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What is Driving the Gold Market?

Posted by Larry Doyle on May 12th, 2010 3:22 PM |

While equities are rebounding nicely today, overall equity volumes remain generally light. That said, there is a bigger development in the markets today. What is it? The shiny yellow stuff is on fire.

Gold is trading close to 1250/oz. and making new highs in the process.

What is driving the gold market? As The Wall Street Journal reports in writing, Gold Prices Extend Climb:

“The gold price is being driven by … the rising concern of the ‘exit strategy’ for central banks given that the ECB is the latest agency to join the (quantitative easing) bandwagon,” JP Morgan analyst Michael Jansen said in a note.

“Indeed, the perceived breach of the ECB’s independence … adds to the view that in the long-term monetary and fiscal authorities will be forced to choose between anemic economic conditions or monetary-driven inflation.”

Anemic economic conditions or monetary-driven inflation? Little wonder why we are witnessing civil unrest in Greece today. What about other Euro-zone nations? What about the UK? The US?


All That Glitters Is Not Gold

Posted by Larry Doyle on December 22nd, 2009 12:45 PM |

The recent spike higher in the U.S. Dollar Index is having a dramatic impact on a variety of markets, but none more than gold.

Gold traded over $1200/oz. a mere few weeks ago, but it has retraced 10% from that level and is now trading at approximately $1080/oz.  Many long term prognosticators forecast that our greenback will continue its trend lower. As such, commodities in general and gold specifically should benefit.

That said, I remain concerned about getting heavily involved in commodities, especially gold, because of the fact that there are many short term speculators involved in this sector. What happens given the preponderance of those market participants? Excessive volatility in the price action.

With gold dropping off the face of the cliff as pictured below, it is highly likely to fall into the $1050/oz range. Why that level? $1050 represents an approximate 50% retracement of gold’s move on the year.

Unless you are the type thrilled and skilled at skiing black diamonds, I recommend keeping gold plays to a small percentage of an overall portfolio.


Dollar Carry Trade Remains in Vogue

Posted by Larry Doyle on December 4th, 2009 3:47 PM |

Today’s price action in the markets is very telling. What is it telling us? The dollar carry trade remains in vogue and technicals continue to dominate overall flows much more than fundamentals. Let’s navigate.

Recall that the weakness in the U.S. dollar has facilitated a large number of hedge funds, market speculators, and to a less extent investors to borrow dollars and buy a variety of risk based assets. What assets? Equities, a wide array of bonds, a basket of commodities, primarily gold. How are these sectors performing?

After an initial spike of 1-1.5% across the equity markets, these major market averages have retraced and are now effectively unchanged to slightly better on the day. Is that a sign of investors not believing in the details of the employment report? No, anything but. In fact, I believe the equity performance today is quite strong given the fact that the dollar has increased by 1.6%.

Bonds have traded in a very narrow range. Interest rates moved higher by approximately 12 basis points (.12%) and have sat there almost all day. The question that now comes back front and center is when the Fed will decide to raise rates. While most analysts had written off the possibility of an increase in rates prior to 2011, now analysts are projecting that the Fed may raise rates by mid-2010.

If rates do rise here, what does that do for our greenback? It will do better and it is doing just that today. As I referenced the U.S. Dollar Index has increased by 1.6%. (more…)

Second Stimulus Speculation Submarining Bonds and Supporting Gold

Posted by Larry Doyle on November 3rd, 2009 3:09 PM |

What are the biggest stories in the market today? Consider the following . . .

1. Warren Buffett makes his single largest acquisition ever with the $34 billion purchase of Burlington Northern

2. Ford posts surprisingly strong auto sales

3. Royal Bank of Scotland becomes the biggest banking bailout yet with another injection of capital

4. Johnson & Johnson announces plans to layoff 7% of its global workforce

Each of these developments is truly meaningful. Interestingly enough, numbers one and two are decidedly constructive while numbers three and four are clearly quite bearish about global prospects. Despite the magnitude of these stories, in my opinion, they pale in comparison to developments in the precious metals and bond markets today. What is happening? Let’s navigate.

The Treasury yield curve is steepening dramatically today with yields on longer term notes and bonds rising by 6 to 8 basis points, while shorter maturities are unchanged. A snapshot of the Treasury market is provided by WSJ Market Data.

Why is the curve steepening? What does that mean? What are the implications for other markets? All great questions. Let’s navigate further. (more…)

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