Wednesday, February 7, 2007

Fed, Bonds and Gold

Fed, Bonds and GoldSocialTwist Tell-a-Friend
Sally Limantour
February 7, 2007

Treasury Bonds:

“Fed Ease Unlikely Until 2008,” said Richard Berner, from Morgan Stanley. So now we have gone from an expected easing in early 2007, to easing late in the year to a possible easing in 2008. The reason: “We think future inflation risks are slightly higher than a month ago.”
(www.morganstanley.com/views/gef/archive/2007/20070205-Mon.html#anchor4338)

The Fed speakers were out in force yesterday with San Francisco Fed President Janet Yellen saying “inflation is a little higher than I would like it to be; I would like inflation to come down.” The bond market had a short covering rally and stops above the 110 15/32 area were triggered. Strong demand for the 3 year and the “slowing” rate of growth predictions by a number of Wall Street economists contributed to this. Certainly $60 oil is also on everyone’s radar.

Bottom-line: Resistance above the 111-00 will keep the bears in control.

GOLD:

The media is focused on the gold rally inspired by the energy price inflation theme. I am more interested in the fact that gold sales by legacy central banks of Europe are low. In order to meet the Washington Agreement’s annual gold sales total they need to sell 9.6 tonnes each and every week. We are now in the 7th consecutive week that the legacy central banks have sold less than 3 tonnes of gold. This is bullish and an important item to monitor.

In other news:

Goldman sells top commodities index. GS has agreed to sell its GSCI commodity index to Standard & Poor’s for an undisclosed amount, according to the FT today. Note this: “the move will give the S&P a potentially powerful influence on commodity markets as any changes to the index composition can have wide ramifications for underlying commodity prices. The GSCI, the world’s leading commodity index, has about $60 bn tracking it. Most of these funds are managed by GS, which is the largest commodities trader among investment banks.”

Regarding the grain and soybean market there is much talk of expected planting and how much will be shifted to corn, given the high prices. While bullish on this sector, I have stepped to the sidelines as I am seeing a dis-connect between the futures and the cash market.

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