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Posts Tagged ‘Federal Reserve System’

Gold Poised to Gain as U.S. Output Data Boosts Easing Prospects

Gold may gain as manufacturing in the U.S. trailed estimates, boosting prospects of further stimulus by the Federal Reserve to spur growth and increasing demand for bullion as a haven.

Spot gold was at $1,599.03 an ounce by 10:37 a.m. in Singapore, after ending little changed at $1,597.10 yesterday. August-delivery bullion was little changed at $1,599.20 an ounce on the Comex in New York, after dropping 0.4 percent yesterday.

Manufacturing in the U.S. shrank in June to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May, data yesterday showed, helping the dollar rebound from its biggest drop in eight months against a six- currency basket including the euro. The common currency fell today as euro-area unemployment reached the highest on record in May, raising concern the debt crisis is worsening.

“Gold lacks direction, but sees a stronger quarter ahead as spotlight returns to the U.S. economy,” Lynette Tan, an investment analyst at Phillip Futures Ltd., wrote in an e-mail today. “Gold prices have been sensitive to signs of economic weakness, which tend to increase the likelihood of monetary easing by the Federal Reserve.”

Cash gold last week capped its worst quarter since the three months to September 2008, as the Dollar Index rallied 3.3 percent, after the Fed didn’t buy more debt and instead extended a program of replacing short-term bonds with longer-term debt.

Spot silver was little changed at $27.5275 an ounce, after swinging between gains and losses. Cash platinum dropped as much as 0.6 percent to $1,446.50 an ounce, and was last at $1,452.50. Palladium fell for a second day, declining as much as 0.6 percent to $574.75 an ounce, before trading at $575.75.

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Dow closes below 13,000 for first time in a month

INVESTORS had a three-day weekend to brood over disappointing job growth in March. When they got back to work and delivered their verdict, it wasn’t good.

Stocks closed sharply lower today, sending the Dow Jones industrial average and the Standard & Poor’s 500 index to only their second four-day losing streak this year.

The Dow finished down 130.55 points at 12,929.59, its first close below 13,000 since March 12. The S&P ended the day off 15.88 points at 1382.20. The Nasdaq composite closed down 33.42 at 3047.08.

The Dow and S&P had four consecutive trading days of declines at the end of January, but the losses then were smaller. The Dow lost 124 points over that stretch. It has lost about 330 this time.

Stocks had their best first quarter since 1998 but have stumbled in April. Last week, the Federal Reserve suggested that it is disinclined to take further steps to help the economy, and the European debt crisis flared in Spain.

Then on Friday, with the stock market closed for Good Friday, the Government said the country added just 120,000 jobs in March, half the pace from December through February.

After a long weekend to think it over, investors sold stocks broadly. All 10 industry groups in the S&P 500 fell overnight, with financial stocks the worst performers. Bank of America fell 3.2 per cent, and Citigroup was off 2.4 per cent.

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Europe risk has eased – Bernanke

Washington – Federal Reserve Chairman Ben Bernanke says the threats from Europe’s debt crisis have eased in recent weeks, but US money market funds remain exposed to risky European assets.

In testimony prepared for a congressional hearing on Wednesday, Bernanke noted developments that have minimised the danger. He pointed to bailout support that European leaders provided in exchange for deep budget cuts by the Greek government and he highlighted the agreement by private creditors to reduce Greece’s debt.

But he said Europe must take further steps, including strengthening its banking system still more and making “a significant expansion of financial backstops” to guard against troubles in one country spilling over to other nations.

“Europe’s financial and economic situation remains difficult, and it is critical that the European leaders follow through on their policy commitments to ensure a lasting stabilisation,” Bernanke said in remarks prepared for the House Committee on Oversight and Government Reform.

While US financial institutions have reduced their exposure to Europe, Bernanke said roughly 35 percent of assets in US prime money market funds are European holdings.

“US financial firms and money market funds have had time to adjust their exposures and hedge their risks to some degree… but the risks of contagion remain a concern both for these institutions and their supervisors and regulators,” Bernanke said.

Bernanke said that if Europe took a severe turn for the worse, the US financial sector would have to contend not only with problems stemming from its direct exposure to European loans and investments but also with broader market movements including declines in global stock prices, increased credit costs and reduce availability of funding.

To address those broader risks, Bernanke noted, the Fed conducted a stress test of 19 of the largest US financial institutions. Those tests, results of which were released last week, found that all but four of the 19 were strong enough to sustain a major economic downturn worse than the 2007-2009 Great Recession.

Bernanke said in his testimony that those results showed that a “significant majority” of the largest US banks would have adequate capital to withstand large loan losses from an extremely adverse situation. He said the tests were designed to capture both direct and indirect exposures of US banks “to the economic and financial stresses that might arise from a severe crisis in Europe”.

Bernanke and Treasury Secretary Timothy Geithner are both scheduled to appear before the House panel on Wednesday.

In his prepared testimony, Geithner said that the Obama administration was encouraged by the steps that Europe has taken to address the debt crisis.

“We hope European leaders will build on that progress with additional actions to calm the financial tensions that have been so damaging to global economic growth,” Geithner said.

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Dollar Near One-Week Low Versus Euro Before Fed Bernanke

The dollar traded within 0.3 percent of its lowest in a week against the euro on speculation Federal Reserve Chairman Ben Bernanke will reiterate today that a slow U.S. recovery warrants near-zero interest rates.

The 17-nation euro neared a four-month high against the yen before reports this week forecast to show German services and factory output grew in March. Australia’s dollar fell for the first time in four days on concern slowing Chinese growth will dent demand for the South Pacific nation’s exports. New Zealand’s currency dropped as Asian stocks weakened, damping demand for higher-yielding assets.

“The Fed is not going to change their recent rhetoric on the economy and they’re going to still characterize the recovery as somewhat tepid,” said Andrew Salter, a strategist at Australia & New Zealand Banking Group Ltd. (ANZ) in Sydney. “The long-term trend that’s in place is U.S. dollar weakness.”

The dollar was at $1.3231 per euro as of 10:37 a.m. in Singapore from $1.3238 in New York yesterday, when it fell as low as $1.3266, the least since March 9. It fetched 83.48 yen from 83.35. The euro bought 110.46 yen from 110.34 after rising as high as 110.57 yesterday, the most since Oct. 31.

Bernanke said March 14 that a “frustratingly slow” recovery in the world’s largest economy was impeding efforts by banks to make profitable loans. Policy makers said the previous day that “elevated” unemployment and a subdued outlook for inflation warranted keeping borrowing costs “exceptionally low” at least through late 2014.

Dollar Declines

Bernanke will give the first of four lectures at George Washington University today and testify before a U.S. House committee about Europe’s debt crisis on March 21.

The dollar has declined 0.5 percent in the past week, the third-worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has gained 0.8 percent and the yen declined 1.2 percent.

Liquidity in currency markets will be thin today due to a public holiday in Japan, UBS AG said in a research note.

Demand for the 17-nation euro may be bolstered before March 22 data from London-based Markit Economics that’s predicted to show manufacturing and services growth accelerated in Germany. Factory output climbed to 51 this month from 50.2 in February while a gauge of services rose to 53.1 from 52.8, according to the median estimate in Bloomberg News surveys of economists.

ANZ Bank’s Salter predicts the euro will climb to $1.35 by June and $1.37 by September. The currency will trade at $1.29 and $1.30, respectively, according the median forecast in a Bloomberg survey of analysts.

China Demand

The so-called Aussie retreated from near a 10-month high against the yen as BHP Billiton Ltd. (BHP), the world’s largest mining company, said steel growth in China has flattened off. China is Australia’s largest trading partner.

“There will be further risk that the Chinese economy will be slowing down” in a stronger deceleration than expected, said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “The Aussie is still a sell on rallies at the moment.”

The Australian dollar declined 0.4 percent to $1.0567 and weakened 0.2 percent to 88.23 yen. It yesterday reached 88.64, the most since May 3. The New Zealand dollar declined 0.3 percent to 82.40 U.S. cents and traded at 68.79 yen from 68.87 yesterday.

The MSCI Asia Pacific excluding Japan index of regional stocks fell 0.6 percent, set for its biggest decline in more than a week.

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Dollar Rejection Could Turn Into Heavy Selling If Risk Appetite Holds

Fundamental Forecast for the US Dollar: Bearish

  • Is the greenback a burgeoning carry currency? A jump in yields fortifies bulls’ expectations
  • Fed decision brings no change to policy, but boosts growth outlook and curbs QE3 expectations
  • US Dollar at risk of turning a correction into a deeper reversal

The dollar took an abrupt, bearish turn through the final 48 hours of this past trading week. The fact that this move turned the currency back onto its traditional ‘safe haven’ track suggests its extraordinary bull run may have come to an end. And, for the technically inclined, it is worth noting that the timing for this turn aligned nicely to a test of 10,100 for the Dow Jones FXCM Dollar index (the range high going back to January of last year) and 1.3000 for EURUSD. When fundamental drive flags, technical barriers often have greater influence over price action.

Where we go from here will likely be a combination of inherent fundamental concerns, underlying speculative interests and ever-present technical influence. Through the past few weeks, we have seen a remarkable shift in long-standing correlations. Perhaps one of the most recognizable links for the markets over the past few years has been the dollar’s position as a safe haven currency (for better or worse). We have come to expect the benchmark currency moving in the opposite direction as ‘beta’ market standard like the S&P 500 or carry trade. That said, we witnessed the equity index drive through the even 1,400 figure while the Dollar Index advanced to the aforementioned range resistance.

This unusual set of circumstances can be attributed to a number of factors: a faulty equities rally that is ready to collapse; a systemic change in the greenback’s function as a funding and liquidity currency; or perhaps it was simply the reflection of lacking conviction behind the one thing that has synced all these markets up: risk appetite trends. In reality, it was a little bit of all three. For the greenback, safe haven appeal does not necessarily translate into an ideal funding currency for carry interest. Yet, with rates anchored to zero, the capital markets awash with stimulus and the Fed vowing to keep the policy reins loose until 2014; the currency has easily fallen into the role.

That said, when we are at this extreme on the spectrum, there is a greater sensitivity to even modest shifts in fundamental changes. Just as we would expect the first rate cut (or expectations of that outcome) to drive a high yield currency like the Aussie lower, when the extremely favorable carry terms for the dollar come under duress; we see an outsized reaction from the market. With the Fed policy decision this past week, that button was pushed. Furthering the concern from the previous week that Chairman Bernanke didn’t offer an easy track for QE3 timing, the policy group gave an improved growth outlook and curbed expectations of another round of stimulus (much less a near-term injection). Indeed, the swaps showed the rate outlook moved up the pricing in of a 25bp hike from mid-2014 up to the third quarter of 2013 and 10-year Treasury yields advanced. However, is this a sustainable trend. Would the market start a rally this early on such distant expectations of what will be a tame return to higher rates? It is unlikely.

What matters once again are risk appetite trends. If capital markets (S&P 500) continue to climb on the outlook for firmer growth and stable, low rates; a low-yield dollar will likely fall back into its comfortable correlations. There will also be a ‘premium’ that was built into the dollar’s strong run on rate expectations that could also work against the currency early in the week given a ‘risk on’ market. However, we shouldn’t necessarily write off the alternative, underlying scenario: a genuine risk aversion shift. If the capital markets’ performance has found any traction on stimulus, the risk that the next move from the primary policy authority is a cut could break sentiment trends.

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Gold investment, paper style

One can now invest in gold minus the bulk, through what is casually termed as paper gold’.

When Neng Azhanie Adzman, 27, got married in March two years ago, the first gift she received from her mother-in-law was a gold bracelet.

“Most Malay girls will have gold jewellery, that’s the norm. Also, my husband’s family from Kelantan really believes in investing in gold.

“The problem, though, is that I’m not really comfortable wearing jewellery, so I’ve never been the type to buy gold jewellery,” she says.

So when she and her husband chanced upon a leaflet promoting the gold deposit account at a local bank in June last year, they decided to go for it.

Since that initial investment of RM500, Neng Azhanie has invested RM15,000 in gold. However, she recently moved her investments back to physical gold, for personal and religious reasons.

“Over the years, the value of gold has been going up. I think this is something which will be valuable for me to have in the long term,” she says.

Another investor, who only wanted to be identified as Adrian, says he had just opened a gold deposit account.

“I’ve always known you can invest in gold but in my mind, it has always been physical gold. It was only recently that my family members told me about the gold deposit account,” he says.

“I’ve only made a small investment, but it’s a start. I’ll see how things go this year before I decide whether to invest more. I am looking at gold to diversify my portfolio.”

With the price of gold soaring about 511% from US$278.95 (RM840) per ounce 10 years ago, to about US$1,700 (RM5,115) per ounce to date, consumers are not the only ones realising the potential of gold investments. Banks have been taking note too.

Maybank’s Community Financial Services head Lim Hong Tat says the public’s response to its Maybank Gold Investment Account (MGIA) has been very good since it was relaunched in May 2011. (It was previously called the Gold Savings Passbook Account.)

Golden returns: With the price of gold soaring about 511%, demand for gold investments has grown.

“From the repositioning of MGIA from May 2011 till March 6 this year, the number of accounts has grown by more than 100%.

“Demand for gold investments has grown. Just over a period of 11 months, the number of accounts, as well as the investment value for MGIA, has more than doubled its size,” he says.

The MGIA allows investors to buy and sell gold at a daily price in ringgit via a passbook without the hassle of keeping physical gold.

“One of the key features is that it requires only 1g of gold to open an account. The subsequent buying and selling is also fixed at a minimum of 1g of gold.

“When investing in gold, customers look for affordability, security, better returns, better protection and convenience,” he says.

Similarly, CIMB Bank’s Retail Financial Services head Peter England says the public’s response to the bank’s Gold Deposit Account, which starts at the ringgit equivalent of 5g of gold, has been “very encouraging”.

“Since launching the Gold Deposit Account in January last year, we have recorded a healthy average of RM25,000 investment per account. We now have close to 20,000 investors who have invested in this product,” he says.

What are the benefits of investing in gold?

“Gold is a non-yielding asset, unlike stocks which give a return in the form of dividends, or fixed deposit which earns interest. However, gold has appreciated steadily over the last 10 years and has shown good returns.,” he explains.

“The price of gold in the interbank market has appreciated over 400% over the last 10 years, giving an average return of 40% per annum.

“Over the last 10 years, gold has benefited from safe-haven demand amid the turmoil in global financial markets, the fall of the US dollar, the hike in oil price, and various geopolitical events.”

Customers, he says, frequently ask whether “paper gold” is backed by an equivalent placement in the gold market. He assures them that all customer purchases are hedged back-to-back in the interbank gold market.

Storing gold

Investing in “paper gold” has its benefits, including the practical aspect of storage and security, says Steven Yong, Strategist & Research head of Citibank’s Wealth Management Products.

“If you’re buying small amounts of gold, like jewellery and wafers, you have a place to store it and you’re not worried about robbers. But if you’re looking at investing in large amounts, then it becomes a problem,” he says.

“Where are you going to store the gold? Do you have adequate security? There are facilities to do that but in Malaysia, they are not readily accessible. Even with safe deposit boxes, how much gold can that hold? I’m talking about really large amounts.”

When advising customers on investments, Yong says Citibank always takes a portfolio basis approach.

“We advise customers to hold gold as part of their portfolio. It’s a hedge against inflation. I can’t tell you how much it will go up, but if you have it as part of your portfolio, gold can offset some of your volatility and the under-performers in other asset classes,” he says.

Citibank also offers a gold account, launched in July 2010, which requires a minimum investment of US$5,000 (RM15,050).

But what are the risks of investing in “paper gold”?

“The biggest risk would be market risk. Investors have to be aware that gold prices will fluctuate according to global market prices. And because it’s in foreign currency, there is also an exchange rate risk as well. They have to take that into account,” Yong explains.

Naturally, the next question would be where is gold headed this year?

Oversea-Chinese Banking Corp Ltd economist Barnabas Gan says that while gold has shifted from being a safe haven asset to behaving like a risk asset, his forecast is that it will climb to about US$1,800 (RM5,417) per ounce by the end of the year.

“That is on the assumption that QE 3 (third round of quantitative easing in the US) does not roll out. If it does, we are looking at gold prices of over US$2,000 (RM6,019) per ounce at the end of the year.

“At the moment, it’s at fair value. There’s definitely room for it to go up,” he says.

(Quantitative easing is a government monetary policy which is occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity. The US Federal Reserve has so far rolled out two rounds of quantitative easing dubbed QE1 and QE2.)

If you’re wondering whether gold investments are for you, Standard Chartered Bank’s general manager of Wealth Management Lilian Long has this to say: “It’s important for you to know your own risk appetite, so that the bank can do the appropriate risk profiling for you. The investor also needs to know what his holding power is.

“If you put this money in, but you think you will need to take it out within a few months, then there is always that risk this investment may not work for you.

“With properties, it’s all about location, location, location! With investments, it’s diversify, diversify, diversify! One cannot go into a single mono-product solution. It’s like putting all your eggs in one basket.”

The bank promotes gold investments through its Premium Currency Investment Gold, but it requires a minimum investment of RM250,000 or its equivalent in foreign currencies. For individuals with net assets exceeding RM3mil, they can invest RM50,000 or its equivalent in foreign currencies.

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