Rise In Yen Stopped Gold's Rise
Christopher Laird
Last week, gold had marched up to around 530. This week it gave back 30 bucks to level at about 500. Now, anytime gold moves so much, (40$ plus since Nov 1 to Dec 10 roughly) you expect a pull back. It did initially pull back to about 493 a couple of weeks ago. But then gold rose through 500 and screamed to 530+ . It looked as if we were into new bull territory, ie a hot hot gold bull was forming.
But events happened this week which stopped gold, and caused lots of selling and or profit taking. It would be expected that the speculators and hedge funds would take profits after a 40 buck rise. But then add another 30 on top of that, first gold rises from about 460 to 500, then from 500 to 530.
Some people made a lot of money. So, just normal market forces like profit taking can account for a lot of the pullback from 530 to 500.
But, usually, there is some fundamental reason that provides the impetus for major changes in gold. In this case we will look at what happened last week in world economies and how gold reacted…
First, the US still had very decent economic statistics. We will outline them in a minute. But Japan has had some decent statistics now. The BOJ Tankan survey showed great improvement in business sentiment:
Dec. 14 (Bloomberg) -- The yen had its biggest gain in four months against the dollar after the Bank of Japan's Tankan survey showed business confidence at the highest in a year.
Japan's yen had the largest fluctuation of any currency today. It has rebounded about 2 percent from a 32-month low versus the dollar on Dec. 5 on speculation the economy is set to escape seven years of deflation, giving the central bank room to shift monetary policy. The Tankan showed companies plan to increase investment at the fastest pace since the bubble economy burst in 1990.
As a result, the Yen strengthened from roughly 119 to the dollar to 116. The German economy also is showing some decent statistics with business sentiment rising the most in 5 years. Japan is having some modest growth. The Euro and the Yen have both strengthened last week. The Euro was dragging at about 1.17, and is now at 1.20 to the USD.
So, what we had this week was significant economic statistics coming out of Japan and the EU which gave pause to the gold impulse, and both the Yen and the Euro strengthened appreciably this week. Gold reacted accordingly. The economic news gave the speculators a very good reason to take their money off the table. So, really, with gold moving up from 460 Nov 1 to about 530, the gold market was looking for a good reason to pause anyway, and it got that with the news from the EU and Japan.
Also adding to euro and yen strength were interest rates. The ECB increased their target rate by .25% to 2.25%. And the Bank of Japan just stated that it is considering an interest rate rise from their pathetic practically zero rates they have had for close to 10 years. The reason? The Japanese central bank thinks they may be turning the corner from deflation, but the Japanese government thinks that has not happened yet (doesn't want to remove stimulation of low low rates yet).
The ECB rate of 2.25% is still well below the US Fed target rate of 4.25%. And with Japanese 10 yr Government bonds running at about 1.6% compared to the US ten year at 4.5%.
But, US bonds are rising this week because there is an expectation that the Fed will not be as aggressive in rising rates in the near future.
Now, overall, let's look at this picture….
The US has had some modestly strong economic statistics, growth is about 4+ %. Inflation is somewhat tame (the public stance anyway). But there is little or no wage growth, we are looking at wage growth this year to be 1 to 2 percent in the US. But every month we get a conflicting picture. One week we get strong numbers and then the next weak ones. Last month we had all this inflation statistics and news and the story was inflation is emerging….
This week we get a report that prices in the US actually dropped the most since 1949! (mainly due to energy costs dropping). With out energy, prices rose .2% . If we take energy out of the picture, .2% equates to 2.4% yearly. That is fairly LOW. But, it is possible that this is a fluke because the previous months we saw numbers like .4% and even 1+ % monthly rises in various inflation indexes.
However, I want to point out that we have been having conflicting stories about inflation. Also conflicting stories about unemployment and so on.
Japan also has had conflicting stories about growth. One month they say deflation looks like it is gone, and they reports GDP growth above 1% .
The next month deflation numbers appear, and you see .2% or zero GDP growth in Japan, and prices still dropping 1% there.
The same conflicting news comes from the EU region. One month, inflation is emerging. The next, unemployment goes up. The ECB has pondered raising interest rates there, and has now added 0.25% . But they were being discouraged from doing that by the member states for political reasons because politicians like the economic stimulus of low interest rates.
As an aside, Japan has a problem in that they have gigantic government debts amassed from fighting deflation since the early 1990's after their real estate and stock crashes. Now, with ultra low rates should the BOJ want to raise them, the government will pay huge interest on that massive debt….
So, we have conflicting economic news that gives gold bulls and bears ammunition. Inflationists get inflation news. Deflationists get deflation news.
Gold bulls get gold friendly and not so friendly news from Japan, the EU and the US on practically alternating months right now.
So you can make a case for gold's rise due to inflation, and likewise make a case that the world economy is recovering well, with Japan growing some now, and the US stats are not too bad (except for those damn deficits and
off-shoring!)
The same alternating good and bad news comes from the EU, and is why the ECB was vacillating about raising interest rates there.
But in any case, the economic news from Japan and the EU are what gave the gold bulls a pause, or a reason to pause. The strong impulse was already looking for profit taking anyway.
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December 16, 2005
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