GOLD & PRECIOUS MINERALS INDUSTRY COMMENTToday from David Christie, P. Geo. (TD Securities-Gold & Precious Minerals)
Change in Fed Language Pushes US Dollar Up and Gold Down for The Short-Term
On Wednesday the US Fed kept its Fed Funds rate at 1%, however dropped the reference to policy accommodation being maintained for a "considerable period" in favour of, the Fed believes "it can be patient in removing its policy accommodation." We believe part of the message behind the change in wording was to appease the rest of the G7 ahead of next weeks meeting. Many of the G7 members had been complaining about the weak US dollar (i.e. Europeans and Japanese). Now there may be less talk of strengthening the US dollar during the G7 meeting. TD Economics believes the Fed will tighten in August as does consensus, however they have a long way to go before reaching a neutral stance. We had been calling for short term weakness in the gold price because we believed it was time for a correction in both the currencies and gold. The equities had been pricing in a correction for a couple weeks which was logical after a few months when the US dollar fell very fast and gold rose very quickly. First we believe it is possible for the Euro to fall as far as 1.19-1.21 (USD/Euro) and be somewhat range bound for 1-3 months, which would put gold in the $385-$400 range before tracking back up towards 1.30 (USD/Euro). Then by the early spring we believe the US dollar depreciation would restart and therefore the gold bull cycle, because of the following four points which are some of the same fundamentals that have driven the US dollar down and the gold price up over the past two years and they have not changed:
- The US trade and budget deficit are at record levels and a further weakening of the US dollar is needed to bring them to more acceptable levels.
- A rise in interest rates would likely end the strength in the US housing market which has been driving a good portion of the recovery.
- Some observers believe that the US Fed does not have much room to raise rates before affecting the recovery.
- The world economy needs continued reflationary policies to continue to recover and the US needs to take on the lion's share of this charge because no one else is in a position to do so.
These policies may all breed inflation but until that happens gold will have a volatile trading pattern following the currencies. A possible trigger to restart the bearish trend for the US dollar and bullish trend for Gold would be the Chinese altering their peg to the US$ or the Japanese changing their fx reserve mix, dropping some US$ and adding gold. We continue to believe that Gold will average $400 or more in 2004 with a high of about $450.
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