In The Lead – Europe After Dark

by Jon Nadler, Kitco Metals Inc. on October 26, 2011 · 0 comments

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Precious Metals CommentaryThe talks intended to come up with some solutions to Europe’s debt woes entered their home stretch this morning following a quite intense Tuesday during which hopes were lifted and dashed in a roller-coaster-like series of news headlines. Investors were presented with everything from promises that this time the plan will be "grand" to a pseudo "walkout" by the EU finance ministers when they cancelled a meeting that was to be held today.

Nondescript statements coming from Brussels read something like "Work on the comprehensive package of measures to curb the sovereign debt crisis will continue. The aim is to adopt all necessary elements and details concerning the package, as promptly as possible."

On the ‘coming attraction’s calendar for today and tonight, a couple of thrillers are among the offerings. First, Ms. Merkel will make a pivotal speech. Then, the Bundestag will vote on the EFSF matter. Finally, the ‘summit of all summits’ will get underway near sundown in Europe, with the hope that the sun will not be allowed to go down on Greece or Europe’s banking sector.

ABC News reports that “the eurozone is locked into negotiations with banks and other private investors to take losses of as much as 60 percent on their Greek bond holdings, but negotiations for the banks have indicated that they will not be willing to accept those losses voluntarily. Forcing losses onto banks could trigger big payouts of credit insurance and cause huge turbulence in global markets."

At least one source, the Wall Street Journal, says that you should not put much faith in the ‘new/improved’ EFSF number-whatever it ends up being. The Journal opines that issues such as how much money would actually be required for Greece and how much for the banks, as well as the key variable of trying to bring down borrowing costs for some of the PIIGS will result in the ‘final’ number to be offered soon being anything but ‘final.’ Keep the dice rolling?

That’s exactly what some did, on Tuesday; commodity players, for one. They certainly tried to come off as being busier than the EU’s finance ministers and they did not sit around on their hands on Tuesday. In fact, they decided in unison that the time was ripe for going out on a big buying spree. The sortie by the bulls actually got started last Friday and it has been as unmistakable as the Northern Lights in Arkansas. Copper has gained 15% since that day, despite hardly anyone having heard of any change of radical proportions in the metal’s fundamentals.

In fact, CFTC-provided speculative positioning reports would actually indicate feeble demand for the orange metal. Now go tell that to the specs who have been stirring the copper pot since Friday… Crude oil flirted with the $93-per-barrel price level. All of these news come literally just days after it had been concluded that commodities suffered some of their worst damage since 2008 recently. Taking anything by Vegas-destined money to that kind of on-again/off-again speculative party is clearly fraught with financial and emotional risk.

Bloomberg News noted on Tuesday that "The biggest rout in commodities since the global recession may be a sign that the fastest U.S. inflation in three years is peaking. The Standard & Poor’s GSCI Index of 24 commodities entered a bear market last month after sliding more than 20 percent from a two-year high in April, on concern that slower growth will cut demand. A slump in the gauge from a 2008 record preceded a drop in inflation, while a 2009 rebound caused the consumer price index to climb. Raw materials fell 12 percent in September as the CPI rose 3.9 percent from the same month a year earlier, the most since 2008." Now, we ask: what percentage of that reality was reflected in Tuesday’s spirited actions?

Yesterday some copper bulls pointed to Chinese base-metal appetite as the emboldening factor for the double-digit-sized rally that the commodity has exhibited in recent days. Better than expected manufacturing data was offered up by giddy fund managers. Evidently, they had not been apprised of countervailing opinion coming from Societe Generale.

One of its strategists warned that "Investors should prepare for both a hard landing and a yuan devaluation."

A key sign of tightening liquidity in China has been the steep fall-off in the accumulation of foreign-exchange reserves in Q3.

The Societe Generale strategist pointed to a "previous soft patch in China’s forex reserves accumulation, which coincided with dollar strength. The drop helped foreshadow a large fall-off in commodity prices and emerging-market equities during the second half of 2008."

 

Doctor Nouriel "Doom" Roubini said yesterday that “If China has a hard landing, for a period of time that’s going to hurt growth and reduce commodity prices until China recovers and until the rest of the world recovers."

Without citing specific odds, Dr. Roubini quantifies the chances of a Chinese runway incident as being a "meaningful probability." The timeline for said event commences roughly after 2013. Dr. "Doom" also envisions a 50-50 probability of a eurozone and US recession at the present time.

Marketwatch’s Jon Markman does not expect the advent of an EU deal to address the debt issues as the piece of the puzzle that will avert a recession in Europe.

Markman opines that "No matter how much policy makers beam on the podium when a deal is ultimately announced, you should be aware that the combination of haircuts and recapitalizations will wreak havoc on the region’s economy". We are advised to note that "The money doesn’t come from outer space. It comes from ordinary citizens — coal miners in Silesia and hairdressers in Slovenia.

"It means a lot less money is going to be available at banks for lending to legitimate businesses that want to expand and to people seeking mortgages." Mr. Markman also feels that as a result of what might be coming out of Brussels "Banks scrambling for funds will need to shrink their lending books so much in the wake of these actions that when we look back it will seem that the euro zone forced itself into recession in order to deleverage. That could be good over the long run, but extremely tough in the short-term."

Yesterday, gold and silver surged to one-month highs amid explanations that their safe-haven status was reasserting itself; this, despite the fact that gold at least has basically been functioning as anything but a safe-haven of late and that it is acting more like a gauge of the shifting sentiment as regards global liquidity. In any case, the perception on Tuesday was that if some solution — even a makeshift one — is cobbled together by tonight in Europe, then some pressure on the region’s central banks to sell some bullion in order to fund various rescues will be relieved.

This morning, gold spot dealings opened at the $1,704 mark on the bid-side and follow-through buying by momentum players was expected to become manifest for at least the first half of the day’s session. Silver traded 7 pennies higher and was quoted at $33.34 the ounce. Current resistance in the white metal extends from $33.50 to $34 the ounce.

The noble metals advanced by $6 each in the case of platinum and palladium. The former reached $1,570 and the latter $647 per ounce. Copper added another 3.3% this morning-for good measure. Oil fell back by 50 cents and the US dollar traded 0.40% lower on the index, at just under the 76 level. The euro was quoted at $1.393 and traders were seen as marking time before the release of various statements from Europe rather than committing to sizeable plays.

While festival season in now in full swing in India, something that is not quite in ‘full’ swing mode is the buying up of bullion by locals. Estimated gold imports by the world’s largest consumer of the yellow metal could drop as much as 30% in the current month as lofty price tags keep would-be buyers entertaining other options. Peak gold demand season in the country occurs between August and late October. Last year, it is estimated by the Bombay Bullion Association that India took in roughly 100 tonnes of the metal in October. Price sensitivity of a different order of magnitude has since become visible among Indians.

Until tomorrow, stay tuned to that European news station…

Jon Nadler
Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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