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Gold and the Canadian dollar: The ‘fading fortunes’ of two ex-darlings

These are stories Report on Business is following Thursday, Jan. 9, 2014.

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Gold and the loonie
Two one-time market stars are in the spotlight today: Gold and the loonie.

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The price of gold may be fairly steady so far after two down days, but a new projection, this one from Bank of America Merrill Lynch, suggests a drop to $1,150 (U.S.) an ounce this year. That's an 11-per-cent cut its forecast.

"While index rebalancing may support gold until 14 January, we see limited support to prices beyond that," the bank said, according to reports.

"Our continued bearish view is driven by the challenging macro-economic environment, which is best captured by rising U.S. 10-year rates and a persistent lack of inflation pressures."

The Canadian dollar, in turn, slipped again today, down to just above 92 cents U.S. by midday, having briefly dipped below that mark. The loonie, as Canada's dollar coin is known, has suffered a year-long erosion that's expected to continue.

That could get worse tomorrow if a key report on the U.S. jobs market is strong, said chief currency strategist Camilla Sutton of Bank of Nova Scotia, because it could heighten expectations of a faster stimulus pullback by the Federal Reserve, in turn pushing up the U.S. currency.

Chief economist Douglas Porter noted how the loonie has moved in tandem with gold.

He pointed out that the loonie's erosion comes despite the fact that other Canadian commodity prices are above their levels of last year at this time.

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"Oil has largely held its own and natural gas prices have roared back via the Polar Express," he noted.

"Curiously, however, the C$ has been closely tracking the steady sag in gold prices in the past year, a commodity that hasn't typically had a big pull on the C$," Mr. Porter added.

"Factors that could be weighing on both are Fed tapering, the slow comeback in the U.S.$ and less demand for safety as financial markets heal. As well, extreme low inflation is crunching gold, and is also heating up talk of a [Bank of Canada] cut."

(For Mr. Porter's research, see the accompanying infographic or click here.)

Central banks hold firm
The European Central Bank kept benchmark interest rates on hold despite a deflation threat that triggered a cut late last year, our European correspondent Eric Reguly reports.

The central bank's holding pattern - its key rate stands at 0.25 per cent - widely expected and came shortly after the Bank of England kept its benchmark rate unchanged at 0.5 per cent and its asset-purchase program intact even though the British economy appears to be gaining strength by the day. Bank of England governor Mark Carney has said rates are unlikely to rise until the jobless rate drops to 7 per cent.

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Economists believe another rate cut by the ECB is off the table for a while and that, if necessary, "non-standard" measures would be employed if the economic or banking markets were to suddenly deteriorate. These measures might include another round of liquidity injections into the banking system under the LTRO – long-term refinancing operation – last used two years ago in an attempt to end the credit crunch and keep banks lending.

Housing starts, permits slip
Housing construction in Canada suffered something of a setback late last year, pointing to what economists expect will be a mild softening this year.

Housing starts slipped 4.1 per cent to an annual pace of 189,672 in December, Canada Mortgage and Housing Corp. said today, down from November's revised measure of 197,797.

Starts in cities fell more than 5 per cent.

"Adverse weather did not seem to put a dent in December," said chief economist Avery Shenfeld of CIBC World Markets.
"We're looking for a marginal further softening in 2014," he added.

This came amid a separate reading by Statistics Canada showing that building permits fell 6.7 per cent in November from October.

"Lower construction intentions, particularly for the residential sector in Quebec and Ontario, were behind the decline in November," the federal agency said.

At the same time, a new forecast by real estate firm Royal LePage projected the housing market will shift in favour of sellers to kick off the year, The Globe and Mail's Tara Perkins reports.

In brief
Canadian Natural Resources Ltd. says it's holding on to its Montney shale gas assets after all because an auction that started last year didn't yield a good enough price, despite high interest. Said the Canadian resource company: "None of the expressions were of sufficient merit to complete a transaction at this time, and as such, the company has elected to retain the acreage, maintaining one of the largest Montney land positions in Western Canada with over 1 million net acres."

Ford Motor Co. today hiked its first-quarter dividend by 25 per cent to 12.5 cents, citing a "strong" 2013. Said chief financial officer Bob Shanks: "This increase in the dividend provides our shareholders with a regular, growing dividend that we believe is sustainable over an economic or business cycle."

Jean Coutu Group (PJC) Inc. posted better-than-expected third-quarter profit of $62.5-million or 30 cents a share, though revenue dipped to $712.5-million. Chief executive officer François Coutu noted the "competitive environment and restrictive regulatory" environment.

China's annual inflation rate slowed in December to just 2.5 per cent, easing at a faster-than-expected pace. Said Mark Williams of Capital Economics in London: "It may rebound this month due to the usual price volatility around Chinese New Year but is likely to remain subdued over the medium term. Despite the benign inflation outlook, we expect policy to remain relatively tight to contain the structural risks from credit growth."

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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