Gold hits record high as dollar sinks and inflation fears revive

The New Gold Rush is on.

The metal soared to record highs early today, fueled by fresh fears that the dollar's status as the world's preeminent currency will continue to erode.

Gold futures in New York were trading at nearly $1,043 an ounce at about 8:15 a.m. PDT, up from $1,016 on Monday and topping the previous peak of $1,033.90 set in March 2008.

The dollar, which has been drifting lower for most of this year against other major currencies, took another hit today after Britain's Independent newspaper said secret talks were taking place among Arab states, China, Russia and other countries to stop pricing oil in dollars, and shift instead to a basket of currencies including the euro, the yen and the Chinese yuan.

Bloomberg News reported that Saudi Arabian Central Bank Governor Muhammad al-Jasser said his nation hasn’t held meetings with other oil producers or consumers on shifting away from the dollar, but that hasn't been much comfort to the buck today.

The euro rose to $1.475 from $1.466 on Monday. The yen strengthened to 89.01 to the dollar, from 89.51.

The dollar also came under pressure after Australia's central bank raised its benchmark short-term interest rate -- another sign of global economic recovery. To gold investors, that means a higher likelihood of rising inflation ahead.

The weakness of the dollar, and the risks posed to the greenback's status as the world's reserve currency, have been the biggest motivators for gold's fans this year.

But some analysts say gold's ascent reflects increasing doubt about the value of all paper currencies, as the world's central banks have pumped enormous sums of money into the financial system to rescue the economy after the U.S.-led crash.

“Gold is acting like the ultimate currency,” Chip Hanlon, president of Delta Global Advisors Inc. in Huntington Beach, noted on Bloomberg. “Central banks are following the same monetary course and trying to stimulate and inflate their way back to growth. Everyone’s concerned about the dollar, but it’s not like you can hate the dollar and fall in love with the euro or the yen.”

“Gold is not just seen as an inflation hedge here in the U.S. but is rather acting as a hedge against all currencies,” Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York, noted on Bloomberg.

-- Tom Petruno

Photo credit: Kim Jae-Hwan / AFP/Getty Images

The dollar's in the dumpster, and nobody's worried -- for now

"A strong dollar is in America’s best interest," the Bush and Obama administrations have repeatedly assured us.

And yet for most of this decade the dollar has been sliding. Now, the greenback again is one of the world’s currency weaklings. But global financial markets, and governments, seem to be taking it in stride.

The dollar has taken a renewed pounding over the last two weeks, driving the DXY index -- which measures the buck’s value against six other major currencies -- to nearly a one-year low.

The euro has been the big winner as the U.S. currency has lost ground. The euro was at $1.47 on Thursday, its highest level since last September and up from $1.42 on Sept. 1.

But the dollar’s troubles haven’t set off alarm bells in Washington. Nor have the Chinese raised a new stink about the buck’s weakness and the devaluation threat it poses to their American asset holdings.

The lack of a ruckus this time reflects that the dollar is dropping for the right reasons, currency analysts say.

For one, investors worldwide are feeling better about the global economy, which is pulling money out of the classic hiding place of the dollar in favor of  riskier assets, including emerging-market stocks.

"A lot of money is coming out of safe-haven dollar bets," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.

Investors and traders also are reacting normally to the interest rate differential between the U.S. and other countries: With U.S. short-term interest rates lower than those of most other nations, and the Federal Reserve in no hurry to raise them, the dollar naturally is at a disadvantage to currencies in countries with higher rates.

Yet even as the greenback has lost ground in recent weeks, there doesn’t appear to be a rush out of U.S. Treasury bonds by foreigners whose assets are devalued with each tick lower in the dollar. The yield on the 10-year Treasury note, at 3.39% on Thursday, was unchanged from its level on Aug. 31.

What's more, Wall Street has continued to rally, pushing major market indexes to 11-month highs.

The dollar's decline "doesn't seem to be impacting U.S. stock or bond markets," says Sophia Drossos, a currency strategist at Morgan Stanley.

Meanwhile, there are some key constituencies for whom the buck's losses are a blessing. U.S. exporters obviously love a sliding dollar because it makes their products cheaper for foreign buyers. And because most commodities are priced in dollars, oil and other raw materials get cheaper for countries with strong currencies.

At the same time, discounted U.S. goods and services become more of an attraction for foreigners looking to vacation here.

For U.S. investors who own foreign stocks and bonds the dollar's drop this year has brought a windfall, just as it did for most of 2002 through 2007. A lower dollar means securities denominated in strong foreign currencies are worth more when translated to dollars.

The Canadian stock market is up 28% in Canadian dollars this year, but it's up 47% in U.S. dollars. The Australian market is up 26% in Aussie dollars -- and 56% in U.S.

But as with all currency moves, there are losers in the buck's stumble. Foreigners' U.S. assets are declining in value (or, in the case of stocks, aren't rising as much). At some point, foreign exporters in Europe, Japan and elsewhere are likely to start screaming about an unfair trade disadvantage. If they're forced to mark up prices of their goods, we'll import inflation. Lastly, Americans who were thinking about foreign vacations may have to reconsider.

The big question is how low the dollar will go. For now, it's still above the worst levels (or best levels, depending on your perspective) of 2008. But it's getting closer to those depths. If it breaks through, there will be a new torrent of speculation about the dollar losing its status as the world's primary currency, and about the risk that that would entail for an economy so dependent on foreign creditors.

Americans have been warned for decades about a possible dollar panic if the world were to lose faith in us. The current decline is no panic. Neither we nor the rest of the world can afford for it to turn into one.

-- Tom Petruno

 

 

The Nightmare Portfolio of 2009

Is it possible for an investor to be losing money in financial markets this year?

With an incredible amount of bad timing and wrong-headed conviction, you actually could have constructed a portfolio on Jan. 1 that would be deep in the red by now -- even as most stocks, bonds and commodities have rallied sharply.

Basically, if you bet heavily at the start of the year on some version of economic and market Armageddon unfolding in 2009 -- and you’ve refused to budge from that bet -- you probably are in a world of hurt.

Though I concede the year isn’t over, and it’s possible that financial Armageddon has only been deferred, here's my idea of the Nightmare Portfolio of 2009:

--- A long-term Treasury bond fund. As 2008 ended Treasury yields had plunged to near-record lows as some investors flocked to the relative safety of government bonds, fearing that the worst was yet to come for the economy and the financial system.

Bad move: Treasury yields began to rebound with the turn of the calendar to January, as the market focused less on the economic meltdown that was in progress and more on Uncle Sam’s massive borrowing needs. When yields go up, bond prices drop.

The 30-year T-bond yield, which fell as low as 2.52% in December, now is at 4.26%. The average total return for long-term T-bond mutual funds this year, according to Morningstar Inc.: a negative 11.6%, as the plunge in bond prices has more than wiped out interest earnings.

--- A bear-market stock fund. With the Standard & Poor’s 500 index down 38% in 2008, and the worst of the recession clearly ahead as 2009 dawned, bear-market funds had huge appeal as portfolio hedges. By using derivative securities or "short selling" strategies the funds are designed to gain if share prices slump.

That continued to be the right market bet -- until stocks hit bottom in early March, turned up, and, so far, haven’t looked back. The average total return of bear market funds year-to-date: a negative 32.3%, compared with the positive 20.5% return of the S&P 500.

--- A strong-dollar fund. If you expected the global financial system to fly apart in 2009 it would have made sense to bet on the dollar rallying, figuring that investors would turn back to the world’s premier currency as a haven. In fact, the greenback rose sharply in January and February as fears of calamity mushroomed.

But once stock markets began to snap back in March the dollar’s allure faded as global investors began to reach for risk again. This month the buck is sliding anew, deepening the losses of funds that bet on dollar strength. Case in point: The Pro-Funds Rising U.S. Dollar fund now is down 9.1% for the year.

--- A natural gas fund. Specifically, the U.S. Natural Gas exchange-traded fund (ticker: UNG). Who knew that, despite the resurgence of crude oil prices this year, natural gas prices would continue to plummet -- to 7 1/2 year lows by early this month?

But there may be hope: Even amid a continuing glut of gas and weak industrial demand, gas futures prices have rebounded 48% since Sept. 3, and the UNG fund is up 30% since then. That may not be much comfort to investors who bought in late last year or early this year, however: The fund still is off 49% year to date.

-- Tom Petruno

Image: The soundtrack from the 1998 movie. (The world was saved in that version, too.)

 

'Feeding frenzy' sends precious metals surging

Gold and other precious metals soared again today amid a buying stampede.

Near-term gold futures in New York jumped $13.90, or 1.4%, to finish the session at $1,018.90 an ounce, a record closing high.

Silver rocketed 43 cents, or 2.5%, to $17.41 an ounce; platinum gained $29.80, or 2.3%, to $1,350.

"It’s really a feeding frenzy," said Larry Young, senior trader at Infinity Futures in Chicago.

Gold is up 7.1% so far this month, beating the 4.7% advance in the Standard & Poor’s 500 stock index.

Traders said today’s rally was stoked in part by another drop in the dollar’s value, which gives investors one of the best excuses for turning to metals as a way to protect their money’s purchasing power.

The DXY index, which tracks the dollar against six other major currencies, is at 76.18 today, down 0.5% from Tuesday and the lowest level in nearly a year. It’s down 2.5% just this month.

The greenback has been skidding in large part because investors are more confident about a global economic rebound. That is luring money into riskier assets, including many emerging markets. Brazil’s main stock index is up 6.9% this month, for example. The South Korean market is up 5.8%.

But there also is an undercurrent of fear about the dollar’s long-term outlook, given the potentially debilitating effects on the currency from the massive U.S. budget deficit. One way to lessen that debt load would be to allow inflation to rise, of course -- which would bolster the case for classic inflation hedges like gold.

For the moment, though, the precious-metals rally is mostly about momentum, many traders concede. "People who’ve been on the sidelines are going to jump in now," Young said.

Frank Lesh, a futures analyst and trader at FuturePath Trading in Chicago, said the metals also are benefiting as some traders turn away from oil futures, fearing that the Obama administration is intent on curbing speculation in that market.

"I think some of that speculative money in the energy markets is moving into gold now," Lesh said.

-- Tom Petruno

Photo credit: Kim Jae-Hwan / AFP/Getty Images

$1,000 or not, gold has been no slouch the last nine years

Gold is trying to get the world's attention again. Its devotees say it shouldn't have to work this hard.

The metal’s third attempt in 17 months to rise above the $1,000 mark -- and stay there -- failed last week. But another run seems likely this week.

Near-term gold futures in New York jumped more than $40 an ounce last Wednesday and Thursday, to  $995.80, before stalling out on Friday. The contract closed Friday at $994.90, down 90 cents for the day.

Is $1,000 a big deal for gold? It could be, if the metal could top that price and hold above it. At that point, investors who’ve been unsure about adding gold to their portfolios might decide it’s high time to get on board. Large, round numbers can do that to people -- and gold’s permabulls naturally would love to be able to talk about $1,000 in the past tense.

Crossing that mark for good also would give gold's fans a chance to remind the gold-free what they've been missing: The metal is on track for its ninth straight annual gain, a feat that few other investments have achieved in this decade.

Gold's winning streak lifted it from $279 at the end of 2001 to just over $1,000 in March 2008, before buyers began to balk. The metal rebounded from last fall's global asset crash to revisit $1,000 in February, only to quickly run out of steam again.

As the price began to lift off last week -- after treading water in recent months -- traders were hard-pressed to explain the sudden move, as I noted in this post on Thursday.

Much of gold’s strength since 2001 has derived from the dollar’s ongoing loss of value. The DXY index, which measures the greenback against six other major world currencies, reached a high of 120.90 in mid-2001. It closed Friday at 78.14, down 35% from the 2001 high.

Gold in this decade has resumed its role as the natural alternative to the dollar, and to all paper currencies, as a store of wealth -- a way to protect purchasing power.

But in recent months the dollar, like gold, had mostly just been running in place. The DXY index last week slipped just 0.3%, and was no lower than it had been a month earlier.

One theory making the rounds last week was that gold’s sudden strength was foreshadowing another steep drop in the dollar this fall. The greenback would be vulnerable if investors were to lose faith in a U.S. economic recovery.

President Obama’s declining poll numbers also could undermine the buck, if foreign investors were to equate his loss of public support with economic weakness.

The other popular explanation for gold’s fresh appeal is that some investors increasingly are wary of all paper currencies, fearing that the response of central banks worldwide to last year’s financial crash -- a massive injection of money into the banking system -- will set the scene for an inflation surge.

Even if inflation never flares, the simple argument for gold in a portfolio is that it should continue to play the same useful role of the last nine years: If you think the dollar has nowhere to go but down as the U.S. tries to borrow its way out of this recession, gold should stay on the opposite side of that seesaw.

And as a bonus, if the hard-core gold bugs finally are right about doomsday being just around the corner, you'll have your gold to trade for that one last can of spinach or tuna, or for that one last shotgun round.

-- Tom Petruno

 

Gold rallies, trying again to make $1,000 a floor instead of a ceiling

Gold made another run for the $1,000 mark today, only to stop short.

The metal soared for a second day, with near-term futures in New York rallying $19.20, or 2%, to $995.80 an ounce after gaining $21.90 on Wednesday.

In the last two years gold typically has attracted heavy interest when the dollar has slumped or when the stock market has tanked, although the metal dived with virtually all other assets in last fall’s global meltdown.

Today, however, stocks rallied modestly and the dollar was little changed against other major currencies.

So, why a big gold rally now -- after the metal’s price has mostly treaded water since mid-August?

Matt Zeman, a metals trader at LaSalle Futures Group in Chicago, says one story making the rounds is that gold buyers are expecting a big downdraft in the dollar soon, which conceivably could happen if faith in an economic recovery was to evaporate.

"There are a lot of big bets being made on the dollar getting weaker," Zeman said. Gold is the dollar’s archrival, competing against the greenback as a store of value.

It may not be pure coincidence that gold is flying just before the August employment report, which the Labor Department will release Friday morning. Economists expect a net loss of about 230,000 jobs for the month. A much bigger number could stoke new worries about the economy.

Some analysts say gold may be benefiting not just from concern about the dollar’s outlook but also from investor jitters about the future value of all paper currencies, as central banks around the planet pump massive sums of money into the financial system -- a recipe for currency debasement and inflation.

"It could be less about the dollar than that investors are fed up with all currencies," said Alan Ruskin, foreign-exchange strategist at RBS Securities in Stamford, Conn.

Or, some traders may just be trying to see whether they can push gold decisively over the $1,000 mark -- which could attract a new wave of investor interest at a time when industrial and jewelry demand remains depressed because of the economy.

The $1,000 level has been a ceiling for gold since the metal first crossed it in March 2008. The price quickly fell back after that rally.

In February, gold again topped $1,000, and again quickly retreated.

"Maybe the third time is the charm," Zeman said.

Some traders aren’t bothering with gold, focusing instead on silver, which today zoomed 93 cents, or 6%, to $16.27 an ounce -- a new 52-week high -- in futures trading.

-- Tom Petruno

Australia OKs Chevron's plans for huge gas field

Australia has given the green light to Chevron Corp.’s plans for a major natural gas production and liquefaction project off the country’s northwest coast.

The development of the Greater Gorgon fields is expected to provide huge quantities of liquefied gas for export to China and other Asian nations.

From Bloomberg News:

Environmental approval has been granted with an additional 28 conditions, Peter Garrett, federal environment minister, told reporters in Canberra today [Wednesday]. The ruling was among the final obstacles before Chevron, Royal Dutch Shell and Exxon Mobil Corp. can make a decision to build the venture.

Gorgon is among more than 12 liquefied natural gas projects proposed for Australia and Papua New Guinea competing for Asian buyers.

San Ramon, Calif.-based Chevron is the operator of the project and has a 50% interest; Royal Dutch and ExxonMobil each have a 25% stake.

Australian Prime Minister Kevin Rudd has estimated that the value of gas sales from the Gorgon fields could total $249 billion (U.S.) over 20 years. Chevron calls Gorgon Australia's single largest natural resources project.

ExxonMobil this month signed deals to sell much of its share of Gorgon production to Asian importers including PetroChina Co. and India’s Petronet LNG Ltd.

Chevron’s shares have rallied from a 2009 low of $56.46 on March 5. The stock slipped 11 cents to $70.65 on Tuesday.

Just an FYI for income-oriented investors: Major energy stocks have been sources of rising dividend income this year even as many other companies have slashed payouts because of slumping profit. Chevron raised its quarterly dividend 4.6% last month, to 68 cents a share from 65 cents.

The stock’s annualized dividend yield is 3.8%, based on Tuesday’s price.

-- Tom Petruno

Photo: A liquefied natural gas transport ship off Yokohama City, Japan. Credit: Kimimasa Mayama / Bloomberg News

Oil could be setting an inflation time bomb for autumn

With oil prices back above $73 a barrel, anyone who regularly fills a gas tank has to be hoping that this isn’t the start of a new surge.

Carl Weinberg, chief economist at High Frequency Economics, says there’s a reason beyond the personal pocketbook issue to worry about another jump in oil prices: The effect on inflation gauges worldwide.

Although crude is up from $34 a barrel in December, it’s still far below its peak prices of a year ago, when it topped out at $145 a barrel on July 3, 2008. The year-over-year drop has continued to put downward pressure on the U.S. Consumer Price Index and other inflation measures around the globe.

In July, for example, the energy component of the CPI was down 28% from a year earlier. That pulled the overall CPI down 2.1% -- the biggest 12-month drop since 1950 -- even though many other costs have continued to rise despite the recession.

Oil's drop more than offset the 3.2% year-over-year increase in medical care costs, and the 1.1% rise in food and beverage costs.

But oil’s beneficial effect on the CPI stands to end this fall, because crude and other commodities began to collapse last September amid the financial-system meltdown.

Oil fell from $115 a barrel at the end of last August to $100 by the end of September, $68 by the end of October and $54 by Nov. 30.

Now, if the price stays at $73 or goes higher, and gasoline follows suit, energy prices will begin to put upward pressure on the CPI by October.

"While the pass-through of higher oil prices into consumer prices may be less than 100%, no one should treat the risk of a substantial increase in perceived inflation by year-end as anything but a serious threat to both consumer demand and to economic growth," Weinberg wrote in a report this week.

He worries that, if financial markets believe that inflation is gaining traction, long-term interest rates could rise sharply, threatening to abort any economic recovery.

In theory, markets shouldn't be fooled: They know enough to look at the "core" inflation rate (CPI excluding food and energy costs) as well as the "headline" number of the overall index.

But what Weinberg fears is that a rising headline number, because of oil, might create its own reality, and could even drive central banks to begin tightening credit in the face of a still dangerously weak economy.

I suppose it could happen. But I think most people would prefer that oil prices stay down for the obvious reason: Higher gasoline prices are a financial drain that most struggling consumers just can't afford.

-- Tom Petruno

Photo: Filling up a year ago. Credit: Brian Vander Brug / Los Angeles Times

The 'good' deflation: Natural gas prices at 7-year low

More of the kind of deflation the economy needs: Natural gas prices fell to seven-year lows Tuesday.

Near-term futures prices in New York slid 7 cents, or 2.1%, to $3.10 per million British thermal units -- the ninth straight decline and the lowest price since Aug. 2002.

While crude oil prices have jumped 55% this year, to $69.19 a barrel as of Tuesday, natural gas has plunged 45%.

The gas price is down 77% from the 2 1/2-year high of $13.58 per million BTUs reached on July 3, 2008, amid the last gasp of the speculative frenzy for commodities early that summer.

The problem for gas producers -- and advantage for consumers -- is ballooning supply, as the recession has slashed industrial gas use.

From Bloomberg News:

Gas stockpiles rose 63 billion cubic feet in the week ended Aug. 7 to 3.152 trillion cubic feet, the Energy Department said. The inventory surplus to the five-year average was about 20%.

"Brimming storage remains a problem," Michael Fitzpatrick, a vice president for energy at MF Global Ltd. in New York, said in a note to clients. "There are already over 3 trillion cubic feet in the ground, levels usually not seen until late September."

Hurricane Bill, the first of the Atlantic season, and two other tropical disturbances have stayed away from energy-producing regions of the Gulf of Mexico, which pressured prices lower, Fitzpatrick said.

With ample storage, the hurricane hasn’t compelled investors to buy natural gas as a hedge against production disruptions, said Cameron Horwitz, an analyst at SunTrust Robinson Humphrey in Houston.

"Not when you have storage at 600 billion cubic feet above last year," he said. "It will take a huge disturbance to get natural gas to take off. That’s a lot of gas to burn off."

What’s more, as the Wall Street Journal points out, rising gas production in U.S. regions away from the Gulf of Mexico has become another depressant on prices.

From the Journal:

In recent years, when the Gulf represented a fifth of the U.S. gas production and markets were strained, any threat of storms could send prices soaring. But gas output from the Gulf now accounts for about 11% of domestic supply as producers have increasingly moved on shore to tap gas-rich formations known as shales, putting less supply in the path of storms and boosting overall output from these new fields.

--  Tom Petruno

Photo: A gas well near Columbus, Texas. Credit: Scott Dalton / Bloomberg News

Chinese stocks plunge again, leading global rout

China's stock market led the rest of the world higher in the spring rally. Now it's leading again -- as investors bolt for the exits on fresh doubts about the global economy.

The Shanghai market sell-off that began Aug. 5 accelerated today, driving the main index down 176.34 points, or 5.8%, to 2,870.63, in the biggest one-day slump since November.

The index now has plummeted 17% from its 2009 high on Aug. 4, after rocketing 91% since Dec. 31.

China's dive has helped fuel selling around the globe. Stocks slid 3.1% today in Japan, 2% in Germany, and prices are down sharply on Wall Street, with the Dow Jones industrials off 153 points, or 1.6%, to 9,163 at about 9:15 a.m. PDT.

Chinese speculators who've been looking for an excuse to cash out found plenty today: Ping An, the country's No. 2 insurance firm, reported weaker-than-expected first-half earnings; Yunnan Copper reported a first-half loss and said there were “no clear signs” of a recovery; and the government said foreign direct investment in China plunged nearly 36% in July from a year earlier.

From Bloomberg News:

“These disappointing earnings from big companies have reaffirmed concerns that share prices have moved ahead of fundamentals,” said Zhang Ling, who helps oversee about $7.21 billion at ICBC Credit Suisse Asset Management Co. in Beijing. “The correction will continue.”

The Shanghai gauge trades at 31 times the reported profit of its companies, compared with a price-to-earnings ratio of 18 times for the MSCI Emerging Markets Index.

“Valuations are at such a stretched level that a correction is overdue,” said Yan Ji, who helps oversee about $850 million at HSBC Jintrust Fund Management Co. in Shanghai. “There may be another 20% or 30% downside for the index.”

The U.S. stock market, too, has been flashing classic warning signs in recent weeks that at least a short-term sell-off was imminent after the heady gains since July 10.

-- Tom Petruno

Photo: An investor at a Shanghai brokerage today. Credit: Eugene Hoshiko / Associated Press