In the Lead – Greece is the Word

by Jon Nadler, Kitco Metals Inc. on June 27, 2011 · 0 comments

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Bullion BarsAlmost exclusively, the focus for various financial market players on this last Monday of June, was Greece. The optimism that was reflected in the gains that the European common currency was able to record this morning was driven by perceptions that the Greek Parliament was closer to approving the belt-tightening measures that would help avoid a default by the debt-ridden EU member. A three-day-long debate by Greek lawmakers begins today in Athens on the specifics of said measures, albeit one might as well rename the country "Sparta" given the additional levels of austerity being thought as necessary to impose upon its denizens.

There are some news reports that some 8% of the Greece’s bank currency deposits have "taken to the sea" since the start of 2011. Should that ebbing in bank deposits grow towards the 35% mark, the country’s banks might well experience a "severe cash shortage" in the opinion of Moody’s rating agency. There was no mention as to where such monies may have been headed, albeit certain, exclusively gold-obsessed forums were quick to posit the theory that they were on a quest for the "Golden Fleece" (or similar golden objects).

Meanwhile, following last week’s major sell-off, the pitched battle for the $1,500.00 mark continued to unfold in the gold market this morning, albeit the yellow metal appeared unable to benefit from hitherto generally supportive factors such as a weaker dollar, stronger euro and minimal losses in crude oil. An overnight dip to the $1,490.00 area reignited perceptions that whatever the scope of the recent falling away from the $1557.00 level might be, the decline might not draw to a close at least until some support is tested nearer the $1,480.00 value zone.

Late Friday analysis from Elliott Wave’s team noted that gold had closed beneath its up-trending support line and that the so-called "disparity index" had underscored just how weak the latest upward thrust early last week had been in bullion. The EW take on the market is that the bearish case currently cementing itself in gold would only be negated if the precious metal managed to overcome the $1,558.75 figure.

Spot gold dealings opened with a $3.30 per ounce loss in New York on Monday and the indication on the bid-side was $1,498.30 at last check. As mentioned, the selling came despite the 0.10 loss that the US dollar was experiencing on the trade-weighted index and on the heels of an only 36-cent decline in black gold. The greenback actually pared its earlier losses in the wake of US consumer spending figures which showed no increase for the month of May. It traded at 75.66 on the DXY index.

Silver fell 53 cents to start the session near the $33.80 level (a loss of 1.54%) and its "stair-step" slide from the latter part of May now firmly establishes the June 10th $37.90 mark as serious overhead resistance to have to be overcome. The white metal’s break to under the $34.40 level, in the angle offered by Elliott Wave analysts, might be signaling the potential for a steeper decline towards lower levels.

Platinum and palladium exhibited follow-through selling as well as they opened for trading action this morning. The former lost $7 to ease to the $1,678.00 bid mark, while the latter declined $5 to be quoted at the $723.00 per ounce bid level. Rhodium was quoted at $1,925.00 the ounce on the bid-side following a $25 loss late last week. Other industrial metals were down as well, with copper losing 1.17% at the $4.05 level and with nickel down 1.42% at the $9.88 mark.

The New York Times ran a story this morning about rising local government debt in China. There have been a growing number of reports in the global financial press lately about China’s seemingly non-stop building frenzy and the fact that there are thousands of large office and apartment buildings that are sitting vacant. Ditto the hundreds of high end name luxury goods-laden stores that no one can afford to shop in. China’s leaders have finally begun an enquiry into just how significant the size of local government debt burdens has become.

There is justifiable angst in China about whether some municipalities will be able to honor their debt obligations. As things stand right now, the country’s huge foreign exchange reserves imply that the China might be able to avoid a complete "meltdown" for some time to come, but this issue is just another in a growing series of "bubble signs" in the country, and is one that appears to be part of a growing structural problem. The topic of a "hard landing" by the former darling of the global economy is thus not only gaining traction but has some serious credence. As we noted in many previous instances, any such "runway accidents" could put a serious damper on the demand for "stuff" coming from that all-important economy.

This is not to say that everything is lining up on the gloomy end of the spectrum for China. Premier Wen reiterated his faith in the fact that he and his team of economic surgeons can keep the inflation dragon at bay in coming months. Albeit Mr. Wen is not so convinced that he can push price increase levels lower, towards the 4% mark, he is reasonably confident that they can be kept at under the 5% one, later this year. Don’t tell that winning story to Societe General’s analysts however; they opine that China may well report June’s inflation levels…at 6.5% (oops). Of course, that would only bolster the case for further (and perhaps more aggressive) tightening by the PBOC.

Speaking of tightening (quite in vogue these days, in one form or another), the Bank for International Settlements said that the world’s central banks should begin hiking key interest rates, like …yesterday. The BIS said that the official sector might have to act faster than it historically has in normalizing the interest rate environment before inflation becomes problematic. There is little doubt that the BIS was pointing a suggestive finger (mainly) at the US Fed in its latest annual report.

As it turns out, numerous central banks in Asia and in Latin America have already been on a track to raise rates in order to combat inflation. However, the US, the UK, and Japan are being seen as laggards in this exit process, while the only one that has shifted its "easy money" policy a notch- thus far- has been the European Central Bank. One would be wise to factor in the shift in trend at this juncture, as the "laggards" may not remain that for very much longer…as certain "doors" crack open in the developed economies of the world as well….

One door that is most likely to remain tightly shut is the one at Fort Knox (and West Point as well). America’s gold, the subject of much sci-fi and conspiracy material, appears not to be offered for viewing if the Treasury department gets its way. Untold numbers of gold bugs still firmly believe that the America’s gold is totally gone (or, that it is, surely and/or entirely pledged to other mysterious entities).

Enter Dow Jones Newswires and this statement from the Inspector General of the Treasury Department, Mr. Eric Thorson:

"Not one troy ounce" of the extensive US gold reserves has been legally encumbered to another country or entity. Those [Ft. Knox] doors aren’t opening … there is nothing there that can happen."

Mr. Thorson said regarding the safety of US gold stocks. As for the audits of America’s bullion stash, Mr. Thorson’s agency completed its latest audit last September, showing that U.S. gold reserves total 9,300 tons with a market value of $320 billion.

Mr. Thorson is also the first outsider to be granted full access to the U.S. Bullion Depository in 37 years, Bloomberg recently reported. He is responsible for keeping track of the U.S. Mint’s "deep storage" gold and silver reserves. Now, if the US GAO would only revalue that pile of bars at market, in lieu of $42.20 an ounce…we might have something worth writing about.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

www.kitco.com and www.kitco.cn
Blog: http://www.kitco.com/ind/index.html#nadler

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