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Production Stalls Driving Dollar Down And Gold Up

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Factory production stalled significantly in April, as American manufacturers deal with blows that range from a strong dollar to cheap oil.

The unchanged reading in manufacturing followed a paltry 0.3 percent March gain that was slightly larger than previously estimated, according to a Federal Reserve released today. When adding mining and utilities into the figures, total industrial production declined for a fifth consecutive month, however.

The strong dollar (which has been falling during the last five weeks) is surely one culprit. However, overall weaker global markets, independent of the dollar’s position, are also to blame. Additionally, the cut back in U.S. oil production and therefore the purchase of equipment and vehicles related to the sector have also hurt industry.

It goes without saying that the dollar is losing strength over these developments. The greenback was also hit today by a dramatic decline in consumer confidence. The preliminary reading issued by the University of Michigan for May thus far puts that sentiment at a seven-month low.

The weaker dollar helped to support gold although in regular trading the yellow precious metal was up only 0.15%. Traders are letting the dollar do the talking.

We hesitate to make sweeping generalizations. We’ll go out on a limb here, though, and say that the American economy is finally feeling the effects of the cessation of QE3 and that new momentum has to be found for the American economy to regain its mojo. Our take is that there has to be more money put in the hands of consumers.

We said some years ago that weak inflation is a far greater threat to any economy than a slightly overheated pace. And here we are. We’d like to issue a memo to all those who control the money supply: we do not live in the Weimar Republic in 1926.

U.S. equities were either marginally up or marginally down today. Nothing spectacular happened there that would affect gold.

West Texas Intermediate was down a very, very small fraction while Brent was up a very small fraction. Crude is having a tough time staying above $60 per barrel, the first stage where we might see a rebound in U.S. production. We won’t see a substantial improvement in oil output until it hits $65 or perhaps even $70.

While technical indicators may be telling us one thing – buy – fundamentals still seem to be a little questionable. If the dollar falls much more it will reignite fears of a Fed rate increase. That in turn, will weigh heavily on gold and silver.

Fundamentally, it seems as if we will continue to trade in a range. What’s changing is that price movement will be slower.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer