 points. Oil is up $.64 at $50.05 a barrel. In spite of all the bad news for oil, it seems to hold steadily at these levels. Gold and silver remain in a corrective and consolidative pattern, which has held pretty well between $880 and $950. With the economy remaining weak and the equity market not able to continue with the rally, safe haven demand for gold may pick up in the near term.
Concerns about deflation are certainly prominent. The Consumer Price Index fell .1% in March from February. That was in line with forecasts. A good part of that has to do with lower energy prices. Ashraf Laidi, chief market strategist at CMC Markets stated with the positive surprises in the financial system already being released early from Wells Fargo and Goldman, the lack of further good news on the financials may bolster gold's rebound towards $920 to $925. Obviously, what he is looking for is additional safe haven demand.
At some point investors will start looking further ahead toward the results or impact of the massive expansion of money supply and bailouts by the Federal government and the Fed and in time that has to exert inflationary influences. Bernanke has been discussing this reality and expressing concern over inflation. However, many of the actions taken by the government are long-term and will not be unwound easily or quickly. That is why so many analysts think inflation will be a significant problem in the years ahead.
Industrial production and capacity utilization both fell again for the month of March. This is yet another signal that the economy is not yet picking up any steam. It may be getting worse more slowly, but it is nevertheless not improving.
Another factor that will be bullish for gold is that central banks seem to be reducing the rate at which they are buying U.S. Treasuries. Dow Jones Wire Service reported this morning that China slowed its treasury-buying spree in February, purchasing only 4.6 billion worth of treasuries compared to 12.2 billion in January. They said that weakening economic growth in China due to a sharp plunge in exports is reducing the amount of foreign reserves that they have to recycle into dollar denominated assets. Also, they are making a strong move towards having the Chinese yuan operate as the reserve currency for Asia. As that process develops further, there will be less need for Asian countries to hold dollars. In time this will weigh on the dollar and cause it to enter a significant downtrend. It is at that point we will likely see rising inflation pressures.
Several analysts have said they see inflation running between 10% and 13% or more in the next few years. Those who anticipate rising inflation will be in a position to come through that period with extra-ordinary gains. Think in terms of the late 1970's movement in the gold price, which exploded to the upside. Think also in terms of the fact that interest rates rose aggressively as inflation took off. In fact, the government today announced that it is re-purchasing some 30 year bonds that it issued back in that time period that are yielding 13% or more.
The point is there will be fantastic opportunities if you position yourself correctly. Think in terms of having a significant liquid position along with a proper diversification into gold to act as a hedge against currency depreciation, to preserve purchasing power, and for the profit potential that it offers. Gold Fields has just recently forecast that gold will rise to between $1,000 and $1,100 this year. B of A/Merrill Lynch has been forecasting a move up to the $1,500 level over the next two years. Fortis Bank, a conservative Dutch bank, has forecast gold at $1,200 by the end of the year. These are prominent analysts with excellent research teams and they all tend to be very conservative in their price forecasts. Therefore, I think you have an excellent upside profit potential with gold as well.