Gold Firms Along With Dollar

by Peter A. Grant

March 23, a.m.
(from USAGOLD.com) --

Gold has pushed to a new 2-week high, moving within $5 of the all-time high at 1444.60 as the return of the European sovereign debt crisis and grim US housing data add to ongoing worries over events in the Middle East/North Africa (MENA) and Japan. While there has been an inverse correlation between the dollar and gold of late, gold is rising today in tandem with the greenback as both the euro and British pound slide.

EMU spreads have surged in advance of the EU summit, where eurozone ministers are going to attempt to ratify a permanent bailout facility. With the Portuguese government on the verge of collapse, they'll have their work cut out for them. The expected rejection of further austerity measures for Portugal is expected to force PM Socrates from office just a day before the summit. Additionally, any hopes of Ireland renegotiating more favorable terms for the repayment of their bailout seem to have been dashed, driving the yield on the Irish 10-year to a record high over 10% and the island nation closer to default. The ECB has reportedly stepped in again to buy periphery debt and the single currency has retreated from its recent highs.

UK Chancellor George Osborne gave his budget speech in the House of Commons today, calling it his "budget for growth" that he claims will move the UK from "rescue to reform and from reform to recovery." Government borrowing is expected to rise to £146 bln this year, then start tapering off through 2016. Osborne forecasts the national debt to rise to 60% of national income this year, and 71% in 2012. Growth for 2011 was revised down from +2.1% to +1.7%. Sterling sold off, indicative of some degree of skepticism, adding further support to the dollar.

I am increasingly convinced that the US housing market will seal the deal on QE3. US new home sales plunged 16.9% in Feb to a record low 250k. The market had been looking for about a 4% gain. Were it not for an upward revision to the Jan figure from 284k to 301k, the headline percentage drop would have been much worse. Nonetheless, evidence is mounting that housing is indeed double-dipping. If the Fed starts removing accommodations at the end of June on schedule, higher mortgage rates would add additional weight to real estate, further eroding the "wealth effect" that the Fed is trying to orchestrate through stock market gains. Consequently, removal of those accommodations is looking less likely, which will probably lead to QE3. That should limit upside potential in the dollar. US stocks are already showing resilience in the face of the grim housing data as market expectations of Fed policy shift.

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

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