In The Lead – We Pledge Allegiance To The Euro…

by Jon Nadler, Kitco Metals Inc. on February 15, 2012 · 0 comments

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Precious Metals CommentaryThe PBOC’s Governor Zhou Xiaochuan pledged that his country will make an investment into Europe’s rescue funds and that it will maintain its positions in euro-denominated assets. The statements were sufficiently supportive to spark a small rally in the euro, gold, European equities, and US stock futures early this morning. Interestingly, while the PBOC Governor spoke to his audience the ECB issued a caution-laden comment on the topic of the regional debt crisis, in effect saying that those who expect the storm to be soon behind us might be sorely disappointed.

In fact, the latest news from Europe points to a further potential delay in the granting of aid to Greece (possibly to beyond that country’s April elections)-a delay that could see the March 20 deadline for euro bond repayments come and go. At that point the nuances between a "technical" and a "disorderly" default will become very difficult to distinguish…

It is as yet unclear whether the ECB was cognizant of certain fresh EU economic metrics when it issued its warning on the various systemic risks being faced by the region’s member nations (and, indeed, of other nations somewhat further away) but there is no denying that some of the figures released today would indeed engender more than a modicum of caution on the part of any observer, official or not. To wit, Italy, the union’s third largest economy, slipped back into recession in the wake of a second quarterly GDP contraction, while Germany — the engine of the region’s output-also experienced a contraction, albeit on a smaller scale of 0.2% in Q4 of 2011.

Overall, the European economy shrank by slightly less than had been anticipated in the final trimester or last year, but it did nevertheless contract by 0.3% and, more significantly, it experienced the first such slippage since the crisis days of 2009. On the 13th, Moody’s cut the credit ratings of six of the EU’s members. France managing to expand a tad and Germany’s better-than-anticipated decline in output stemmed the overall damage but the situation still points to the fact that practically no one is out of the debt woods as yet. When it comes to the economy of Greece, well, that country’s GDP fell by 7% in 2011’s final quarter and by 6.8% on the year as a whole. It was the fifth year of recession for Greece and it is now being accompanied by a near-21% unemployment level.

Meanwhile, talk of Greece defaulting, or leaving the EU altogether continues to make the rounds in various political cabinets and market trading rooms on both sides of the ocean. Talks about the second rescue package have run into a snag and EU finance ministers opted not to meet on the subject matter but to hold a telephone conference call instead. Greek Finance Minister Venizelos warned that EU members are "playing with fire" when they float the idea that Greece ought to be jettisoned from the union. However, at least as 24/7 Wall Street.com sees it, the probability of either a default by Greece or a return by that country to its former currency of the realm remains high enough to warrant caution on the part of euro-bulls and speculators of similar ilk.

While "risk-on" flavored optimism was on display in various markets this morning, the US dollar’s losses were rather small. The greenback lost 0.3 to slip to 79.38 earlier in the day but then erased those losses and began to rally- it was last seen trading at 79.55 on the trade-weighted index, up 0.25% on the day. In the background, the euro was not reflecting too much in the way of enthusiasm by its buyers in the wake of the Chinese ‘nod’ and was quoted at just under $1.31 against the US currency.

Precious metals opened firmer on the heels of the "risk-on" sentiment engendered by the PBOC’s statements but remained confined to fairly well-defined trading ranges after having spent the past two sessions simply drifting without energy. One Marketwatch headline noted "Blue Skies Over Wall Street" this morning. Hmmm…that might certainly depend on one’s definition of "blue." Pantone number 19-4057 it certainly is not; not if you care about headlines such as these. To be continued…

Gold opened $8 higher at just under $1,730 while silver added 17 cents to trade at $33.75 the ounce. The yellow metal still appears confined to the $1,709-$1,763 trading range and will need fresh headlines to convincingly move it beyond those support and resistance pylons.

Here is a finding that flies squarely in the face of rosy projections that China will — somehow — be the salvation for the silver market, owing to its putatively "insatiable" demand for everything. Read on. Standard Bank (SA) commodity market analysis issued this morning correctly points out that silver demand is heavily (60%) dependent on industrial offtake (along with investment participation by speculators). Since silver demand has been helped by the fact that China had become a net importer of the metal in the period of from 2008 to 2011, many have jumped onto the bandwagon that believes that which we mentioned above.

However, it turns out that, at the moment, that country is filling the approximately 1,400 tonnes of metal it needs to fill the supply/demand gap it faces by drawing down internal stockpiles rather than importing silver. There has been a sharp decline in SGE silver premiums (from $4 per ounce to about a tenth of that recently) and there is evidence that Chinese imports of the white metal have also declined.

Thus, the SB team concludes that while silver has scope to trade back up near $40 again, it might not do so unless China finishes de-stocking, and that the current quarter might not allow for prices much above the $35 level actually. Speaking of industrial metals and China, do take a look at this hard-hitting analysis of copper and its prospects in the event China manages not to pull off a so-called ‘soft landing’ and it encounters the runway with a bit more ‘force’ than it might be…desirable. In essence, the author concludes, that the prognosis of the copper market is substitutable by the prognosis of the overall situation in China.

Platinum and palladium advanced by modest amounts this morning, also benefiting from the ‘buy everything’ syndrome that was back on the menu in the markets. The former rose by $7 to the $1,632 per ounce mark and the latter added $4 to reach $687 on the bid-side. No changes were noted in rhodium which was still bid at $1,525 the ounce. In the background, copper declined by 0.27% while crude oil climbed by 0.79% and the Dow lost 32 points in the first half-hour of trading, despite the aforementioned "blue skies."

Hope to see you at our free webinar on gold allocation, upcoming at 12:00 noon EST today.

Until tomorrow,

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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