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July 2008

 

Breakout or failure for gold?

 

 Talks about higher rates are disappearing in the United States, as the concentric work by the Federal Reserve and the U.S. Treasury department to bring the economy back on track is taking its course. The Fed is watching events carefully, but rates are staying at 2.00% for now. The fiscal stimulus package is just getting into the system and some time is required to see how it will impact consumer behavior.  Nevertheless, the perception of  a change in policy rates could be beneficial for the U.S. dollar and help commodity prices to regress a bit in the coming weeks/months. At present, the European currency is consolidating within a tight range against the U.S. dollar. The important support line at 1.53 has held so far and the market has challenged the key resistance line at 1.5850/1.5900 with no success. The Euro is currently near key support lines at around 1.55/1.56. A move below 1.5490 would target 1.5380, eventually 1.5290. A breakout above 1.5960 is instead necessary to lift prices to 1.6050, 1.6120, 1.62.

 

 As the dollar is rebounding slightly from recent lows, gold is receding to important support lines at 915/905. This level should hold at first touch. A move above 962 is nevertheless necessary for 990, 1200. A decline below 905 could in fact target 890, 870.  Fundamental and technical analysis still support the precious metal over the long term and new historical highs will be discovered. However, February’s  top should be cleared with decision for another leg up. Physical demand for gold in India, Far East and Middle East has contracted a bit in face of current strong prices and a mounting economic slowdown. Vietnam, as an example, has apparently suspended gold imports to reduce its trade deficit. In the first part of  2008, it has imported about 60 tons of gold, almost two times the level of last year.  Finally, global inflation, which is set to continue for few decades, might come back slightly over the medium term.

 

 In reality, the decision of the European Central Bank (ECB) to rise rates by 25 basis points to 4.25 in the mid of an economic slowdown could be a big risk. Growth might fade further in Europe, while the European currency could be hurt over the medium term. Only Germany is keeping up the strong economy momentum, but other key European nations are fighting to stay above water. German investor confidence is nonetheless fading, as uncertainty about the future, high commodity prices and the global economic slowdown are concerning European consumers. The ZEW index fell to -52.4 in June from -41.4 (-44.0 expected), the lowest level of the last fifteen years and  the current situation index  fell to 37.6 from 38.6.

 

 Inflation stays a menace, but it might retrace a bit over the medium term. In May, the Euro zone Consumer Price Index (CPI)  moved up to 3.7% from 3.3% year on year, while core prices rose to 1.7% from 1.6%. In Germany, the Producer Price for industrial products increased instead 6.0% (+5.8% expected)  in May year on year, the largest move of the past two years, versus April’s increase of  5.2%. Monthly, the up move was 1.0% (+0.9% expected) compared to April’s 1.1%. In addition, the idea of a larger, and hopefully efficient, European Community (now 27 states) is at risk, after  Ireland said “no” with a referendum  to the so called “Lisbon treaty”. The approval of the treaty could continue, but it might require many months of painful negotiations  to overcome the Irish veto, since it must be approved unanimously by all the twenty-seven members.

 

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