The financial crisis in the US had already produced extremely negative headlines and a further pull-back in the US dollar and consequently a further rise in the gold price looked a certainty when the net long positions of speculators hit a new all-time high of 202,000 contracts at the end of October 2007. Based on the specification of the gold future on the COMEX of 100 troy ounces per future, this translated into a volume of roughly 628 tons, or approximately 25% of global mine production. Up to the end of the year, the gold price ultimately fluctuated around $800 per troy ounce, without any indication whether speculators would eventually unwind their extremely high positions, which would have triggered a strong pull-back in the price, or whether the financial crisis would escalate once again with the turn of the year. But the US economic data released at the turn of the year were disappointing across the board.
In December, non-farm payrolls posted their slowest growth since 2003, and the unemployment rate surged to 5%. In addition, the purchasing managers' index fell to its lowest reading in almost five years, and durable goods orders were once again much lower than expected. In the interim, the S&P/Case-Shiller Index showed a 6% y-o-y decline in home prices. The Fed became, therefore, very concerned about the economy and slashed the key interest rate by 75 basis points from 4.25 to 3.50% in an emergency inter-meeting move. This demonstrated a dramatic shift from inflation to growth concerns. Fed officials hinted clearly at further rate cuts in future. Futures markets, now, even signal a possible rate cut below 2.50%. It is, in any case, likely that the next cut will come as early as next week, with a clear risk that a further rate cut may follow on March 18. Much will depend on the impact of the $140 bn or 1% of GDP fiscal stimulus program proposed by President Bush.
This development is decidedly positive for the gold price. The combined fiscal stimulus program and accommodative monetary policy deliberately ignore the rise in inflation: consumer prices +4.3%, producer prices: +7.2%, import prices: +10.9%. At a key rate of 3.50% and a T-Note yield of 3.45%, US key rates are clearly negative at both the short and the long end. As a result, the gold market has a very positive time ahead of it. |
