Gold needs to retain its string of recent closes

By Jon Nadler

Gold prices eased into a lower trading channel of from $915 to $926 during the overnight hours, as participants observed an additional rise in the US dollar (72.34 on the index) and a bit of a profit taking slippage in oil prices.

The trade was also mindful of jewelry fabrication demand starting to put the brakes on once again in the wake of higher prices. News that market analysts expect a US approval of the IMF's plan to sell 403.3 tonnes of its gold reserves was not playing too much of a direct role in the current decline. Still, the IMF announcement's net result is that more gold will come into the market in due course.

Whether it will be mopped up by central banks or investment demand or find a home with fabricators is not known at this time. The sales are expected to be conducted in an orderly fashion and spread out over time.

New York spot gold opened $7 lower, quoted at $913.20 per ounce as players awaited figures on the retail chain index and pending home sales data. There was not much else in the way of immediate directional drivers on the scene at the moment. Silver lost 32 cents to open at $17.73 while platinum reversed yesterday's gains, dropping $17 to $2017.00 per ounce. Palladium fell $1 to $452.00 per ounce.

Risks of probing lower levels in metals remain in place as the markets try to find direction in the wake of recent drops. For the moment, the action will continue to be dollar and US economic news driven until either ECB or G 7 signals are intercepted as to where next on the currency and interest rate scene. The rate cut expectation fever in the US has calmed somewhat, with markets now giving 64% odds to a quarter point cut at month's end. Gold needs to retain its string of recent closes above $900 as the first order of business.

We have (for months now) heard that the US slowdown will not affect the rest of the world, especially Asia, which has been regarded as a region that could withstand any storm as it grows and grows. Surprise. Not only is the regional situation worsening, but it is doing so at a rate which has many pondering as to whether a common currency could offer some relief. MSN reports that:

Asia is hit badly by the current recession in the United States. Investors are shying away, stock markets are down, thousands are losing jobs. In this scenario, there is once again talk of evolving a common currency for Asia for safeguarding its financial stability. But there are many hurdles on its way. One is the `hegemony' of stronger states. Smaller Southeast Asian states feel threatened by China's growing economic power and Japan's isolationist economic policy. They also question whether the currencies of Australia and New Zealand should be included with India. Japan is not too comfortable with China's emergence and the fact that the yen may be overshadowed by the yuan. India too has been so far cool to the proposal for a common ASEAN currency, holding that it would require more coordinated efforts on the parts of all the participants and removal of many political and technical obstacles.

Some argue that it is impossible to replicate the euro experience because Europe had sorted out the question of hegemony long before the question of a single currency was mooted. The ideal preconditions that existed in Europe prior to the introduction of the euro either don't exist in Asia or are only emerging. There were several factors that bound the European nations together. They included high trade interdependencies, Common acceptance of basic political and social values, fairly even economic development and comparable living standards. Even with common objectives, it took half a century for Europe to achieve a single currency.

The article in India Syndicate goes on to extoll the virtues of a single currency system for the region:

The benefits of an eventual single currency are numerous. It will increase market transparency by making prices more easily comparable. Cross border transactions will also become more attractive as market operators will no longer be exposed to exchange rate risks, and costs associated with currency conversion will be eliminated. Moreover, single currency will go a long way in promoting political union in Asia. But it will be a long drawn out process. Europe has worked towards political and economic integration for over 50 years before the birth of a single European currency in 2001.

To which we might add that all of that is fine, except for the small number of vocal critics of the Euro who have not minced words in calling the single currency an exeperiment and one that could fail for a number of reasons, within less than twenty years of its debut. Hmmm...for the moment, the euro appears to be doing not too badly, eh?

Look for volatility but thus far the scale is on the small side for today. Let's see what the economic data begets.

Jon Nadler is a Senior Analyst with Kitco Bullion Dealers Montreal