Gold Rises on Energy Expectations

U.S. 10-year Treasury bonds rose today, despite
an unexpectedly strong non-manufacturing ISM report. Bonds have been
trending lower since the beginning of December, when the U.S. began to report
turn-around economic numbers. The U.S. was plagued with negative economic
reports through the second half of 2006, which sent bond prices steadily higher.
Bond prices usually rise on weakness and fall on strength. A string of
recent positive reports from the U.S. has sent bonds lower, with bond prices now
consolidating around 5-month lows. Fed futures now show a nearly 100%
chance that the Fed will keep rates at 5.25% in March; interest rate futures also hint that
investors are now looking for coming hikes, not cuts.

The yen surged against the dollar and the euro
today, ahead of the G-7 meeting this week. Investors are speculating that
the conference will focus on yen weakness as a debate topic, and many forecast
that the conference could signal a short-term end to yen weakness. The yen
snapped back in response to European officials’ comments that the committee
would be focusing on the yen. The international currency market has
favored currencies backed by inflationary, positive-growth economies, which puts
Europe in the most favorable light. The U.S. has just recently been able
to string a number of positive reports together, which has helped the dollar off
recent lows against the euro. Japan’s continued weakness has led to record
lows for the yen, and threats of political interference in the form of the G-7

Crude oil fell 0.5% to close at $58.71 a barrel,
on speculations that crude supplies can handle the cold weather. Oil
prices fell dramatically in the first 2 weeks of 2007, but have since rebounded
and have nearly erased all losses from the board. Cold weather in the
U.S., coupled with U.S. plans to double its strategic oil reserve in 10 years,
have helped oil prices to rebound strongly from recent lows. Natural gas
futures rose over 2% on a cold snap in the Northern U.S., which should effect

Gold futures rose just over 0.5% today, on
speculation that energy prices are on the rise as a whole. Gold usually
trades inversely to the dollar and with oil, but it was speculative oil trading
that dominated today’s action. Despite crude’s decline today, investors
feel that oil has more room to move higher, and predicted that gold costs would
rise with energy prices. Copper prices fell fractionally today on high
supply levels, pushing lower to 10-month lows.

Grains traded mixed today. Soybeans rose to
an 18-month high, but closed up fractionally today, on speculation that farmers
will convert soybean land for corn use to handle ethanol demand. Corn fell
fractionally and wheat fell nearly 1%.


The ISM’s
non-manufacturing index grew unexpectedly to 59.0, the highest since May.

John Lee

Associate Editor