Gold drops after dollar rockets

In the Lead: “Bubble, Bubble on The Wall…”

The “B” word has been making the rounds quite frequently since the start of 2011 in certain niches; that is for sure. As to how many of how few recognize a spherical object of that type when they see one (let alone when they actively participate in one), well, that is a story for another day. Suffice it to say that, historically speaking, the recognition of a balloon is normally applied in retrospect and that the popping of same never occurs in a slow-motion manner.

New York spot gold dealings started the day with a loss of from $6 to $8 per ounce and while they traded above the $1,505.00 level and as high as $1514 overnight the nervousness remains tangible as other parts of the metals’ complex suffered thrice the damage in the wake of economic-flavored jitters being displayed by the specs. Silver fell 58 cents to the $34.50 mark and remained under pressure once again while the CME flat-out asserted that it was not responsible for bursting the bubble that had clearly formed by the last trading day of April.

The platinum-group metals dropped by fairly sizeable amounts this morning as players in that niche also found it wiser to let go of positions rather than build on some of last week’s hard-fought gains. Platinum fell $29 to start off the session at $1,745.00 the ounce, while palladium lost $11 to ease to the $722.00 per ounce level. Rhodium also continued weaker, trading at $1,890.00 and exhibiting a $10 per ounce decline in the quotes we obtained from New York traders. Not much in the way of specific news from the automotive sector was available at this early stage of the weekly trade, but the complex was basically seen following the larger-than-3% decline in crude oil and was also seen as worried about Asian and European future demand as economic conditions came into question.

Another factor that likely played into the weakness on display in the commodities niche this morning was the fact that CFTC data revealed that players in agricultural commodities have scaled back their bullish positions (in some cases by hefty percentages) in the wake of perceptions that the recent advent of stratospheric food prices has caused a sufficient amount of demand destruction in the niche to result in a palpable easing of whatever shortages were thought to be present in the markets. Wheat’s net-long positions shrank by 54% in the latest reporting week (ended May 17) while cocoa positions were seen contracting by 39%. Similar 30% + declines in net-long positions also took place in lean hogs and coffee. Chocolate lovers, rejoice. Caffeine junkies, party on.

Meanwhile, Fed-watching addicts, well, keep on watching. Bloomberg notes that the “cue” for the U.S. central bank to begin its “mopping-up” of the monetary stimulus campaign may actually be inflation; not as seen and felt on the street, but inflation-related expectations. Such anticipation has leaped by more than 43% since the start of what has become known as QE2 that was set into motion last November.

The jump in the metric of what is expected down the road versus what is tangible at present is now sufficiently large to serve as that “green light” that the Fed needs in order to set the monetary policy’s course towards the “Exit” sign. Or, as former Richmond Fed President Alfred Broaddus puts it “this is one of those really critical turning points in monetary policy where it’s pretty clear the next move is toward tightness, and the whole question is timing.”

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