As the onset of QE2 and ongoing concerns over the health of the euro zone continue to plague currency markets, many investors have sought to limit their exposure to fiat currencies and establish larger positions in the precious metal and commodity markets. However, as worries over the euro zone–especially with regards to Irish debt–drive down demand for the common European currency, the greenback has made a small surge as of late, with the U.S. dollar index posting gains of 2.5% during the month of November.
This strength in the greenback has combined with growing fears over a commodity bubble to punish precious metal and soft commodity investors over the near term; sugar prices were off more than 18.5% over the past week, while gold saw its value decline by a much more modest 5% over the past five days. While the events in many of the soft and grain markets can be explained by supply and demand issues, the same cannot be said for gold, which has not had the same volatility in supply over the past few weeks and is instead regarded as a currency of its own by many traders. This gold ‘currency’ is heavily dependent not only on investor fears about the global markets but the health and inflation expectations for the U.S. dollar as well [read Gold ETFs: Boom Or Bust?].
For these reasons, today’s report of the October Consumer Price Index looks to weigh heavily on the precious metal markets. Analysts expect that the CPI level will show a month-over-month change of 0.4% while core CPI–less food and energy–will likely come in just above zero at 0.1%. If these numbers hold up, it will make for a 0.7% year-over-year gain, the lowest annual CPI gain in close to 50 years, a figure which could ease investor fears over imminent hyperinflation and reduce demand for the yellow metal. “I don’t think that realized inflation like CPI is likely to surprise meaningfully to the upside for a while,” said Adrian Cronje, chief investment officer for Balentine. “It’s inflation expectations in the future that matter. Inflation can become a self-fulfilling prophecy if expectations are not kept in check.” [see The Ten Commandments Of ETF Investing]
Due to this CPI reading and its likely impact on gold given the yellow metal’s recent plunge, we look for the SPDR Gold Trust (GLD) to be active in today’s trading. GLD is one of the most popular ETFs in the world with over $55 billion in assets under management and average daily volume exceeding 16 million shares. The fund has posted solid gains so far in 2010, surging more than 20% since the start of the year, but has been on a slump in the past week; GLD has declined by close to 5% as a stronger greenback has helped to limit demand for the precious metal. If however, CPI levels come in higher than expectations due to (until recently) soaring commodity prices, look for demand in GLD to pick back up very quickly. If on the other hand the CPI falls short and deflation becomes a real possibility, investors may continue their exodus from gold and pile into bonds, further sinking the value of GLD [also read Technical Trading Ideas: GLD].
Disclosure: Eric is long gold bullion and IAU.