Blanchard in the News
November 8, 2006
Gold Softer; Any Election Impact Not Likely To Last
11/08/06
DOW JONES NEWSWIRES
The outcome of U.S. congressional elections may be putting slight pressure on gold futures so far Wednesday due in part to profit-taking, but the result is not likely to have a lasting impact on the metal, most analysts said.
At 10:51 a.m. EST, December gold was down $2.60 to $625.10 on the Comex division of the New York Mercantile Exchange. The December futures at the Chicago Board of Trade had lost $2.80 to $625.10.
"I think it's just a bout of profit-taking," said Jim Steel, senior vice president and metals analyst with HSBC. "The market doesn't seem to be particularly disturbed by anything."
A marginally firmer U.S. dollar could be pressuring the metals slightly, he said. The metal and greenback tend to have an inverse correlation.
Otherwise, the analyst offered the view that the election is not having a major impact on gold.
"I think the impact will be modest down the road," he continued, although for now, "it might be used as an excuse at the moment to take profits."
Uncertainty ahead of the elections may have contributed to some price strength, thus the liquidation now, he added.
"There might be a little bit of selling the fact after the Democrats picked up the House of Reps and possibility of picking up the Senate as well," said Bernard Hunter, director of precious metals at Scotia Mocatta. "The U.S. dollar has been stronger."
With Republicans no longer controlling both the White House and Congress, it now becomes more difficult to push through their agenda - whether it be government spending or foreign policy.
"Obviously, people have been very concerned about the amount of money they've been spending and the rate of increase in the deficit and the cost of the war in Iraq," said Hunter. "All of those things have probably had a negative impact on the U.S. dollar for a while. So, the fact they are left unable to just push ahead doing whatever they like, releases some of that pressure and you are seeing a slightly stronger U.S. dollar. As a result, the gold price is a touch lower, whether through profit-taking or position rebalancing.
"But I don't think it's a long-term impact."
In fact, said Hunter, there are expectations the dollar will continue to soften, thus potentially supporting gold.
"I see this as more of a corrective phase, rather than an end to the current trend," he said. "The fact that the Democrats have control of the House of Reps is not going to make the trade deficit with China go away. It's not going to change a lot of things."
Stephen Platt, analyst with Archer Financial Services, also suggested gold may have drawn some pre-election support. Thus now, with the metal "not responding in a real strong fashion on the upside, you've seen some profit-taking and liquidation pressure," Platt said.
He noted that some stalemate in Washington is likely and that Democrats may use their increased influence to get the U.S. out of Iraq.
"In line with that kind of sentiment, it could lead to some softening (of gold)," he said, since it may mean less buying based on Middle East tensions, he related. Also, added Platt, the softer tone in equities could be spilling over into metals such as gold.
Representatives of Blanchard and Company, Inc. said they anticipate gold will continue rising and would have done so regardless of who won the congressional elections. The company is a large retailer of American rare coins and precious metals, with more than $1 billion in sales in the last decade.
Chairman and CEO Donald W. Doyle Jr. said in a research note late Tuesday that the dollar would remain under pressure whether Republicans retained control of Congress or Democrats wrested the majority away.
Current spending policies have made the dollar vulnerable to rapid depreciation, he said. Meanwhile, he continued, the perception of a Democratic leadership is the party would push for policies that could weaken an already softening economy and plunge the nation further into debt, a scenario that will push precious metals prices higher.
A continued pause by the Federal Reserve in hiking interest rates could also put renewed pressure on the dollar, he said.
Blanchard's Neal Ryan, vice president and director of economic research, commented Wednesday morning that "the real driver for the gold price is going to be the fact that it's trading much like a currency. And, with continued pressure on the dollar and a Congress that now isn't going to be able to accomplish much if anything on economic decisions, we think it's going to continue to be a positive for the gold price."
He described the dollar as "in a very precarious position," adding, "we believe has no choice but to continue to weaken over the short to intermediate term."
He pointed out that the market is approaching a period when prices tend to be strong seasonally.
"We think with the election being behind us now, we'll really start to see prices react," he said. "More than anything, we just needed to get it (the election) out of the way."
-By Allen Sykora, Dow Jones Newswires; 541-318-8765;
allen.sykora@dowjones.com
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