Oil, Gold Erase Losses To Close Higher

By John Lee
Wednesday, Jan 24, 2007
U.S. Treasury bond prices traded fractionally lower today. The U.S. government sold $20 billion in 2-year notes today in an auction, which drew a yield of about 4.9%. Bond prices have been trading within a fairly tight range for the past two weeks, after falling steadily since the beginning of December. Bond prices usually fall on economic strength and rise during weakness. Bonds initially shot higher last June, when the Fed initiated a rate-pause on the grounds of slowing U.S. growth and moderating inflation. Bond prices moved consistently higher during the second half of 2006, on continued weak housing, confidence and other economic reports. However, the beginning of December saw a dramatic shift in housing numbers, as well as other consumer, sales and confidence indicators. Bond prices have been falling since the beginning of December when the turn-around reports started to appear. Speculators will be paying close attention to any future housing reports, which are used as key indicators to the broad economic health of a country.

The yen gained dramatically against the dollar and the euro today, on a Reuters report that suggested that a G-7 meeting next month could focus on the yen's recent declines. Extreme continued weakness in the yen has led global leaders to feel that the playing field is not balanced, which could lead to major disruptions and upsets in the currency market in the future. Investors have been selling the yen heavily against the dollar, euro and other foreign currencies on Japan's slow-growing economy. Sentiment across the board led to record lows against the euro and yearly lows against the dollar, but today's report by Reuters of international opposition to yen weakness led to a significant bounce off of those lows.

Crude oil closed with fractional change today. Crude prices reacted initially to rising inventories by selling off, but erased those losses to close barely green on the day. Crude stockpiles rose by about 750,000 barrels last week, and crude supplies are well-above their 5-year averages. Crude has fallen over 30% from record July highs, and OPEC has called for massive international output reductions to curb the falling prices. Just recently crude prices have turned around and started to push higher; price strength can be seen in crude's rebound after selling off on a strong inventory report. Natural gas fell nearly 3% on speculation that strong inventories could easily handle any spike in demand.

Gold erased early losses to close up fractionally today. Gold initially sold off with energy, and on relative dollar strength, but the late-day crude rally helped to spark gold buying. Gold usually trades inversely to the dollar and with oil, and it was oil action that lifted gold off the day's lows to close slightly green. Traders turn to gold as a safe-haven in the face of rising energy costs and dollar weakness. Copper prices continued to rise today, closing up nearly 1% on speculation that inventories have fallen in China.

Grains fell across the board after President Bush signaled last night that ethanol will not be the only source for alternative fuels, and that new sources aside from grains will be explored in coming research. Wheat fell nearly 3%, corn fell nearly 2% and soybeans fell just over 1.5%.

Economic News
No major U.S. economic news to report today.