During periods of yen strength, Japanese investors tend to buy more U.S. dollar-denominated gold, as it becomes cheaper in yen terms
(Interesting set of factors in play here. Best of luck... pb)
sg.biz.yahoo.com
UPDATE: Mixed Outlook For Gold Post-FOMC; USD Still Key
By Nicholas Sinclair
Sydney, July 1 (Dow Jones) - The bullion market's outlook for gold prices is decidedly mixed following the U.S. Federal Reserve's decision Wednesday to increase benchmark interest rates for the first time in four years.
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The one area of agreement among bulls and bears is that the U.S. dollar will remain the most reliable driver of gold over the medium term, maintaining its tight negative correlation with the yellow metal.
Making any kind of price forecast on gold is thus now, as much as ever, an exercise in accurately projecting the American currency's likely path against its chief rivals in the weeks and months ahead, traders and analysts said.
As was widely anticipated, the Federal Reserve's Open Market Committee raised its target for the Fed Funds rate by 25 basis points to 1.25% in a unanimous decision.
In its traditional post-decision statement, the FOMC signaled that its neutral bias on monetary policy remains intact and said that with "inflation still expected to be relatively low... (it) believes that policy accommodation can be removed at a pace that is likely to be measured."
This was interpreted as a relatively dovish statement, meaning the rate hiking campaign that is now underway will probably be slow and cautious, several Asian gold traders said early Thursday.
As a result, the U.S. dollar slipped against most of its key rivals following the announcement and spot gold edged slightly higher, touching an intraday peak of US$395.55 a troy ounce Thursday morning in Asia. At 0610 GMT, spot gold was quoted at US$394.65/oz, but with key regional trading center Hong Kong closed for a holiday, players said volume was very light.
Prior to the Fed decision, spot gold was last quoted at US$393.25/oz.
The outlook for future interest rate decisions by the FOMC is of central importance to gold, since, all other factors being equal, rising rates are usually bearish for the yellow metal on several fronts.
First, higher rates stand to boost the U.S. dollar by closing the yield gap with other currencies. Second, they could increase spreads between nearby and forward gold prices, thereby giving producers more incentive to hedge. Third, until now low rates have benefited gold by reducing the opportunity cost of holding it over interest-bearing securities.
FOMC'S "MEASURED" APPROACH WON'T NECESSARILY LIFT USD
Notwithstanding the Fed's indication that it is "likely" to move slowly, the now clear upward direction that lies ahead for U.S. rates should make the U.S. dollar more attractive, "and that's going to put pressure on gold," a Sydney trader with a British dealer said Thursday.
But such a call on the dollar, which underlines almost all bearish calls on gold, is far from universal.
"As the Fed moves along in its gradualized approach, that's not particularly supportive for the dollar," David Durrant, chief currency strategist at Swiss-based Bank Julius Baer, told Dow Jones Newswires Wednesday after the FOMC announcement.
He suggested demand for dollars was unlikely to jump as rising U.S. rates aren't typically bullish for U.S. equities, and U.S. yields aren't expected to rise enough to compensate for building inflationary pressures to make U.S. bonds an attractive place to invest either.
A technically-oriented Singapore gold analyst, who isn't overly concerned by the prospect of a firming U.S. dollar, said that after a quiet end to this week, the yellow metal should edge higher through July and possibly target US$410/oz.
Bullion's successful tests of support near US$372/oz in mid-May and US$381 in mid-June were both encouraging signs, he said. The same applies to gold's tendency to gradually establish "higher highs and higher lows" within the US$370-US$405 range that has held since mid-April, the analyst added.
According to UBS AG, another gold bull, current near-term support levels lie at US$388/oz, then US$385.
"We remain positively disposed towards gold and hold our one month and three month forecasts of US$405/oz and US$425/oz respectively, and our year- end forecast of US$450/oz is also unchanged," Geneva-based analyst Andreas Maag said Wednesday.
SUPPORT ON DIPS COULD COME FROM ASIAN PHYSICAL BUYING
While the aforementioned views are more bullish than most, market participants largely agree that gold is unlikely to witness a steep sell-off in the very early stages of the FOMC's rate hike campaign.
In addition to good technical support from chart-following players, the yellow metal is likely to attract increased physical buying in Asia on any dips, two separate traders in Sydney and Singapore said.
This latter would likely intensify around the US$385/oz level, the Singapore trader, with a medium-sized British bank, said.
Another source of support for gold could also come from Asia, in the form of increased Japanese interest on the back of a strengthening yen, a Tokyo trader with a major Japanese dealer said.
The U.S. dollar-yen cross-rate has fallen steadily from mid-May, when it peaked at Y114.87, to last week's low of Y107.04.
At 0555 GMT, the dollar-yen cross was quoted at Y108.03, but was once again under pressure following a stronger-than-expected quarterly "tankan" business sentiment survey from the Bank of Japan, which boosted the attractiveness of the Japanese currency.
During periods of yen strength, Japanese investors tend to buy more U.S. dollar-denominated gold, as it becomes cheaper in yen terms, while refraining from purchases of yen-denominated Tocom futures.
The benchmark June 2005 Tocom gold contract was down Y3 a gram late Thursday at Y1,372/gram, and is likely to face further pressure in the near term as the yen gathers pace, the Tokyo trader said. |
