Daily Commentary

Fed Decision Causes Dollar To Soar

Yesterday, after the Fed decision gold rallied $15 based upon a softer dollar and expectations that the Fed would remain accommodative.  Overnight analysts seemed to have changed their opinion and are now betting the Fed will not be as accommodative as previously expected.  That caused the dollar to soar today, up 60 basis points at 73.11.  Oil came off as the dollar rose, falling $.50 to $112.95.  It also caused gold and silver and other precious metals to fall back along with other commodities.  In early trading gold is down $10, silver down $.30 and the Dow up 22 points.

One major caveat is that the European and Russian markets are closed today for May Day.  Several other markets around the world also observe this holiday.  Therefore, we may be seeing somewhat of an aberration in these markets as a result of thin trading.  The biggest factor is that the euro is very weak.  With the European markets closed, currency trading is likely very thin.

Nevertheless, we must observe that gold and silver have both broken down below key support levels.  The next major support level for gold is $850.  If that level fails then one would have to assume that $800 comes into view.

As we look at the economic data the Institute for Supply Management data continues to suggest contraction in the economy.  When we look at the prices paid component of that index, it also suggests rising inflation.  Of course we don't have to be an economist to recognize both of those factors.  Jobs are harder to get, layoffs are increasing, Home Depot is closing fifteen stores and abandoning plans to open fifty more, and we see the same kind of situation occurring throughout the economy.  In the construction field we continue to see construction spending in the residential sector down 4.6% for March.  There has been virtually no improvement in the housing sector and we have yet to see the bulk of foreclosures impacting the banking system. 

It simply looks to me as though these problems are not getting better.  However, government officials continue to talk this market up and analysts on Wall Street continue to promote the equity market heavily.  In my view this is a great deal of talk, but little in the way of substance.  I cannot see any improvement in the financial sector or the economy.  Therefore, I continue of be of the belief the problems will actually worsen not improve over the next several months.  In fact the Fed's statement itself pointed out that they expect economic difficulties to persist into next year.

Professor Morici, Professor of Economics at the Maryland School of Business and the former Chief Economist at the U.S. International Trade Commissions says he thinks the malaise will continue.  He sites several structural problems such as the growing trade deficit runaway, oil prices, poor employment situation and significant job loss.  When we add in the massive budget deficits and the impossibility of meeting future expenses, there seems to be little to justify this expectation that the Fed will tighten policy.

One of the factors in the Institute for Supply Management report was that prices are rising at a "highly inflationary rate".   It is difficult to understand how the dollar could be strong and precious metals weak in that inflationary environment.  It suggests there has been some significant intervention in the dollar market and in the precious metals sector.  In my view it is unlikely for such intervention to produce lasting results or to persist for any lengthly period of time. 

Many analysts continue to believe the declines we have seen over the last month in the precious metal sector are part of a continued period of correction and consolidation.  While it has gone on longer and has been deeper than many have anticipated it nevertheless is within the ranges that we have seen repeatedly throughout the context of this bull market. 

For example in the year 2006 gold experienced a similar correction.  It was nevertheless in a major bull market.  At that time gold moved from approximately $730 an ounce down to $560 an ounce.  Another correction and consolidation resulted in a correction from $650 to approximately $575.  Both were significant periods of correction, but did not violate the long-term up trend.  Similarly we are now experiencing what may appear to be a significant correction albeit not as large as we saw in 2006.  Gold continues to be well above its long-term trend lines.  It is well above its 200-day moving average.  Gold remains extremely oversold.  Both of these indicators would suggest this period of correction and consolidation should conclude relatively soon. 

Many analysts continue to believe gold presents an excellent investment opportunity and it will rise above $1,000 an ounce by the end of the year.  Moreover, it is still on track to reach the kind of average annual prices that have been anticipated by the major analysts.  These are all factors that suggest gold continues to be an excellent buying opportunity.

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