MARKET COMMENT
February 20, 2007
It’s useless to argue with current thinking when it’s in
command.
The historical correlation
between gold and crude oil prices is not that reliable.
But if it’s what some pundits wish to use to explain
the smackdown in gold today then they’ll use that
until they can’t.
Typically gold trades either
lower or higher based on inflation expectations [higher if worries persist];
current economic conditions [higher if robust]; interest rate policy [lower if
rates rise]; and most commonly with the level of the dollar [higher when Bucky is weak].
It’s just that simple.
Now from all technical measures gold heading into trading
today was not much overbought.
We’ve
been pointing out for weeks now how difficult a grind it has been for gold to
push past various resistance levels.
Currency markets don’t justify the smackdown
today as the yen was weaker while the euro did little.
So what’s going on?
First, important Asian investors are still on holiday and trading
remains thin.
The meeting of the
Japanese central bank is also putting gold on the defensive should they raise
interest rates.
These two circumstances
alone set the metal up for a sell-off.
Now there’s plenty of conspiracy talk about “cartels” and
central banks that may wish to hold the metal back.
Frankly, we just don’t know.
There may be forward selling by commercial interests
[miners] and maybe even a sense from some important trading desks that with
liquidity low, the market was ripe to get picked-off.
The latter resonates best with my
thinking.
Now the stock market was the beneficiary of some “happy talk”
from Fed Governor Susan Bies who after much pundit
translation convinced everyone the Fed isn’t going to raise interest rates, the
housing market is just fine and the subprime mortgage
problems are a mere “sliver” of the mortgage market.
Not to worry was the message.
And despite poor earnings results from Home Depot investors
chose to focus instead on good reports from WMT and bid stocks higher.
Meanwhile, overseas Asia
lingers on holiday with volume light and folks celebrating Carnivale
are just returning home today.
It’s
amazing anything happened.
The above charts generally sum things up for this first day
of trading in a shortened week.
Gold
markets should be lively the balance of the week as important players in Asia are quiet and gold bears are stalking for
opportunities.
I’m willing to keep an
open mind that perhaps folks can make real a gold/oil price correlation that
endures.
Until then, I’m a skeptic but
respectful of the tape.
Disclaimer:
Among
other issues, the ETF Digest maintains positions in: GLD, RCD, SPY, RSP, MDY,
MVVV, IWM, UWM, RYT, IGN FDN, KCE, PPA, PHO, PZI, INP, EWM, EWY, EWJ, EWA, EWC,
EWZ and EWW.