Weekly Commentary

Inflation fears in the world's largest economy were added to during the week. Core inflation, that is wholesale prices excluding food and energy jumped 0.8 percent for the month of January alone. This was their biggest gain in 6 years or since December 1998.

Wall Street economists had forecast a 0.2 percent gain in both overall and core producer prices and the higher-than-expected figures hit some markets hard. Treasury bond prices tumbled and stock futures turned negative. The report increases expectations that the Federal Reserve will have to keep raising interest rates for the foreseeable future and indeed may have to do so in a more aggressive manner.

Greenspan's "conundrum" as to why yields on long-term bonds have not risen despite the rise in short-term interest rate certainly woke up the bond market. There are concerns that the so called bond vigilantes, who normally sell bonds when there is even a hint of inflation, may be beginning to get nervous about recent inflation figures and the fact that oil, gold and other commodities as represented by the Reuters CRB are near record year highs.

Treasury bond prices tumbled for three sessions, pushing the yield on the 10-year note up to 4.26 percent from 4.08 percent. Treasury prices and yields move in opposite directions. The CPI (Consumer Price Index) is released on Wednesday and will provide more information as to whether the inflation genie has been let out of it's bottle. Economists are looking for a gain of 0.2 percent or, when food and energy are excluded, 0.3 percent.

Equity markets are assessing fourth-quarter corporate profits, amid forecasts that their rate of growth will fall by just about half in the months ahead. While Wall Street has so far accepted the subdued outlook sanguinely, skeptics say it won't take much to push stocks over the edge.

Mutual fund manager Henry Van der Eb of the Gabelli Mathers Fund is telling clients that "the Fed's artificially low short-term interest rates have flooded the system with excess liquidity. It has generated a series of asset bubbles, including stocks, housing and commodities, which will deflate. He says it's possible that the next Fed rate increase "will be the needle that accidentally pops the housing price bubble, as was the case for stocks in 2000."

Bloomberg reported that gold may rise for a third week on expectations a drop in the dollar will spur inflation, boosting demand for the precious metal as a hedge, a Bloomberg survey of 48 traders, investors and analysts showed. This is true but a little simplistic as gold is a hedge not just against inflation but also deflation, geopolitical risk, and currency and macroeconomic risk.

Thirty-six respondents surveyed from Melbourne to New York on Feb. 17 and Feb. 18 advised buying gold, the most bullish sentiment in the survey since April 30. Some investors buy gold when inflation erodes the value of assets such as bonds or stocks. Five participants recommended investors sell the precious metal, and seven were neutral. It looks quite likely that gold's recent pull back may be at a close. However, investors should always look to the long term and realise it is highly speculative and difficult to try and time the market in the short term.

The substantial increase in the price of energy prices and oil during the week will increase this bullish sentiment. This will not be helped after Venezuelan President Hugo Chavez threatened Sunday to suspend oil exports to the United States if someone tries to assassinate him, adding that US President George W Bush would be to blame. The situation throughout the Middle East from Iraq, Syria, Lebanon to Iran is as volatile as ever.

This precarious supply situation comes at a time when much of industrialising Asia and particularly China and India are "in a ravenous thirst for oil that now has the world's two most populous nations bidding up energy prices and racing against each other and against global energy companies in an increasingly urgent grab for oil and natural gas fields around the world. Energy economists in the West . . . . worry about the effect on energy supplies as the two countries, with 37 percent of the world's population, rush to catch up with Europe, the United States and Japan".

March crude settled at $48.35 a barrel, up 81 cents. Also on the New York Mercantile Exchange, April crude was higher by 79 cents to close at $49.01 a barrel. Both contracts added 2.5 percent for the week.

US stock, bond, commodities, futures and options markets will be closed Monday for Presidents' Day. The weekly auction of short-term government debt will take place Tuesday.

Weekly Markets

World oil prices rose this week as OPEC's forecast of increased global demand for 2005 overshadowed a sharp rise in US crude inventories.The Commodities Research Bureau's index of 17 commodities rose to 290.50 points on Friday from 285.70 points a week earlier.

Gold prices broke through the 420-dollar barrier, benefiting from a weaker US dollar and rumours that the United States could veto the International Monetary Fund's bid to sell some of its reserves. Gold prices climbed to 427.10 dollars per ounce on Friday -- its highest since January 24 -- amid "speculation the US will veto the proposed IMF gold sales," said James Moore, analyst with specialist website TheBullionDesk.com. The IMF wants to provide debt relief for the world's poorest countries by selling off some of its gold reserves. Gold gained from its safe-haven status "following the increase in tensions between Iran/North Korea and the United States," Moore added. The weakening dollar made gold -- which is priced in the US currency on world markets -- cheaper to buyers using other currencies. On the London Bullion Market, gold prices stood at 427.10 dollars per ounce at the late fixing on Friday from 418.85 dollars a week earlier.

Silver prices finished above the symbolic 7.0 dollars-per-ounce mark, reaching two-month high point on speculative buying. Silver rose to 7.32 dollars per ounce on Friday -- the highest level since December 8. The precious metal "rallied sharply after the recent liquidation on a resumption of speculative buying," said UBS analyst John Reade. Meanwhile, a weakening US currency could push silver prices up further. "Weaker dollar sentiment suggests silver will make further tests of the 7.40 dollar level," said James Moore. Silver prices rose to 7.32 dollars per ounce at the late fixing on Friday from 6.98 dollars a week earlier.

PLATINUM AND PALLADIUM: Platinum prices dropped on falling South African demand, while its sister metal palladium held firm. Platinum fell on "comments from both Anglo Platinum and Impala Platinum -- two large world producers -- suggesting downside potential," said Barclays analyst Kamal Naqvi. Impala had worries about its Zimbabwe operations while Anglo Platinum, subsidiary of Anglo American, was hit by the strong appreciation of the South African Rand, driving up costs. Palladium was "struggling to hold decisively above 180 dollars," he added. By Friday, platinum prices fell to 864.50 dollars per ounce on the London Platinum and Palladium Market from 870 dollars a week earlier. Palladium prices edged up to 181.50 dollars per ounce from 181 dollars the previous week.

World oil prices ended the week higher as strong US stocks data failed to dampen news that OPEC raised its forecast for global oil demand in 2005. "Any bearish news, like the large builds in US stocks on Wednesday, isn't affecting the market," said Veronica Smart, analyst at the Energy Information Centre. The Organization of Petroleum Exporting Countries (OPEC) raised its forecast for 2005 global oil demand to 83.78 million barrels per day -- a rise of 2.11 percent compared to the previous year -- due to upward revisions to world economic growth.

The world economy would grow by 4.21 percent this year, up from previous estimates of 4.12 percent, it said. Oil futures briefly shot up by more than a dollar on Wednesday after a false alarm following a powerful blast in the southern Iranian port of Daylam -- which was however blamed on construction workers. Prices fell back slightly after US data showed big rises in crude and gasoline stocks.

The US Department of Energy (DoE) said in its weekly report that crude stockpiles rose by 2.1 million barrels to 296.4 million barrels during the week ending February 11. By Friday New York's light sweet crude for March delivery rose to 47.75 dollars per barrel from 47.17 dollars the previous week. In London, Brent North Sea crude for April delivery stood at 46.12 dollars from 45.28 dollars a week earlier. (AFP)

The Week in Quotes

"For centuries gold has served as an enduring store of value during periods of political and social turmoil. It has also functioned to preserve purchasing power during times of high inflation. The link between oil prices and gold is well established. Gold was at its previous high of $800 an ounce in 1980 when oil was past $100 a barrel in today's money. Thus in real terms, gold prices should be twice as high as they are today when compared with oil prices. So if you accept that high oil prices are here to stay (especially given Chinese demand) and an increasing number of analysts (myself included) now fall into this camp, then much higher gold prices are also on the way.

Some potential investors are put off by the fact that gold has gained over 60% in value in the past couple of years. But if the bulls are right then you could still double your money. Gold is a great hedge against inflation which is surely what high oil prices, a falling dollar and budget deficits imply. Furthermore, the supply of gold is fixed while dollars can be printed relatively quickly. There is also the Wall Street factor to consider. Where will share prices go if inflation starts hitting profits, and the Federal Reserve raises interest rates aggressively in response? US producer prices(excluding the volatile food and energy components) recorded their highest monthly increase in six years in January, while the annual rate of increase was the highest in nine years, suggesting that inflationary pressures are starting to build again. If inflation picks up then highly valued US stocks could crash, leaving gold as a 'safe haven'." Alan McQuaid, Bloxham Stockbrokers

"Investors worldwide are deciding to diversify their assets, to reduce risk by not concentrating so many eggs in the dollar basket."
Robert Hormats, vice chairman of Goldman Sachs (International)

"Interest rates are low and America is awash in money. But what will happen when Fed Chairman Alan Greenspan turns off the tap? - "We've never seen U.S. companies so dependent on the steepness of the yield curve," says Leo M. Tilman, chief institutional strategist at Bear Stearns. "If short rates rise fast, I doubt many companies will be able to deliver the level of earnings investors are expecting." . . . "The Sword of Damocles is that hedge funds could leave the market en masse," says Fridson, former Merrill Lynch junk bond strategist , now publisher of the newsletter Leverage World. "Of course, they could leave in an orderly way--but that usually doesn't happen."
Bernard Condon, 'Fool's Paradise', Forbes Magazine

"When the euro began circulating at the start of 2002, Kenneth Rogoff figured it would take 50 years for the new 12-nation currency to rival the importance of the United States dollar in world financial markets. Today, the former chief economist of the International Monetary Fund says parity could come in five to 10 years. For the first time in many decades, perhaps since before World War I, the dollar has a serious competitor." "Euros are coming more to the front," says Ulrich Ramm, chief economist of Commerzbank in Frankfurt. "It's a real alternative ... to the dollar." If Washington is intent on spreading its influence in the world, the dollar's fall makes it harder - and more expensive - to expand its military and political reach." David Francis, 'How US suffers when the dollar falls'.
David Francis, Christian Science Monitor

"By all accounts, the new economy died three or four years ago. Business cycles do exist. Share prices can fall. Companies eventually have to make money. Bubbles burst. But one aspect of the roaring '90s survived and, indeed, thrived. Investment in new technology helped America produce twice as much per hour worked as it had in the previous quarter century - Suddenly, a familiar question is back in vogue: Has new technology truly raised the long-term productivity rate? Or could this signal the end of the U.S. miracle? - And naturally, because everything in economics is somehow linked by the flow of money, the end of the miracle would have global repercussions. It would call into question the ease with which the United States can fund its giant budget and trade deficits. Foreign investors from Beijing to Barcelona have assumed that dollar-denominated assets offer a superior rate of return because of healthy productivity growth. Investors could now demand a higher return, bidding up interest rates or, worse, putting more of their money elsewhere. The trouble is, the lopsided global economy still relies too heavily on American spending as the locomotive for growth. Europe, China and Japan would have to start taking up the slack. "U.S. productivity is the holy grail of the global economy," says Morgan Stanley chief economist Stephen Roach.
Karen Lowry Miller, Newsweek International

Special Notice:
We shall be attending the "The Loop Ireland" forum being held in The Berkley Court Hotel, Wednesday the 23rd of February, 2005 at 6pm. Speakers will include Jim Powers of Friends First, Cliff Taylor of The Sunday Business Post and Tiarnan O'Mahoney. Tickets are €15. Please visit www.theloopireland.com for further details.