A defense of Japan''s massive currency intervention

Section:

By Myra Saefong
CBSMarketWatch.com
Friday, February 20, 2004

http://www.marketwatch.com/news/yhoo/story.asp?
source=blq/yhoo&siteid=yhoo&dist=yhoo&guid=%7BD07D25C5%2D82CE%2D45BB%
2DA1A2%2D817F979BE8DD%7D

SAN FRANCISCO -- Gold futures fell as much as $16 an
ounce Friday, closing at a three-month low as a
heightened terror alert in Japan boosted the U.S. dollar
and dampened investment demand for precious metals.

Gold for April delivery traded as low as $394.50 an ounce
on the New York Mercantile Exchange before closing at
$398, down $12.30. For the week, the benchmark
contract's loss came to $12.80.

The decline marks the biggest session drop in gold
futures since Jan. 29, when the February contract fell
$16 an ounce.

The dollar surged Friday vs. the yen and other major
currencies, extending its gains after Japanese
authorities raised the nation's terror alert to its highest
level in nearly a year.

Strength in the dollar pressures investment demand for
gold because the dollar-denominated metal becomes
more expensive for foreign traders to buy. Gold also
tends to lose some of its allure as investors seeking
higher returns turn their attention to alternatives such
as an appreciating dollar.

John Person, head financial analyst at Infinity Brokerage
Services, believes that besides the news on Japan's
terror alert, U.S. retail-level inflation data for January
"were favorable to a stronger dollar."

Consumer prices rose a sharp 0.5 percent in January,
driven by higher gasoline and fuel oil prices, the Labor
Department said.

"The outlook of higher inflationary pressures gave traders
a clue that if that trend continues, the Fed may be at a
position to raise interest rates sooner rather than later,"
said Person.

"The concept that higher interest rates would support the
dollar by attracting foreign capital -- that seems to be the
theme today," he explained.

All in all, that puts the dollar in a favorable position to
gain strength in the months ahead and places an upside limit
on gold, Person said, adding that he expects prices for
the yellow metal to fall back down to the $380 level in the
weeks ahead.

But Grady Garrett, chief trading strategist at
EnergyTrendAlert.com, a commodity information provider,
questioned whether the dollar could sustain its gains.

"With the current fundamental setup (low interest rates
and expanding deficit), it is unclear that any near-term
bottom in the greenback will be able to hold up," he said.

So "the prospect of further dollar weakness is likely to
continue to underpin the price of the yellow metal," he
said.

With that in mind, Todd Hultman, president of
Dailyfutures.com believes that Friday's decline is
"overdone and that time will prove it out."

"While it is reasonable to expect the Federal Reserve to
raise interest rates sometime this year, there still is no
urgency to do so and [Friday's] inflation report does
not change that," he said.

In contrast to Person's expectations, Hultman said
gold "continues to favor higher prices, based on the
Federal Reserve's low interest rate (weak dollar) policy
and little, if any, increase in gold production this year."

The June contract for gold will likely make new contract
highs in the next 3 to 6 months, he predicted.

Taking a look at the even bigger picture, Peter
Grandich, editor of The Grandich Letter, an investment
publication, said investors bullish on gold are "going to
have to figure out how to sidestep days when a declining
euro is impeding their process."

"The last missing ingredient to what would be a classic
gold bull market is to have gold rising in most major
currencies, not just against a falling U.S. dollar," he
said.

"The fact that gold still retreats when the euro declines
tells us bulls we still have some work in front of us,"
Grandich said.

In other metals action Friday, copper futures eased
back after climbing in each of the six previous Nymex
sessions, and other metals prices followed suit.

March copper closed at $1.3085 per pound, down 2.1
cents. The March silver contract ended down 12.5 cents
at $6.533 an ounce, while April platinum fell by $14.10
to close at $839.20 an ounce and sister metal March
palladium ended at $233 an ounce, down $10.25.

On the supply end, copper supplies were down 1,328
short tons at 249,168 short tons as of late Thursday,
according to Nymex. Silver stocks were down 47,836
troy ounces at 123.9 million troy ounces.

Meanwhile, gold inventories stood at 3.48 million troy
ounces, down 32 troy ounces from the previous session.

Key indexes for mining shares mirrored the broad decline
in the metals futures market, retreating to their lowest
levels in two weeks.

Tracking the mining sector as a whole, the Philadelphia
Gold and Silver Index and the CBOE Gold Index each fell
more than 2 percent to close at 97.55 and 83.69, r
espectively.

The Amex Gold Bugs Index declined 3.3 percent to end
the session at 222.3.

Among the biggest index-component losers were shares of
Apex Silver Mines and Durban Deep, which ended Friday
with losses 5 percent.

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