In The Lead – The Hangover – Part II

by Jon Nadler, Kitco Metals Inc. on June 18, 2012 · 0 comments

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Precious Metals CommentaryThe much-anticipated Greek elections concluded with a very narrow (2.7%) margin of victory for the pro-bailout New Democracy party. However, the final outcome was deemed to be an equally significant triumph by SYRIZA officials who now view their formerly "fringe" party as the main opposition force that embodies the nation’s anger over externally imposed austerity programs and never-ending internal corruption. At the end of the day, neither one of the celebrating parties was able to overcome the economic reality manifest in their country.

As things currently stand, the Greece has enough cash to last only a few weeks while it has also pledged to come up with almost 12 billion euros more in spending cuts this month in order to secure its next loan installment. The nation’s unemployment remains above 22% while the ranks of the homeless keep rising by the day, as do the numbers of business closures. New Democracy may have carried the day on Sunday but its leadership must be familiar (or soon might be) with the term "Pyrrhic" when it comes to a certain victory.

Spanish PM Rajoy greeted the Greek news with… joy over in Los Cabos, Mexico, declaring that "the Greek people got it right" and that "what’s good news for Greece is good for the euro and for Spain." Not everyone agrees that Sunday’s voting outcome reflects the exact sentiments of Greece’s denizens however. The degree to which the final tally was a "squeaker" could be telling us a thing or two about the national mood in that country.

Asian equity markets greeted the news from Athens not only with gains on the order of about 2% but with the sense of relief that, for the time being, Greece’s departure from the euro system was averted and that the global financial system did not have to be injected with a dose of liquidity adrenaline by a consortium of worried central banks. The euro’s leap to above the $1.27 mark did not last a very long time however and the US dollar also showed signs that it still had staying power following the voting in Greece. By this morning the common currency was trading a lot closer to the $1.26 level rather than soaring to new heights as had been anticipated.

The same situation applies to gold as well. The "relief rally" that was expected in the event of SYRIZA not winning at the polls did not materialize. To the contrary, we got more of a "relief sell-off" as gold prices fell by a substantial $21 and change in the wake of the Greek election results and touched lows near $1,605 per ounce after last night’s opening. The yellow metal subsequently recovered a good portion of those losses and drew closer to the $1,620 level as overseas trading action unfolded during the night. The speculative focus apparently quickly shifted over to the G-20 meeting in Mexico, the upcoming Fed meeting, and to the difficulties that China is evidently experiencing.

Spot dealings opened with lower prices in all but palladium this morning in New York. Gold lost $9 to be bid at $1,618 per ounce while silver declined 42 cents to the $28.32 mark per ounce. Platinum fell $2 to $1,478 the ounce while palladium bucked the trend and climbed $1 to $626 per ounce. Rhodium was up for a change as well, adding $25 to $1,250 per ounce on the bid-side. Background market indications showed the US dollar rising 0.65% on the trade-weighted index (to 81.88) while crude oil lost $1.21 per barrel in value (last seen at $82.82). The market is said to be in oversupply and is apparently unconcerned with the loss of Iranian black gold that will commence when the embargo on it takes effect on July 1st.

Copper prices also fell; they lost 1.2% this morning. US stock futures slipped early as the mini-euphoria related to Greece wore off and reality (soaring Spanish bond yields) set in once again in the EU. Countries much larger and economically pivotal than Greece (Italy and Spain come to mind) remain at risk in the region and that fact has not been lost on investors around the globe, or on the G-20, apparently.

As it turns out, the Mexico summit of the G-20 will likely yield a communiquĂ© that places a whole lot of new pressure on Europe’s leadership to finally and decisively act to snuff out the debt crisis that threatens to derail the global economic recovery. World Bank President Robert Zoellick summed the situation up by saying that "this meeting is coming at an absolutely critical time and we’re waiting for Europe to tell us what it is going to do." No pressure, we just wanted to say: "good luck, we’re all counting on you."

There was something else that may have spoiled the Greek voting after-party in the financial markets today. We are referring to the latest Chinese statistics that show that home prices in that country fell in a record 54 out of 70 cities being tracked by the government. May was unkind to prices in a big way in the city of Wenzhou where home values dropped by 14%. Beijing and Shanghai property values showed a 1.6% drop on the month. In April "only" 46 out of the 70 cities on the watch-list fell in value. Some analysts believe that the slump still has some months to go before showing a bottom while others see the now eight-month-long slide in prices as potentially sparking a new wave of feverish speculation by buyers excited about the recent relaxation of monetary policy by the government.

Expectations of similar monetary accommodation by the Fed and by other central banks prompted hedge funds and other specs to augment the level of their bullish-commodity bets as seen in the CFTC data that covers the period up to June 12th. The increasing amount of noise surrounding the imminent FOMC meeting appears to be uni-dimensional in tone: the Fed will give us something. That is what is expected. However, even the most optimistic of Fed-watchers have concluded that the most they can be "given" by the Fed on Wednesday is a mere extension of Operation Twist for a short period after it expires in twelve days. Call it "one for the road" courtesy of the Fed, even though $2.3 trillion has already been served at that bar.

A sexy QE3, that OT "dance," is not. A dollar-sinking, unemployment and/or growth problem-solving, hyperinflation-inducing event it will also not be. Expectations are one thing; however, reality is quite another. "The risk is overwhelming to the downside in terms of commodity markets," says John Stephenson of First Asset Management Inc. over in Toronto. Mr. Stephenson feels that the official sector’s efforts to possibly boost the flagging global economy may be a case of too little, too late, and that commodity demand is already sagging.

Well, there is something that is not exactly "sagging" at the moment, and that would be the demand for the ‘terminally ill’ and ‘soon to be doomed’ US dollar. In the process of rebuilding their foreign-exchange reserves at the fastest clip since 2004, the world’s central banks are now competing with private investors in their quest for the US currency. So hot and heavy is the demand for greenbacks out there that it is now estimated that the private sectors is being left with about $2 trillion less than it needs.

Wait a minute! Wasn’t this the year when the dollar was supposed to be removed from the list of reserve currencies and buried forever? Evidently, not only not, but the dollar’s share of global reserves has… risen from 60.5% to 62.1% as of last December. Go figure. The buck has gained 3.5% since the end of April and Morgan Stanley analysts predict that it will rise by 8.2% this year — the most in seven years. It will also remain a sought-after safe-haven shelter until the debt storm in Europe is resolved. How the cottage industry of US dollar morticians will explain these little bits of news to their dwindling readership remains to be seen, but the facts are the facts. It is up to you to decide how "wise" conventional wisdom is.

Until Wednesday,

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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