GoldSeek's Peter Spina: U.S. must sacrifice the dollar or the economy

Gold Tallies Two-Day Loss
of More Than $11

Price Climbs in Electronic Session
After Fed Minutes;
Metals Index Up Slightly

By Myra P. Saefong
CBSMarketWatch.com
Tuesday, August 29, 2006

http://www.marketwatch.com/News/Story/Story.aspx?column=Metals+Stocks&si...

SAN FRANCISCO -- Gold futures fell in tandem with oil Tuesday to tally a two-day loss of more than $11 an ounce, then moved higher in the electronic trading session as investors weighed the prospects for metals demand and mulled the minutes from the Aug. 8 Federal Reserve monetary policy meeting.

"The FOMC minutes detail the growing fears of the weakening U.S. economy while trying to downplay inflationary pressures," said Peter Spina, chief investment strategist at GoldSeek.com.

The choice remains clear: "you must sacrifice the economy or the dollar," Spina said, explaining that higher rates will help support the ailing dollar while crippling the fragile economy and "it does not appear this will be their route."

The market could be "looking at rate cuts in 2007" and this will "drive another nail into the dollar's coffin," Spina said. The falling value of the dollar "will be another strong driving force for the gold market as we look into 2007 and beyond."

A new Fed staff forecast of below-trend growth over the next year and a half was a key factor in the central bank's decision to stop tightening after two years of steady rate hikes, according to the minutes of the meeting released on Tuesday.

Minutes from the meeting were released at 2 p.m. Eastern time Tuesday -- shortly after the close of regular metals-futures trading in New York.

At that meeting three weeks ago, the central bank left rates unchanged for the first time in two years, although there was one dissenting voice on its policy-setting committee.

Gold for December delivery climbed back over $620 an ounce in electronic trading Tuesday evening in New York, trading up $1.90 at $621 immediately after the Fed minutes were released.

"Looks like the Fed may indeed get its wishes (at least as regards the inflation-combating stance is concerned) -- and then some," said Jon Nadler, an investment products analyst at bullion dealers Kitco.com.

"The combination of the slowdown in the housing market, the effects of higher energy prices on household purchasing power, the waning impetus of household wealth effects on consumer spending, and the effects of past policy tightenings is not particularly appetizing, and the economy now has 'stagflation' written all over it, he said.

Before the details on the Fed meeting were released, December gold closed down $4.80 at $619.10 an ounce on the New York Mercantile Exchange, marking its lowest closing level since June 29.

The contract touched a five-week low of $615.50 earlier, tracking a sharp selloff in oil prices as Tropical Storm Ernesto stayed away from oil and natural-gas infrastructure in the Gulf of Mexico.

Crude futures for October delivery closed below the $70-a-barrel level Tuesday for the first time since April.

Over the past week or more "the gold price has come under pressure from Comex (the commodities exchange division of Nymex), and not from other global gold markets, giving rise to the belief that this is a fund-driven assault on the gold price, tying in their selling to the declining oil price," said Julian Phillips, an analyst at GoldForecaster.com.

The oil price hasn't fallen significantly, Phillips said, and the "fundamentals remain unchanged in that market, so with the rising demand from the physical sector appearing at these and higher levels, the funds are very much in danger of drawing back a bow string on the gold price," he said. And "the further back it goes, the tighter the bow."

Adding pressure to gold prices Tuesday, the U.S. consumer confidence index fell to 99.6 points in August from a revised 107 in July, according to the Conference Board.

"Stagflation is indeed the name of this game -- normally good for gold, but not today," said Nadler.

Lower confidence means no luxury spending, which means poor seasonal jewelry buying expectations and lower gold prices -- possibly to $600, he said.

The dollar saw mixed trading following the consumer confidence data, with the greenback trading down against the yen but up against the euro.

Gold traders also continued to track developments related to Iran. On Tuesday, President Mahmoud Ahmadinejad challenged the authority of the United Nations Security Council, the Associated Press reported. His comments came days ahead of the Aug. 31 U.N. deadline for Iran to halt uranium enrichment.

Ahmadinejad also challenged President Bush to a live, televised debate on world issues, the report said. No immediate U.S. response was made to the offer, but the White House has so far refused all offers with Iranian officials that would offer direct dealings, the AP said.

Iran last week offered to open talks with the West on its nuclear program but has insisted it will push ahead with its enrichment program in defiance of the U.N.

On Saturday, Ahmadinejad inaugurated a heavy-water plant and on Sunday, Iran tested a missile fired by submarine during war games. The move raised concern Iran could disrupt Persian Gulf tanker traffic if tensions worsen with Western nations.

"That the appeal of gold as a safe-haven asset in the midst of the very region most affected by uncertainty and violence diminished precisely while such drama was unfolding is quite troubling, indeed," said Nadler.

"We cannot chalk up the reluctance to buy gold by locals to simple volatility. There must be a perception afoot that higher prices are unsustainable or that geopolitics do not matter," he said.

Against this backdrop, December silver closed at $12.322 an ounce Tuesday, reversing from an earlier low of $12.02 to close up 12.5 cents. "Volume as thin as we have had makes for exaggerated moves in either direction," said Nadler. "It felt like early book-squaring before Labor Day."

October platinum closed down 20 cents at $1,227.50 an ounce and December palladium fell $4.85 to end at $342.90 an ounce. December copper lost 6.65 cents to finish at $3.384 a pound.

Tracking the metals equities, indexes closed modestly higher after trading lower for most of the session, as gold prices moved higher in electronic trading.

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