Gold run set for breather as rate hikes eyed

While fears over the stability of paper currencies and inflation may keep gold high, it will struggle to maintain the soaring investment flows that took it to an all-time peak of $1,226.10 an ounce in December, analysts say.

In the short term, gold's underlying fundamentals look fragile as jewelry demand languishes and miners lift supply. Spot prices had retreated from their December highs to around $1,076.50 an ounce by early afternoon on Wednesday.

"We see a number of headwinds for investors in gold, most notably potential increases in rates," said RBS Global Banking & Markets analyst Daniel Major. "The opportunity cost of investing in commodities is going to be important."

Gold sinks as Greece, Bernanke lift dollar

Gold futures sank on Wednesday as the dollar regained some safe-haven strength as European lawmakers delayed a decision to address Greek's debt problems.

Gold for April delivery fell $2.70, or 0.3%, at $1,074.50 an ounce in electronic trade in New York.

On Tuesday, gold rallied as talk of a German plan to rescue Greece led stocks to soar, removing safe-haven demand for the dollar and lifting commodities.

But the dollar gained some strength early Tuesday. The dollar index (INDEX:DXY) , which tracks the performance of the greenback against a basket of currencies, rose to 80.031 from 79.768 late in the prior session.

A meeting between the German finance minister, Wolfgang Schaeuble, and law makers, ended on Wednesday without any concrete package of Greek aid announced. Expectations remain for a package to be announced on Thursday.

Also helping lift the dollar, Federal Reserve Chairman Ben Bernanke said in written testimony that the Fed may raise the discount rate. While Bernanke clearly explained this would not be a monetary tightening, the speech still confirmed the Fed's plans to unwind its extraordinary liquidity-boosting measures.

News Hub: Fed to Tighten Credit, Raise Rates

Fed Chairman Ben Bernanke outlines a plan to pull back policies that have been propping up the economy. Dow Jones Newswires' Neal Lipschutz and WSJ's Sudeep Reddy join Kelsey Hubbard in the News Hub with more.

"The Fed is carefully laying the ground work to begin tightening policy, but is not expected to act for quite a while longer," said Michael Gregory, senior economist at BMO Capital Markets, in note.

The dollar also advanced even after the government reported the U.S. trade deficit widened to $40.2 billion in December from $36.4 billion the month before.

A weaker dollar tends to boost gold and metals as it makes them cheaper for holders of other currencies. Gold also loses its appeal as a hedge against weaker currencies.

For gold, the "technical situation remains bearish after its recent break down below previous support $1,075 an ounce," analysts at GoldCore wrote in a note. "However, there would appear to be strong support at the $1,000 to $1,030-ounce price level which was the previous strong resistance."

Among other metals Wednesday, copper for March fell 2 cents, or 0.6%, to $2.97 a pound. Silver for March delivery dropped 18 cents, or 1.2%, to $15.26 an ounce.

March palladium dropped $4.90, or 1.2%, to $411.70 an ounce, while platinum for April gained $5.30, or 0.4%, to $1,507.70 an ounce.

OPEC Worries U.S. Economic Uncertainty Will Hurt Oil Demand

Uncertainty about the pace of the U.S. recovery is putting oil-demand growth at risk for the world's largest crude consumer and is weighing on global consumption, the Organization of Petroleum Exporting Countries said Wednesday in its monthly report.

The warning, adding to OPEC's concerns about European countries such as Greece, suggests the group is likely to stick to its existing production quotas when it meets March 17 in Vienna.

"The 1% forecast growth in U.S. oil demand this year is facing a set of obstacles that could prevent it from materializing," the report said. "If this happens, then the U.S. oil demand might come flat if not negative for the total year," OPEC added. The U.S., which uses close to a quarter of the crude oil consumed worldwide each day, "is a key country to world oil-demand changes," the report said.

The organization also warned of "heightened fiscal uncertainties in the euro zone," with "the mounting public debt of some of its member countries, particularly Greece." Greece's budget deficit and debt load have put its sovereign bonds at risk of default, triggering credit-market jitters world-wide.

Fellow European Union partners are now considering a bailout. In the major industrialized countries, "the recovery is far from self-sustaining and remains largely dependent on continued government support," OPEC said. The organization, which has come under pressure in the past to increase production, may have a vested interest to paint a bleaker picture than consumer nations.

But its concerns follow last week's data from the U.S. Department of Energy that unexpectedly showed a weekly buildup in crude inventories as refineries continue to struggle with not enough demand. Despite its concerns, OPEC said Wednesday it was keeping its world oil-demand forecast unchanged for 2010, hoping that rising Chinese consumption will make up for any weakness in Western economies.

Global demand is still expected to average 85.1 million barrels a day this year, growing by 0.81 million barrels a day from last year. That would suggest a downgrade in demand growth of 10,000 barrels a day. In its previous report, OPEC estimated demand growth at 0.82 million barrels a day. But the expected rise in global consumption comes as OPEC members may already be outpacing demand growth.

While OPEC sees demand for its own oil at 28.8 million barrels a day on average this year, the group's production rose to 29.2 million barrels a day in January, up 63,200 barrels a day. The statistics, based on secondary sources, show compliance with production cuts agreed in 2008 has now fallen to 53.5% from 80% in March last year.

Higher production in Angola and Venezuela more than offset a drop in Nigeria's output, which fell by 124,000 barrels a day in January. There, militants in the Niger Delta restarted attacks on oil installations last month, shutting down some production for Royal Dutch Shell PLC and Chevron Corp.

Taiwan Will Allow LCD, Chip Investments in China

Taiwan will end a ban on domestic companies building liquid-crystal-display factories in China and allow chipmakers to invest in their Chinese peers, as long as they spend more locally and keep their best technology at home.

Flat-panel and chip makers will be allowed to invest in manufacturing facilities in China provided they already use more-advanced technology in Taiwan, Minister of Economic Affairs Shih Yen-Shiang said at a press conference today in Taipei. The new rules will be effective “within days,” he said.

Easing of rules would allow AU Optronics Corp., Chi Mei Optoelectronics Corp. and Innolux Display Corp. to compete with South Korea’s Samsung Electronics Co. and LG Display Co. by manufacturing panels closer to their customers in China. Taiwan Semiconductor Manufacturing Co., the largest custom-chip maker, and AU plan to take advantage of the new rules, they said today.

“The growth driver for the LCD industry is televisions, so the key will be larger factories,” said Richard Ko, who rates AU “outperform” at Jih Sun Securities Ltd. in Taipei. “If the LCD industry is healthy this year then it will be beneficial to those who go first, but if the industry isn’t as healthy as expected, first movers may face bigger risks in building more capacity in China.”

Innolux added 0.6 percent to close at NT$50.60 in Taipei, AU advanced 0.3 percent to NT$36.30 and Chi Mei was unchanged at NT$24.05. The benchmark Taiex index rose 1.1 percent.

Panel makers can start a combined total of three LCD factories of sixth generation or above in China, as long as the applicant already has a plant in Taiwan that’s at least one generation ahead, the ministry said in a statement. There’ll be no restrictions on facilities below sixth generation, it said.

Chipmakers can apply to invest in or build factories in China that are two generations less advanced than those already on the island, it said.

Benefit Taiwanese Companies

Taiwan Semiconductor, which currently operates a plant near Shanghai that produces chips on 8-inch wafers, plans to upgrade the facility to 0.13 micron technology from 0.18 micron, JH Tzeng, spokesman for the Hsinchu-based company, said by phone after the announcement. Taiwan Semiconductor operates more- advanced 12-inch factories in Taiwan.

Chipmakers remain limited to building plants in China that can make 8-inch wafers or less, the ministry said.

The new rules will pave the way for Taiwan Semiconductor to use technology as advanced as 90 nanometers in China, Woody Duh director general of the economic ministry’s industrial development bureau said. Taiwan companies were previously restricted to 180 nanometers, or 0.18 micron, the ministry said.

AU, based in Hsinchu and currently Taiwan’s largest LCD maker, operates a 7.5-generation factory in Taichung, Taiwan and is building an 8.5-generation plant that can make panels the size of a pool table. The later generations enable makers to supply larger screens more efficiently for use in televisions.

“The move will increase the competence of Taiwan panel industry,” AU said in a statement after the government’s announcement. The new rules will help shorten the company’s shipment cycle and facilitate on-site services in China.

Building Advanced Plants

Chi Mei, which plans to merge with Innolux next month to overtake AU in Taiwan, is also building an 8.5-generation plant in Kaohsiung, southern Taiwan.

“If Taiwan doesn’t invest in China, we may lag behind and lose our competitive advantage,” Taiwan Premier Wu Den-yih said Dec. 8.

Taiwan maintains restrictions on the value and type of investments it allows its companies to have in China, with advanced chip-making and the manufacture of ethylene among those currently banned, to prevent strategic technologies from migrating to the mainland.

China is Taiwan’s largest export market and regards the independently governed island as part of its territory, threatening to attack if it declares formal independence. The two sides split 60 years ago after Mao Zedong’s communists took control of China, forcing the Kuomintang to retreat to Taiwan.

Suwon, Korea-based Samsung, the world’s largest LCD maker, said Oct. 16 it will spend 2.6 trillion won ($2.2 billion) to build a 7.5-generation panel factory in China. Two days earlier, Seoul-based LG Display, the second-biggest, said it will form a $4 billion venture for an 8th-generation LCD plant in Guangzhou.

Honda adds vehicles to recall over air bags

Honda said Tuesday that it is voluntarily adding 437,763 vehicles to a previously announced recall to fix drivers-side air bags in 2001 and 2002 model year vehicles, bringing the total number of affected vehicles to 947,913 worldwide.

The company said it will replace the air bag inflator in the cars because they can deploy with too much pressure, causing the inflator to rupture and injure or kill the driver. Honda said it is aware of 12 accidents related to the issue, including one that resulted in death with the others causing injuries.

The expanded recall by Japan’s No. 2 automaker includes 378,758 vehicles in the U.S., as well as 41,685 in Canada, 4,042 in Japan and 13,278 in other countries. That brings the total number of Honda vehicles recalled for the air bag issue to 826,424 in the U.S.

Models affected include the 2001 and 2002 Accord, Civic, Odyssey CR-V and some and some 2002 Acura TLs.

John Mendel, Honda’s executive vice president of Honda in America, said Tuesday evening that Honda informed NHTSA of its decision to expand the recall Tuesday and notified the Japanese government.

Mendel said Honda decided to hold a conference call with journalists Tuesday due to the increased scrutiny and interest in automotive safety caused by several recent Toyota recalls involving unintended acceleration on many of its models as well as brake problems on its popular Prius hybrid.

“There is certainly a heightened sensitivity right now with anything that has to do with recalls,” Mendel said.

Honda issued its first recall related to the air bag inflators in November 2008 for 3,940 copies of 2001 Accords and Civics in the U.S. That recall was based on three complaints dating back to February 2007.

In 2009, Honda received five more reports of shards and in June 2009 Honda expanded the recall to 443,727 Accords and Civics from the 2001 model year.

That move drew questions from the National Highway Traffic Safety Administration, which asked Honda in August 2009 why the expanded group of vehicles hadn't been part of the original recall. Honda said in September 2009 it and its supplier, Takata, had limited the recall based on their understanding of a problem with the air bag propellant.

The June recall was “expected to capture all affected vehicles,” Honda told NHTSA in September.

The public file does not contain any further requests for information from NHTSA about the problem.

Mendel said NHTSA’s inquiry remains pending. Still, Honda officials said its action today was not due to NHTSA's questions or pressure.

Honda said it is in the process of notifying all owners of affected vehicles and is encouraging the owners it notifies to take their vehicles to an authorized dealer so that the air bag can be replaced.

Bernanke lays out plan for tighter money

Federal Reserve Chairman Ben Bernanke unveiled a blueprint Wednesday for pulling back the trillions of dollars the central bank has provided to prop up the nation's economy.

"These programs, which imposed no cost on the taxpayer, were a critical part of the government's efforts to stabilize the financial system and restart the flow of credit," Bernanke said in prepared testimony for a Capitol Hill hearing that was postponed due to snow. "As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs."

But Bernanke also emphasized that the U.S. economy still needs the support of easy money policies. He said that "at some point" in the future the Fed will "need to tighten financial conditions" by raising short-term interest rates and reversing programs that pumped liquidity into the markets.

The markets have been waiting to hear an inkling of how the Fed plans to start raising rates and pulling back on the trillions the Fed has pumped into the financial system since it started teetering on the edge of collapse back in late 2008.

For the last 18 months, the Fed has bought mortgages, long-term Treasurys and the debt of mortgage finance firms Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).

Currently, the Fed holds $2.29 trillion on its balance sheets, up from $934 billion in September 2008, when the financial crisis really kicked into gear.

On Wednesday, Bernanke laid out a plan to sell some of those mortgages, Treasurys and debt, by offering what's called reverse repurchasing agreements. Under those agreements, the Fed sells its securities to a third party while agreeing to rebuy them at some point in the future.

The second way the Fed plans to soak up money is to sell banks and financial firms the equivalent of certificates of deposit. In this case, the Fed gets a chunk of the bank's reserves in exchange for paying interest at a steady rate. Dubbed a "term deposit facility," these deposits would be auctioned off and banks couldn't count their investment in the Fed as cash or reserves.

"Reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so," Bernanke said.

Bernanke said he planned to start testing out such programs this spring.

But he added that the "firming" of exit strategy policy would start with an increase in the interest rate paid on reserves, adding that the Fed could always take a more "rapid exit," by increasing the rate paid on reserves if the economy needed it.

Bernanke was supposed to testify before the House Financial Services Committee about unwinding emergency Fed liquidity programs. The hearing fell victim to the snow that has blanketed the nation's capital over the past five days, and has yet to be rescheduled. Instead, the Fed released Bernanke's statement.

Two weeks ago, the Fed left interest rates unchanged at near zero percent, pointing to improvement in business spending but adding the recovery is likely to be "moderate" for some time.

But one member, Kansas City Fed President Thomas Hoenig, voted against the Fed's latest action, saying he thought economic conditions had improved enough so that low rates were "no longer warranted." He was the first dissenting vote among Fed policymakers since January 2009.