In The Lead – Banks, Japan: Take My Gold, Please…

by Jon Nadler, Kitco Metals Inc. on December 8, 2011 · 0 comments

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Precious Metals CommentaryThe waiting game in the markets continued for yet another day albeit there was one item for which participants no longer need to wear their guessing caps; the ECB’s rate decision. Mr. Draghi’s institution cut its interest rate by one quarter percent and with that move fully reversed Mr.Trichet’s previous hikes (which some have labeled as ‘mistakes’).

The fear implied in the ECB cut is that the eurozone will slip into an economic contraction perhaps as early as the beginning of 2012, and, based on recent data coming from various parts of the region, such a possibility is now more of a…certainty.

Metals dealings opened with the same level of nervous indecision that they have exhibited all week. Despite market survey projections that showed most polled participants being quite bullish on gold for the week, the yellow metal has managed to do little more than to bump up against the $1,750 mark a few times and then retreat in a hurry. Today’s opening had gold rising 90 cents to the $1,744 mark and silver advancing 28 cents to $32.79 per ounce.

After another feeble attempt at overcoming the seemingly impenetrable $1,750-$1,750 resistance zone gold prices went into somewhat of a freefall following less than encouraging words from Mr. Draghi at his news conference. In effect, the markets threw a mini-tantrum when they learned that the ECB declined to signal that it might ratchet its debt purchases higher in order to put the crisis fires out in Europe. The Dow fell 70 points in early dealings this morning after Mr. Draghi declared that his institution’s hands are ‘tied’ and that the decisions that matter are really up to politicians now. The new EU fiscal compact cannot come soon enough. The question is: will it stick? Investors are voting with their feet, this morning at least.

Meanwhile, President "Sarko" warned that the failure of the euro is a ‘luxury we cannot afford’ and his minister for European affairs warned that the "euro could explode" and that Europe could "unravel." Explode, implode, the net result is the same: when in serious doubt, flee to the greenback (it surged nearly 0.50% to 78.81 on the index). Gold lease rates fell to a record -0.57% (yes, that’s a minus) as stories that European banks are on the hunt for dollars and will do anything to track’em down circulated among professional traders. If verified, such a development can at least in part explain why gold is acting in the manner it is acting in…(read: counter-intuitive).

Bullion fell to lows near $1,705 and the euro fell under $1.34 once again as Mr. Draghi tried to temper impatient speculators with words of caution as to what certain parties are prepared to do or not to do in order to address the crisis in Europe, and how long such measures might take to come to fruition. Since so much had been built on a uni-dimensional level in the market (optimistic anticipation), the ‘exhale’ proved quite damaging to precious metals at this juncture. Silver fell two-thirds a dollar to the $31.85 per ounce mark. So much for the ‘surprise’ rally we were promised earlier in the week by chart-parsing fortune-tellers. This "congestion" on the charts has, thus far, led to a "sneeze."

Certain speculators were/are holding out hope that the ECB summit will yield some positive news for the euro and thus for precious metals as well. Others remain wary about the likelihood of comprehensive solutions being born out of the meeting and continue to hang on to US dollars instead. In any case, the EU hoopla is keeping other notable headlines crowded out from media flows. Lost in the shuffle this morning: news that US jobless claims fell 23.000 to 381.000 filings (lowest in nine months) and news that Mr. Corzine "simply does not know" where the missing $1.2 billion in client funds might be (and you thought you’d heard it all…).

A potential contrarian metric to keep an eye upon as we head into 2012 is the fact that Japan’s gold exports have risen to 100-120 tonnes this year. Wait a minute; Japan does not produce gold other than that which it finds in urban landfills, does it? Well, no, it does not. However, Japanese individuals have been selling quite some quantities of gold bars, gold coins, and gold jewellery into market price strength for some years now. Dis-investment from Japan has remained an ‘interesting’ feature on the tables of fundamental supply and demand for several years now. Not that anyone bothered to point it out.

While the World Gold Council for example, might prefer to gloss over such findings and focus instead on Borat’s homeland having recently bought a little gold tonnage, you might just want to consider why it is that an entire generation of investors who bought gold at roughly $300-$500 is letting go of (at least some) of its stash. Hint: it has to do with a) record prices and b) the rising need for cash (in so many words, the very reasons the gold was purchased for, in the first place: potential profit and the liquidity it provides in times of trouble).

Platinum opened unchanged at $1,523 per ounce and continued to trade at the largest discount vis a vis gold since circa 1985. The gap is now about $230 versus a historical premium ranging from $200 to $400 against the yellow metal. Palladium rose $1 and opened at $678 the ounce. The noble metal is bumping up against chart resistance around the $680 area after having put it a marathon run from the $563 level seen on the 25th of last month. Palladium has advanced nearly 21% in just over eight trading sessions; about as much as gold has risen all year. Perspective, check.

The ECB rate cut was totally unsurprising and it takes a back seat to the fretting about what the EU meeting might result in. In the background, S&P fired off another round of ‘depth charges’ with the announcement that it has placed large eurozone banks on ‘review’ and that it might cut the EU’s AAA rating soon. That twin announcement certainly did not make for any new European fans for the ratings firm and the feeling is that a veritable war (at least of words) is developing between the agencies and the targets of their reviews and ratings downgrades.

France and Germany remain hard at work on a "Marseille Plan" — one that harks back to a similarly sounding European Recovery Program back in 1948. However, the critical funding support, this time, needs to come largely from within the region, and not America. The fact that the plan’s unfolding might just last as long as the last one (four years or so) is not openly being talked about even though Chancellor Merkel has clearly warned markets well in advance about the fact that this will be a process and not a pen-stroke solution.

Nevertheless, market players are acting as if they expect radical measures to materialize and be implemented in literally days. Fat chance, say we. Disappointment of major proportions might follow any short-lived euphoria that could become manifest post-Marseille. When the realization surfaces that the "debt devil" is ultimately in the plan’s details, the reaction might just be wholly different than what we could witness late this week and early next week. You have just had a preview of that kind of reaction in this morning’s sell-off while Mr. Draghi spoke.

And so, we await Friday along with the rest of the world. Will it bring EUphoria or EUthanasia for the euro? Time will tell.

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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