Weekly Financial Review
Gold tries to glitter again.
Published: May 20, 2013
Grain markets spend much of their time fretting about USDA reports. On Wall Street historically the oracle is the Federal Reserve. That's been especially true in the wake of the financial crisis, when the central bank's massive interventions into monetary policy flooded the banking system with cash and sent interest rates to record lows.
Gold and other commodities were the beneficiaries of this so-called quantitative easing, at least for a while. This year has been a bad one for gold especially, which spent the last eight months in a steady downturn. Lack of inflation, despite the money flow, kept gold on the defensive, as many economies struggle to avoid being locked into a deflationary spiral.
The precious metal took a further hit into the start of the week, on ideas the Fed may begin scaling back its easing, selling some of the bonds and other debt it purchased. That would raise interest rates, because rates move inversely to bond prices. Higher interest rates, in turn, would make the dollar more attractive, one reason the greenback rallied to its highest level last week since July 2010. This appeared to remove one of the other key rationales for buying gold, namely as a hedge against a weak dollar.
But there are signs these trends may be abating, at least for a while. Gold looked like it was ready to test its spike low from its mid-April collapse. Instead, prices reversed sharply higher, with the five-week interval suggesting potential for a short-term double bottom.
The dollar's reaction was also in line with this trend. The greenback dropped sharply on ideas maybe the Fed wouldn't end its easing program quickly. One trigger for the dollar weakness was a firmer Yen. While the Bank of Japan's own easing sent the nation's currency into a tailspin, comments by officials that it may not need to get any cheaper triggered short covering.
The stock market, meanwhile, traded both sides of a new record high. The Dow's gains achieved the objective from its move above the April high, with the S&P also looking overbought. But other news on the financial front suggested the market could have more gains ahead of it after a pause seasonally.
The Congressional Budget Office, for one, projected a sharp drop in the federal budget deficit for the year, falling to just 4% of GDP – down from 10.1% at the depth of the financial crisis. To be sure, the budget sequester, which is draining some demand from the economy, is one cause of the declining deficit. But tax revenues are also up as the economy continues its slow recovery.
Along with good corporate earnings, low interest rates and slowing falling unemployment, the data suggest potential for year-on-year gains in stocks to top 20%.
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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and farm management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key farm crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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Tagged: usda, farm management