Gold Rebounds

by Peter A. Grant

March 16, a.m.
(from USAGOLD.com) --

Gold has rebounded after Tuesday's retreat attracted buying interest below the $1400 level. Now that the initial bout of deleveraging associated with the disaster in Japan seems to have passed, look for the yellow metal to be supported by ongoing safe-haven interest. In the wake of this morning's release of much hotter than expected US PPI data for Feb we are also looking for heightened demand for gold as an inflation hedge.

The market will be eagerly watching to see if higher input price pass-through is reflected in tomorrow's CPI data. Right now, the market is expecting a headline CPI number around +0.4%. If CPI is a miss as well, it will put increased pressure on the Fed to remove accommodations just as the US economic recovery faces threats from an oil shock and ongoing uncertainty about the Japanese risk. While the FOMC did concede in their policy statement yesterday that "energy and other commodities are currently putting upward pressure on inflation", they maintained that "longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued." Nonetheless, the Fed held steady on rates and maintained their 'exceptionally/extended' language.

More bad news on the housing market is likely to hamstring the Fed as well. US housing starts plunged 22.5% in February, well below market expectations and the biggest decline in 27 years. Building permits dropped to their lowest level on record. The Fed will understandably be concerned that the removal of accommodations will add further weight to the double-dipping housing market, cutting deeper into the "wealth effect" generated by recent -- but vulnerable appearing -- stock market gains. The Fed reiterated its commitment to QE2 yesterday, shifting the markets attention to ongoing speculation about the likelihood of QE3.

Portuguese Prime Minister Socrates has steadfastly maintained -- in the face of considerable external pressure -- that his country does not need a bailout. He revealed the first crack in that facade today after Moody's downgraded Portugal's sovereign debt another 2-notches over worries about high borrowing costs and expected difficulties the country will face in meeting fiscal targets amid rising opposition to further austerity. PM Socrates blamed the main opposition party for not supporting the latest austerity measures; and with that scapegoat, indicated that "The consequence of a political crisis is the worsening of the financing risks of our economy and would lead Portugal to request external intervention." That's political-speak for a bailout.

If Portugal goes the way of Greece and Ireland before it, the market would likely turn its full attention to Spain, while continuing to glance suspiciously at Italy and Belgium. This turn of events comes just days after eurozone leaders hammered out a proposal for a permanent bailout facility, which will be pitched at the EU summit that begins next week. Clearly the increased likelihood of a permanent bailout facility and the ability of the EFSF to buy sovereign debt in the primary market have done little to alleviate the perceived risks in periphery Europe.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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