In The Lead – Cracked BRICS

by Jon Nadler, Kitco Metals Inc. on June 25, 2012 · 0 comments

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Precious Metals CommentaryThe new trading week got underway in New York this morning and the price boards in the metals’ complex were once again in the red following Friday’s tepid recovery attempts.

Spot gold started off at $1,568.30 with a loss of $4 while silver fell 15 cents to $26.75 per ounce. The $1,550-$1,525 putative support zone remains the focus among technicians who argue that if those levels do not prove to be strong we are possibly looking at the mid-$1,400s in gold before too long. EW technicians on the other hand are still targeting the $1,300 mark as the destination in gold prices if the $1,525 shelf breaks.

Jimmy Tintle, a market strategist with GreenKey Alternative Asset Services noted that gold’s post-Fed washout in prices underscored just how much the yellow metal was tied to the ebb and flow of inflationary fears and that — given the lack of fresh QE hints by the Fed- it could stay low for the rest of the year. Mr. Tintle said that

"inflationary concerns are pretty much null and void unless something blows up before December."

Those who were still betting on commodities to rise have — for the second week in a row-been proven wrong as the niche fell into a bear market and as the Fed refused to sell them some more speculative "crack."

With the touching of the $26.66 mark in the active July contract, silver has now hit a 19-month low. Barclays’ analyst Suki Cooper notes that

"in light of the industrial demand slowing down and investment demand failing to plug the [approximately 7,400 tonne] gap, it is the precious metal most vulnerable to the downside."

EW analysis issued on late Friday projects silver in the very low $20s f the support shelf at $26-$26.50 gives way in coming sessions. Platinum declined $2 to $1,429 and palladium dropped $3 to $605 the troy ounce.

Background markets showed the dollar climbing once again and crude oil dipping nearly 1% to %79.05 per barrel. The principal preoccupation among market participants continues to be spelled "E.U." and all eyes/ears are on the meeting of the leaders of same on Thursday and Friday. Frankly, we’ve lost count of the number of ‘be-all/end-all" meetings of this type but not of the number of final resolutions they have thus far yielded — zero.

Meanwhile, not that we have kept track of the number of same, but Spain has once again asked for a bailout for its banks just ahead of the EU summit. Don’t forget the: Ayudame, por favor. Well, at least they did so, very politely and obsequiously. The bailout request love note read as follows:

"I have the honour to address you [the eurozone finance ministers] in the name of the Government of Spain to make a formal request for financial help for the recapitalisation of Spanish financial institutions that may require it."

The Wall Street Journal notes that "European Central Bank President Mario Draghi broached the topic of a banking union in late May during testimony in Brussels. Though the idea has gained traction in some quarters, bank associations in Germany have been particularly resistant as they worry that this would transform into a “transfer union” — a shifting of funds from northern Europe to the southern economies, where some argue fiscal policy and supervision aren’t as strong.

Meanwhile, Germany did not mince words when it told Greece to stop asking for more help and get on with the task of putting into action the words of promise it made about reforms and austerity. German Finance Minister Schaueble once again reminded one and all that his country is opposed to the recently floated concept of a single euro-bond by saying that

"anyone who has the chance to spend someone else’s money will do [just] that."

Friday’s rebound in gold and other precious metals prices proved rather short-lived as overnight advances in the US dollar and a fresh breach of the $1.25 pivot-point in the euro/dollar rate prompted additional selling across the board in the complex. RBC Capital’s speculation that new short positions may have been added in the gold space was corroborated by CFTC positioning data which, as of June 22, shows an elevated level of speculative shorts present in the market. In fact the near 152-tonne size of the bets on lower gold prices is running at about 50% higher than last year’s average.

That is not the case over in the platinum market, one in which — according to Standard Banks (SA) analysts- the net speculative length increased for the fourth consecutive week in the latest CFTC reporting period.

The team notes that "momentum appears to be building in the unwinding of short positions" as prices are so close to relative to production costs.

Platinum under $1,450 is seen as offering good value by the SB team as well as by Commerzbank. Net speculative length in palladium also witnessed an improvement but it remains relatively "unenthusiastic" at near 660,000 ounces while the size of the short bets is still running higher than the 12-month average.

If the so-called gold "paper market" appears to be expecting lower prices, the physical market — at least as represented by India (typically the largest global taker of the metal) does not appear to be countervailing that situation at the moment. Commerzbank analysts note that demand from that country remains lackluster owing to the weak local currency and that

"in view of this development a rapid recovery of gold demand is not likely."

Indeed, turned off by record-high gold prices India’s middle class now appears to be taking a bigger liking to something else that is shiny; diamonds.

Finally, as regards the yellow metals’ principal "enemy" — the greenback, the situation does not appear to hold out too much hope for a major rebound in the market either. The US currency has broken out to the upside recently and this morning it climbed another 0.37% to above the 82.55 mark on the trade-weighted index as just one week after the Greek voting hopes for a resolution to come out of the upcoming EU summit late this week faded fast. Risk assets were thus placed on the back-burner and the heat was turned to "low." This took place despite the late Friday easing by the ECB of access to some of its funding operations and the enlargement of the list of acceptable collateral by it.

The dollar’s advance has of course come at the expense of the value of the euro which is saddled with the regional debt problem that refuses to go away. On the other hand, if you had followed the previous loudly stated advice of some anti-dollar financial gurus and had gone out to load up on the currencies of the BRICS at the same time, well, you’d not be in very good shape at the moment. Bloomberg News reports that

"for the first time in 13 years, the real, ruble and rupee are weakening the most among developing-nation currencies, while the yuan has depreciated more than in any other period since its 1994 devaluation."

According to the news organization, many

"investors are fleeing the four biggest emerging markets, known as the BRICs, after Brazil’s consumer default rate rose to the highest level since 2009, prices for Russian oil exports fell to an 18-month low, India’s budget deficit widened and Chinese home prices slumped. Investors are bracing for more losses as economic growth slows."

The worst is apparently not over just yet, as currency analysts envision an additional 15% erosion in the value of said currencies by the end of this year.

As of this writing, for example, the Indian central bank’s (RBI) efforts to lift the rupee via a number of steps intended to stimulate foreign capital inflows have failed to accomplish their objective. The country’s currency has lost 23% since August — it has been one of the worst-performing Asian currencies. Local authorities have not shied away from identifying gold and oil imports as having contributed to India’s fiscal woes but they have thus far been unable to make a dent in the current account deficit or in the size of the tax intake. India’s budget deficit stands at 5.8% of GDP. To be continued…

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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