In The Lead – Sail Away

by Jon Nadler, Kitco Metals Inc. on May 23, 2012 · 0 comments

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Precious Metals CommentaryAnother day of substantial selling in the precious metals complex brought gold prices right back to the $1,550 value zone, raising legitimate questions about whether the numerous calls of a bottom occurring last week were perhaps premature considering the unresolved situation over in Europe.

Albeit gold managed a relatively swift climb from last Wednesday’s $1,526 low to $1,600 on Monday, the pullback on Tuesday as well as overnight took shape with an equal amount of speed and (this time) selling energy.

Tuesday evening’s closing spot bids showed gold down by $24 at $1,568 per ounce, silver off by 24 cents to $28.20, platinum losing $23 to $1,441 the ounce, and palladium declining by the smallest amount on the session; $1 an ounce to $609. The evening hours witnessed additional declines in the metals. Gold fell further and reached lows near $1,554 while silver fell decisively under the $27 mark per ounce ($27.68). Platinum shed another $10 (at $1,431) while palladium dropped $2 to $607 the ounce.

The midweek session in New York opened with losses on the board once again. Gold slipped $11 to $1,558 silver declined 51 cents to $27.69 per ounce, platinum shed $17 to $1,425 and palladium fell $5 to $604 the ounce.

Standard Bank (SA) reports that "PGMs continues to follow the broader downward trend of the rest of the complex despite supply issues remaining. The union-related work stoppage at Implats continues, and Northam announced a suspension of work at one of its Zondereinde shafts due to an accident, which resulted in a fatality (the company’s refinery operations have also been closed for two weeks after a burn out occurred) — and a fire has occurred at the jointly owned (Implats and Aquarius) Mimosa mine in Zimbabwe (details are not yet available on the damage and production losses).

At this juncture, the precious metals have all but erased the hard-fought gains they managed to put on the price boards in the final two sessions of last week. Albeit the US dollar was a tad lower (-0.04%) it was still above 81.70 in the index and the euro was still sweating crisis bullets with a quote near a fresh low of $1.265 (a 21-month nadir) against it. Wall Street was prepping for a down day while crude oil was already struggling with one; it was hovering near $91 a barrel, down another 0.75 percent.

While base metals lost very little in Tuesday’s sell-off, crude oil fell by almost 1% to $91.44 as speculators began to… speculate about where demand for the commodity might come from in the event Europe and/or China encounters a difficult economic period ahead. Speaking of difficulties, the latest report from Credit Suisse on China is going to be somewhat alarming to the camp that still believes that the country is going to remain in an "insatiable for commodities" mode going forward. Far from it, it would appear.

Credit Suisse joined other financial firms today in predicting that "China’s commodity-demand peak has passed." Credit Suisse warned that China will "no longer serve as a driver in the global commodity super-cycle." The Swiss firm also said that demand for commodities is set to trend lower as "China’s growth rate cools and its economic focus switches to consumerism."

Since March, and well before, we have been telling you in these columns that, as China goes, so do most commodities.

Among the factors that might negatively impact commodities, Credit Suisse listed "the end of the infrastructure-building frenzy, a housing market boom that now appears to be in its twilight stage, and the dying out of the “golden age” of government stimulus to help drive growth." CS analysts said “We see China’s trending growth pace as likely to slow to 7%-8% over the coming decade, while the driver of growth is likely to shift to consumption, which demands fewer commodities.”

In Latin, the above would be prefaced by a bold "Nota Bene."

Stocks were flat on Tuesday and the Dow lost less than 2 points but Facebook lost more… face on the day. Some 8.5 percent’s worth, to be precise. FB is starting to look more like the face from the Edvard Munch painting that sold for $120 million last week (and obviously enjoyed a better "reception").

The yellow metal thus fell by 2% to an intra-day low of $1,560.60 on the bid-side as the US dollar picked up some serious safe-haven-flight flavored steam and gained more than eight-tenths of a percent to climb to 81.65 on the trade-weighted index. The 82 level on the same index represents a potentially major break-out point for the greenback, if and when it is overcome. Meanwhile, the beleaguered euro breached the $1.27 support figure (one not seen since January as a matter of fact) amid indications that the European region’s crisis is at risk of spiraling into deeper trouble.

The OECD picked up on these ‘vibes’ and sounded a stern note (many have called it a warning) when it issued its semi-annual global economic report yesterday. The somber report came on the eve of today’s gathering of the EU’s leadership in Brussels and it revised previous estimates for the eurozone’s GDP downward; by the OECD’s calculations the region will shrink by 0.1% economically this year and grow at only a 0.9% pace next year. Just six months ago those numbers were projecting 0.2% and 1.4% growth for the same periods respectively.

Mincing no words, the organization’s Chief Economist, Pier Carlo Padoan, wrote that "The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth," and that "Such a downside scenario “may materialize and spill over outside the euro area with very serious consequences for the global economy.”

The OECD factors in the decent-but-still-anemic growth levels underway in Germany (1.2%) and France (0.6%) and the offset factor that the USA’s rate of current growth represents, but it is also cognizant of the 1.7% and 1.6% rates of economic contraction manifest in Italy and in Spain respectively.

Thus, the report concludes that "Recovery in healthier countries, while welcome, is not strong enough to offset flat or negative growth elsewhere.”

Also on the eve of today’s Brussels meeting of the EU, the markets got word of the fact that Germany-contrary to stories that made the rounds on Monday- is still against a joint "eurobond" as a solution for what ails the PIIGS of the union. The debt "swine flu" has now spread to enough nations in the union to give rise to all sorts of attempts to find a solution to the issue. The latest and perhaps final calendar period intended to once and for all conclusively address the problem will take place this weekend.

Greece may be given just 46 brief hours to leave the EU and go sailing off on a separate Odyssey. The clock could start ticking at Friday’s bond market close and stop doing so in the wee hours on Sunday night. During those sleepless hours Greece will have to: a) manage any and all civil unrest, b) manage a potential sovereign debt default, c) plan a new currency, d) recapitalize its banks with it, and e) try to stem the outflow of capital from the country. Good luck with all that unfolding in an orderly fashion, one might say.

Others are simply tabulating various odds at this time. More than half of Bloomberg-surveyed investors believe Greece will wave good-bye to the union by year’s end and Citigroup gives 75% odds of a Greece sail-away in the next 18 months. Other odds-makers (of the market type) are running the gamut of bets from "Merkel cannot fail" to "Merkel will cave" and everything in-between. With such levels of uncertainty and financial drama the biggest surprise to consider is why gold is not soaring to fresh record highs and why "just another doomed fiat currency" — the US dollar-is attracting the world’s frightened asset owners.

Today’s "informal dinner" chefs in Brussels may or may not offer Brussels sprouts for the main course, but they will be surely be serving a dessert of sweet platitudes topped with a whipped layer of indecision. Those holding their collective speculative breaths in the hope that they can once again resume inflating commodities (and other assets) in a skyward direction will just have to cool their jets and wait some more, or sell some stuff in a pre-emptive, defensive move (just they are now doing). Dollar, dollar on the wall…

Until Friday, here is something to hum along to as you go about tackling your daily worries…

Jon Nadler

Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Metal 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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