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Gold May Rise as Fed Likely to Leave Benchmark Rate Unchanged May 3
By Claudia Carpenter
Bloomberg News Service
Sunday, May 2, 2004
http://quote.bloomberg.com/apps/news?pid=10000080&sid=adFYmvdcLnTE
NEW YORK -- Gold may rise this week, ending a five-week
slide, amid speculation the Federal Reserve on Tuesday will
hold target interest rates at a 45-year low, boosting the
metal and driving the dollar lower, a Bloomberg survey
shows.
Twenty-seven of 34 traders, investors and strategists
surveyed from Sydney to New York on Thursday and
Friday advised buying gold. Six recommended selling, and
one advised "hold."
Gold had its biggest monthly drop in 19 years in April as
the dollar rose against the euro on expectations the Fed
will boost its benchmark rate as early as August. A rising
U.S. currency erodes the appeal of gold as an alternative
to other dollar-denominated assets. The metal touched a
five-month low last week on the prospect that demand
from China may decline.
"I don't think the Fed will do anything to hurt the economy
or hurt President Bush's chances of re-election," said
Jeffrey Ward, chief executive officer of Metallic Ventures
Gold Inc., which started producing gold in Nevada in
February after four years of development. "I would bet they
won't do anything at least until after the election."
Gold for June delivery on Friday rose 40 cents to $387.50
an ounce on the Comex division of the New York
Mercantile Exchange. The most-active contract fell 9.5
percent in April, the biggest such decline since July 1984.
The metal fell 2.1 percent last week and 1.5 percent the
previous week.
"Some people have difficulty conceiving of a rate increase
in a presidential election year," said Tim Evans, senior
commodity analyst at IFR Markets in New York. "A
weaker dollar and low interest rates, especially in an
environment when the economy is growing: That
combination is really ideal for gold."
Evans gave a buy recommendation for gold after correctly
predicting in the past two weekly Bloomberg surveys that
the metal would fall. Most analysts had said bullion would
increase.
The price on Thursday touched $377 an ounce, the lowest
since Nov. 7, after Chinese officials said they will try to
slow economic expansion. Gold rebounded late Thursday
and on Friday as concern eased about a possible drop in
demand from China, the world's third largest gold-jewelry
user. The metal also got a boost from the dollar's gain
against the euro late last week.
"The violence of the selloff is misguided and predicated
upon Fed tightening sooner rather than later," said Dennis
Gartman, a Suffolk, Va.-based economist and editor of the
daily Gartman Letter. "With the Chinese doing what they
can to stem their economy, the Fed's urge to tighten
shall have tumbled.'
All 83 economists surveyed separately by Bloomberg
expected the Fed's Open Market Committee to keep the
benchmark federal funds rate at 1 percent when it meets
Tuesday. After the last meeting on March 16, gold rose
1.1 percent.
U.S. rates at half the benchmark of the European Central
Bank and a quarter of the rate by the Bank of England
boosted the allure of gold as a hedge against
dollar-denominated assets. Gold rose to a 15-year high
of $433 an ounce on April 1.
Some analysts said the Fed meeting is a reason to sell.
"Normally before an FOMC meeting, you will see people
liquidate in case anything unexpected happens," said
Bernard Sin, chief precious metals trader at MKS Finance
SA in Geneva. "The Japanese will be out for the Golden
Week holiday, so there will be a lack of demand."
Gold demand typically falls at the end of April and the
beginning of May, Newmont Mining Corp. President Pierre
Lassonde said last week. "The wedding season is over in
India and Italian manufacturers start to pull back on their
purchases for holidays in July."
Some buyers may not be able to resist the metal at these
prices, other analysts said.
"It is a good buy above $388," said Harish P. Rajdev, an
analyst in Ahemdabad, India, who advises 150 bullion
traders.
"Traders can re-enter the market when the price falls to
$376 an ounce," said Wang Xinyou of the Agricultural
Bank of China. "We believe that buying from bargain
hunters, including those from China, will send prices on
a rebound."
Should the Fed unexpectedly raise rates, gold still may
gain, said Patrick Chidley, a mining analyst at Barnard
Jacobs Mellet (USA) LLC in New York.
"Gold bears should be wary of missing the point that
while, in the short term, higher interest rates may
support the dollar, rates are being raised to try to counter
inflation," he said. "One might expect gold to perform well
in an inflationary environment too."
The 79 percent of traders who advised purchasing gold this
week in the Bloomberg survey compared with buy
recommendations from 60 percent last week and 59
percent the week before.
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RECOMMENDED INTERNET SITES
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NEWS AND ANALYSIS
Free sites:
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http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kuik.com/KH/KH.html
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Eagle Ranch discussion site:
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Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
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