Inflation Fears Suggest Commodities Correction Will Be Short-Lived
By MATT WHITTAKER and ALLEN SYKORA March 22, 2008; Page A14
A roughly 10% drop in gold prices from record highs in the past week doesn't portend a longer and deeper correction for the metal, because inflation concerns are likely to continue, and sellers will probably return as buyers into what has been a bullish market.
"We've needed a healthy correction in commodities," says Bill O'Neill, a principal with Logic Advisors. "This may be a signal that the corrections may not be lasting in nature. This does not signal the end of commodities."
The nearby-month March gold contract has fallen nearly 10% from an all-time front-month high of $1,014.60 an ounce on Monday to Thursday's low of $917.70. It settled down $25.10 to $919.60 on the Comex division of the New York Mercantile Exchange, ahead of Good Friday, when markets were closed.
Over that same period, most-active April gold futures have fallen more than 12% from a contract high of $1,033.90 on Monday to Thursday's low of $904.70. April gold declined $25.30 to settle at $920.
Still 'a Decent Bet'
"Longer term, I still think gold is pretty much a decent bet," said Bart Melek, global commodity strategist with BMO Capital Markets.
The perception that inflation may increase on "very accommodating monetary policy" from the Federal Reserve will likely keep commodities in an upward direction, Mr. Melek said.
"I do expect the markets to come back," said Frank Lesh, broker and futures analyst with Future Path Trading. "A lot of it just depends on the outlook for the economy and interest rates. We don't have a clear picture of things right now."
Hedge-fund-led selling on Wednesday and Thursday was responsible for much of the losses, as the dollar rose after a smaller-than-expected interest-rate cut from the Federal Reserve on Tuesday afternoon.
March gold on Wednesday saw the biggest drop in dollar terms in more than 28 years -- since Jan. 22, 1980, when it fell $143.50. Wednesday's was the largest percentage decline since July 13, 2006.
Just One Week
However, the past week's slide in gold prices doesn't represent a major turnaround for the market, said Scott Meyers, senior trading analyst with Pioneer Futures.
"I think the trend is still up," he said. "You're seeing a reaction [to the less-than-expected rate cut]."
There are temporary price drivers, for example, such as the funds taking some profits as the end of the first quarter approaches, Mr. Meyers said.
Daniel Pavilonis, senior market strategist with Lind-Waldock, described himself as "still bullish" on gold. And in many cases, those who exited from long gold positions are also bullish, he said.
"They've pulled the pin on their positions," he said. "They are holding off, waiting to get back in the market."
Many are waiting for the market to show signs of putting in a bottom before re-entering, and it is possible that won't occur until the coming week, Mr. Pavilonis said.
Otherwise, inflation remains a concern in the U.S., and investors often buy gold as an inflation hedge, he said.
"People are still paying more money at the grocery store, and they are paying more money at the pumps," Mr. Pavilonis said. "As we still have inflation, you're still going to need a safe haven to put your equity."
While the Fed's concern about inflation has boosted the dollar and sent commodities lower, some portion of that talk may simply be "rhetoric" meant to appease those who see the central bank as not doing enough to curb rising consumer prices, said Michael Gross, broker and futures analyst with OptionSellers.com.
'Too Far Too Fast'
The week's action in gold isn't likely the beginning of a longer and deeper correction, he said.
"I think this is a knee-jerk reaction to the Fed's announcement," but longer term, the central bank will have to continue cutting interest rates, which will likely further pressure the dollar and prove supportive for gold, Mr. Gross said.
"This is the inevitable consolidation that you have to see when markets have run-ups like this," said Logic Advisors' Mr. O'Neill. "It just came too far too fast."
Mr. O'Neill expressed concern there may be more "shoes to drop" amid continuing troubles in the credit markets, which have led to safe-haven buying of gold lately, but he said he doesn't foresee the pullback as the start of a longer-term correction.
Write to Matt Whittaker at matt.whittaker@dowjones.com
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