In The Lead – Arrivederci, Roma!

by Jon Nadler, Kitco Metals Inc. on November 7, 2011 · 0 comments

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Precious Metals CommentaryMetals markets opened firmer on Monday as the on-going eurozone drama continued to play out without signs of a resolution despite the G-20 summit’s end. Gold moved higher despite a slip in the euro and a slightly stronger US dollar. Spot gold dealings started off at $1,776 and remained within the $1,775-$1,780 resistance zone while silver added 45 cents (to open at $34.54) and then remained nearly static for the first hour of trading action.

Potential attempts to touch the $1,800 mark might be in the works for the day/week in gold but nervousness prevails and European news will play the pivotal role in the market, perhaps more so than the dollar’s gyrations. On the other hand, silver does appear to be struggling somewhat at this juncture.

Veteran market follower Ned Schmidt relays his take on the white metal as follows this morning:

"[The]chart has a decidedly negative pattern. Silver has been trading below the 200-day moving average, now $37, since the last week of September. All of that does not create a picture of a price preparing to skyrocket to a new high. Rather, it is a picture of something with the path of least resistance being down. We still expect Silver to make an important low in the first quarter of the new year."

A similar take on silver was found in the late Friday production of the Elliott Wave update:

"A "double divergence" has developed between gold and silver. Silver made a lower high in early September relative to gold’s all-time high at $1921.50 on September 6. This five-month bearish divergence between the higher-beta silver and the lower-beta gold led to a decline in both metals to the September 26 low at $1532.20 in gold and $26.02 in silver. Both metals have bounced since, with another smaller divergence developing since October 28.

Gold has exceeded its October 28 high while silver remains beneath its similar high at $35.71, which met the internal trend line shown on the chart. Since the near-term wave structure of the bounce in both metals counts best as an upward correction, the potential remains high for renewed across-the-board decline. Gold’s next leg lower, a third wave, should eventually draw prices toward $1300, the bottom of a fourth-wave of lesser degree. The area surrounding the $23.00 level in Silver remains the next short-term target."

This morning at least, gold partially benefited somewhat from the clarification that Germany would not employ portions of its gold reserves to bolster the EFSF. It has been reported that France (at the G-20 meeting) had suggested that the Bundesbank could resort to some of its ample gold holdings in order to reinforce the rescue fund. Platinum and palladium advanced only modestly ($3 and $4) and traded at $1,636 and at $658 per ounce respectively. While the recent steep fall in platinum-group metals prices has brought a buying opportunity about, the enthusiasm manifest among fund and speculative players remains a tad tentative if one parses the positioning data provided by the CFTC.

On the fundamentals’ side of the PGM market equation, carmaker GM reported a 10 percent gain in October car sales in China; it moved over 220.000 vehicles into local consumers’ hands. Meanwhile, Toyota Motor Co. managed a 32% sales gain last month and unloaded 802.000 vehicles in that market. Toyota currently remains stymied by supply issues resulting not from the March Sendai quake but by a natural disaster of another sorts; the floods in Thailand. The rising waters near Bangkok have halted production of certain Toyota models and will also interrupt the output of other ones this week and next. Copper and oil diverged; the former lost 0.59% while the latter climbed by an equal percentage as the focus remained on news flows from the Old World.

Mining company executives continue to project not only $2K+ gold prices as being "just" around the corner, but also out-performance by their own firms’ shares in coming months (now there’s something not surprising at all). What is rather surprising, is the fact that one important mining firm’s executive has broken ranks with his unanimously uber-bullish peer group and has come out with a more…"tempered" view. He must be reading certain different "tea leaves" than the ones some US and Canadian execs are parsing in their teacups…

The vice-chairman of China’s largest gold producer (the Zijin Mining Group) — Mr. Lan Fusheng — stated that in his view "the gold prices currently are unreasonable, [and that] prices have been boosted not only by people’s needs to hedge risks, but also by speculations." Mr. Lan said that he also thinks it would be more "sustainable" for gold prices to stay at $1,200-$1,300 per ounce in the next few years and that he is not "optimistic" about 2012’s gold prices, or the global economic paradigm.

While Mr. Lan made no observations about part or all of China’s economy for 2012, someone else- that country’s leader, Mr. Wen- certainly did. The Chinese Premier said today that his country is seeking a "reasonable correction" in housing prices and that Beijing is committed to make homes more affordable. There are many ways to interpret that language, but we will stick with the obvious; the red-hot real estate sector will not be red-hot in coming months and that has "other" implications for commodity bulls.

Other market watchers see signs of real trouble in China, and not just in real estate. The plethora of stories related to corporate fraud and to corruption at various levels (official and private) is a sign of big trouble brewing in big China. At least that is the take by global strategist Dylan Grice over at Societe Generale. The country is exhibiting the so-called five-stage Kindleberger pattern of manias, panics, and crashes. Economist Kindleberger’s model was based on the work of Hyman Minsky and it classifies the current situation in China as being ‘stage three going into four’ — i.e. the move from "euphoria" to "crisis." Nobody wants to (yet) consider what ‘stage five’ (revulsion) might look like…

Albeit certain commodities experienced gains in the latter part of last week, the general sentiment (at least as reflected in the latest CFTC data) towards the complex has soured just a bit for the first time in a month. Speculators are evidently leaning towards the theory that the turmoil in Europe might just turn out to be damaging enough to derail the region’s economic growth (and in turn, the demand for "stuff") down the road. Two-thirds of the complex declined last week as worries about Europe continued to unnerve players.

The Greco-Roman world’s wrestling match with its economic and political adversaries continued to occupy most of the available space in the global financial press as the new week got underway.

Beleaguered Greek PM Papandreou will step down from his post but do so only after an interim government is formed and the bailout deal offered by the EU is agreed to. It is not yet known who will fill Mr. Papandreou’s shoes or what Greece’s socioeconomic near-term future will look like, but the compromise in Athens is being interpreted as a breakthrough and certain markets are thus rejoicing, even if perhaps (as has been learned in recent weeks) they are doing so just a tad too prematurely.

Another occupant of an office of leadership — Mr. Berlusconi-was rumored to have stepped aside overnight but the suave singer denied he was logging on to Linkedin in search of a stint on "Dancing With The Stars." Instead, he was seen doing the "denial dervish" in Rome while being heavily pressured by many to do the "resignation rumba," seeing as Italian government bonds reached what is being labeled as "bailout-level" yields of over 6.5% this morning. The bond markets as well as the soaring bourse in Milan have apparently voted Mr. B out of his office well before he eventually steps up to the podium and waves goodbye to Capitoline Hill.

The global markets are also on the boil as there has been no grand euro-rescue plan to come out of Cannes in the wake of the G-20 summit. Yes, there was some talk of the leveraged EFSF potentially becoming a big enough cannon with which to demolish the debt bogey but for the time being no one has seen a sufficient amount of detail on the fund to feel confident in its success. Drawing money into the fund appears to be a tall order and many countries remain reluctant to throw their own dough into it.

Some are looking at the IMF with hopeful eyes, while others are… banking on China to join the club. For the moment, despite recent supportive words, China seems less than eager to play the role of rescue paramedic in Europe. At least that was the body language coming out of the weekend’s G-20 meeting. Thus, no grand or even less-than-grand plan was hatched this weekend, as some had anticipated on Friday.

In fact, the absence of such an anticipated G-20 scheme and the on-going drag that the crisis is placing on the region’s economy has prompted analysts at Societe Generale to project a eurozone recession in 2012. The bank calls the contraction as "inevitable." The spillover effects of such a slowdown will almost certainly reverberate in the US and in China; the two countries which have thus far kept the global economy from dipping under the proverbial waterline. How profound the effects might turn out to be remains an open question at this point.

However, at least on UBS market observer believes that the US dollar will benefit from America’s ability to skirt that which Europe appears to be headed into. Others believe that the coming slowdown will be global in scope but remain at the "manageable" level and that it will dampen the inflationary pressures that so many (incorrectly) see as being the "inevitable" outcome of the current accommodative posture manifest among global central banks. The ECB cut its benchmark rate to 1.25% last week, indicating that it is trying to mitigate the prospects of the aforementioned shrinkage from turning from "mild" to "severe."

Until tomorrow, do keep the diagnostic tablets handy and stay close to the intensive care unit in Brussels…

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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