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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (37547)	8/29/2003 7:42:45 PM
From: elmatador	Respond to of 74559

Gold poised for substantial move higher By Kevin Morrison Published: August 29 2003 15:03 \| Last Updated: August 29 2003 15:03 The prospect of gold breaking the six-year highs hit in February increased this week when so-called "open interest" in US gold futures on Comex in New York reached a record high, after a large surge in trading on Wednesday. Andy Smith, analyst at Mitsui Global Precious Metals, said the increase in open interest, which is more than 26m ounces or more than 40 per cent of last year's world gold production, suggested that there was perhaps new buying by investors who do not traditionally venture into the precious metals market. The purchases were worth about $6.9bn, relatively small by equity or bond market values, but very large for gold. Silver, platinum and palladium have also been enjoying near-record volumes of interest in recent weeks. Previous large open interest volumes were followed by events that rapidly moved gold prices. In March 1993, George Soros and the late Sir James Goldsmith announced they were buying gold; in January 1996, Barrick Gold, one the world's largest gold producers and major proponent of gold hedging, announced it was closing up to a third of its hedge book; and in September 1999 when Wim Duisenberg, president of the European Central Bank, announced the formation of the Central Bank Gold Agreement. Rumours about a renewal of the gold agreement was one of the reasons analysts gave for the increase in open futures contracts following confirmation this week that the Bank of Greece sold 20 tonnes of gold last week, raising €200m. Greece is the only member of the eurozone not part of the agreement, which expires inSeptember and was widely seen as joining the pact in any renewal. Mr Smith said options for about 60 tonnes worth of gold were in place at strike prices of between $400 and $500 a troy ounce. Spot gold was trading at $373.25/$374.00 a troy ounce, up more than $10 on the week, but about $15 below the six-year high of $388.50 reached in early February. "This could be enough to make some gold producers reduce their hedge book, so that they don't miss out on any price gains," Mr Smith said. Gold miners hedge a proportion of their production at fixed prices for a future delivery, but recent years they have reduced their hedging positions and this has in turn helped lift gold prices.

To: TobagoJack who wrote (37547)	8/30/2003 1:55:24 AM
From: EL KABONG!!!	Read Replies (1) \| Respond to of 74559

Interesting analogy... online.wsj.com THE MACRO INVESTOR By STEVE LIESMAN For an Economics Lesson, Stick Your Hand Out the Car Window Next time you're driving along, stick your hand out the window for an economics lesson. That wind you feel, you should realize, doesn't stop your forward progress. It is created by your forward progress. The faster you go, the stronger the wind. It's called drag and the worst it can ever do is slow you down, not stop you. It is the wind you feel against your hand when you are at a stoplight, a headwind, that has the most serious potential to impede your motion. This is a critical distinction for investors to understand as the economy launches (or maybe lurches) towards recovery. There are a host of factors out there that qualify as bona-fide headwinds. But they are different from the winds, or drag, created by economic growth. A lot of economic analysis these days seems to confuse headwinds with drag. Take housing. There's an awful lot of worry out there that the housing market could crash as higher interest rates depress home prices and home building, and that this represents a potentially fatal headwind for the recovery. After all, growth in the housing market, both from new home sales and higher home prices, has helped underpin growth amid slower activity elsewhere in the economy. Yet that concern shows a fundamental misunderstanding of both the economy and the housing market. Housing could cool some as a result of higher rates brought on by speedier economic growth. It won't and can't be decisive in determining whether we grow or not. Stick your hand out the window again a couple of months from now. Some of the wind you'll feel is potential push back from a slowing housing market. But you're still cruising along. The housing market might slow some as a result of higher interest rates, but a crash seems like a longshot. At least that's what we've learned from the data in the past week or so. Housing starts have gained in each of the past three months. Existing home sales hit a record 6.12 million at an annualized rate in July. And here's a great stat, courtesy of Celia Chen at Economy.com: "By the end of this year, home sales will likely have been rising nearly non-stop for thirteen years.'' That's a baker dozen of years in which interest have gone down and up. Now, a lot of those housing home runs we've been hitting are courtesy of the record low mortgage rates of the past several months. They've gone away. But does that mean housing collapse? Hardly. Interest rates may serve as a drag on housing, but they aren't the primary engines of the industry. Demographics in the form of growing household formation (the children of the baby boomers outnumber the boomers themselves), new immigrants and the overall economy are the drivers. "The drag [from housing] will not be severe if hiring resumes as we now project," wrote the economists at UBS Warburg in an analysis this week. "The added growth in take-home pay will help to keep new homes affordable despite the rise in mortgage rates." So a decline in housing from current record levels is drag. It's not a headwind, that is, independent of the speed of the economy. To the extent that higher interest rates are a reflection of better growth prospects, they are also drag, not headwinds. The same argument can be made about the stronger dollar. The dollar's reversal in recent weeks seems to coincide with the recognition by markets of greater U.S. growth prospects (along with more intervention from the Japanese government.) So that too is a byproduct of our car's speed. It's drag. The question then becomes whether you create so much drag that you eventually begin to slow. Interestingly, for engineers calculating real drag, relative speed is among the most important variables. (Speed is so critical that the drag equation uses half the square of the object's velocity.) The same is true for the economy. At growth rates or speeds that are below the potential of the economy, drag from higher interest rates have less of an impact on growth if those rates are still relatively low. As the economy's speed increases, and rates rise, these factors matter more. "Because you are going so much slower than capacity, the fact that you feel some wind against your hand is no big deal," says Stu Hoffman, economist at PNC Financial Services in Pittsburgh. "It's like going from a standstill to 30 miles per hour. It's when you're going 100 mph and the capacity of the engine is only 70 when internal fatigue could build up." So a yield of 4.5% on the 10-year Treasury still allows for plenty of growth. But Mr. Hoffman says he starts to get worried when rates rise into the 6% or 7% range. Finally, there are legitimate headwinds out there. The ever-growing budget deficit, higher oil prices and the cost of war in Iraq are gusts in the face of the recovery. They could meaningfully slow us down. Just don't be spooked by the byproducts of economic growth. Housing can slow, interest rates can rise and the dollar can appreciate all without crippling the recovery. Economic growth created those winds. And it'll drive right through them. OK, bring your hand back inside the car now, before you get hurt. If you'd like to reach Steve Liesman, write to him at steve.liesman@nbc.com, and place "Attn: Macro Investor" in the subject line, or write to newseditors@wsj.com to have a comment published about the Macro Investor. Updated August 28, 2003 6:17 p.m.