In The Lead – Europhoria Ephemeris

by Jon Nadler, Kitco Metals Inc. on July 2, 2012 · 0 comments

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Precious Metals CommentaryFriday’s EU news lifted gold prices in a hurry but it appears that the $1,600 resistance level proved to be… resistant to further assaults for the time being.

The yellow metal started the abbreviated trading week in profit-raking mode as did the rest of the precious metals’ complex. The US dollar advanced to 81.90 on the trade-weighted index as a slew of scary economic data issued forth from Europe (as well as China to some extent) and the euro slipped back to under $1.26 in early trading action. The afterglow of the EU summit began to cool as last night’s markets opened for business in Asia.

Before we dive into post-game analysis of the Brussels summit, it is worth mentioning that reports over the weekend indicated that China’s manufacturing expanded at its slowest rate in seven months during June. The government’s efforts to get the economy back on track have thus far fallen short of their aims. The final tally of the HSBC PMI came in at 48.2 and pointed to deteriorating conditions in the manufacturing space. One state official reckons that first-half Chinese GDP growth will be computed to have been near the 7.5% level and that no bottoming out (soft landing) occurred in the period.

Spot gold opened with a loss of $11 at $1,588 per ounce in New York. Gold’s April-June "performance" has managed to undo many a forecast and analysis. Marketwatch’s Mark Hulbert noted just on Friday (of all days) that

"despite a consistently bullish conclusion from contrarian analysis ever since, gold is today about $120 per ounce lower than where it stood April 10."

Albeit Mr. Hulbert does not conclude that gold’s paradigm has yet shifted to a major bear phase, he did pose an important question to his readers, i.e,:

"Might gold’s continual failure to respond to positive sentiment conditions mean that bullion has entered into a major bear market? That possibility needs to be taken seriously."

He also cautions that, despite certain projections that the best is yet to come in gold and in commodities, those same forecasters

"also believe that the current commodity bull market is far closer to its end than its beginning." "In other words," advises Mr. Hulbert, "its final end could very well be not that far away. Do not become a perma-bull."

That last piece of advice, judging by a plethora of pronouncements, is being heeded by a fraction of microscopic proportions in the gold bulls’ contingent.

Take the Paulson funds, for example (yes, the ones that tallied a staggering 47% loss in 2011). Their leader’s defiantly bullish gold and gold shares stance has been cited as an integral part of the reason why last year and this have not been too kind to the portfolio’s performance. Bloomberg Business Week notes that

"gold is Paulson’s biggest, boldest — and most simplistic — idea in several years: The wild volatility of many gold stocks is part of the reason for the continuing slide in several Paulson funds. In addition to the Paulson Gold Funds, which were launched in 2010, almost a quarter of the Advantage funds were invested in a "gold event" in 2012, according to investor communications."

Mr. Paulson has taken a page (or five) straight from some of the most frightening hard money newsletters out there and has adopted their essential views:

"We view gold as a currency, not a commodity," Paulson says. "Its importance as a currency will continue to increase as the major central banks around the world continue to print money." He adds that as the market keeps shuddering, demand for gold will stay high, and soon enough all of his depressed gold holdings should shoot up. He also thinks that anyone in Greece, Italy, and France should pull all their money out of the banking system and purchase gold bars before the Continent collapses," observes BBW.

Sounds like another sure-fire, 100%-guaranteed winning bet, along the lines of the real estate one that boosted Mr. Paulson’s fame and timing skills, doesn’t it?

However, "when Morgan Stanley Smith Barney sent an internal memo to its financial advisers on April 17 announcing that it would not accept any more investments for the Paulson Advantage funds through its Hedge Premier platform, gold was cited as an area of concern. "During 2011 and into 2012… the Manager has made a number of market timing errors," the memo read. It added that the fund seemed far too concentrated in gold-mining stocks: "The Funds’ near-term performance is largely dependent upon a single sector that has generated negative results throughout 2011, and again in 2012.There does not appear to be an obvious catalyst for reversal in the near term."

Spot silver headed 26 cents lower to start the session at $27.23 the ounce. The white metal tallied its largest quarterly decline in four years on Friday — 19%. The iShares Silver Trust (SLV) tracked the industrial metal’s losses with an 18% fall of its own on the quarter. Technicians continue to keep an eye on the pivotal $26 level — a breach of which could send silver into the low $20s in a hurry if it occurs.

Analysts over at Standard Bank (SA) noted this morning that

"as hopes of further quantitative easing faded (post the FOMC announcement) silver was hard hit by a speculative sell-off (the hardest hit among the precious metals). A massive 817.0 tonnes were removed from net speculative length for COMEX silver, all as a result of the 881.9 tonnes added to speculative shorts (the largest addition of the past 12 months). By comparison, a meagre 65.0 tonnes were added to longs. In previous weeks the futures market seemed conflicted over its outlook on silver. This past week has given a clear indication of where futures market participants stand—the view remains decidedly bearish."

Platinum shed $11 per ounce to open at $1,433 on the bid-side and palladium lost $7 to be quoted at $575 bid. In the background, crude oil dropped $1.6% to the $83.60 per barrel mark while copper slipped $1.3% to $3.46 at last check. EU sanctions on Iranian oil exports entered into full force yesterday and oil experts figure that one million out of the 3.3 million barrels of black gold bearing the "Made in Iran" label that the country produces daily will now be removed from the equation.

Monday morning quarterbacking of the EU "summit to end all summits" goes something like this:

While Italy’s soccer team went home with dejected faces last night, the country’s Prime Minister, Mario Monti, managed to ‘score’ a victory of another kind against Germany. Apparently, staying up until 4:30 am and negotiating like "Super Mario" paid off. Friday afternoon’s global markets told us as much. Take the battered commodities complex for example. It jumped by the most (5.6%) since April of 2009.

The list goes on: Crude oil enjoyed its fourth ever largest gain. Gold climbed and closed with a near-$50 advance on the day. Copper enjoyed a 5% lift. Other financial sectors benefited from the EU news as well; the Dow finished 2.2% higher posting a 277-point gain. Still, at the end of that buoyant market day, there were still a plethora of unanswered questions lingering on investors’ minds.

Already, there are analytical sources whose opinion it is that the compromises that were hammered out in Brussels will fall by the wayside before too long as they represent a complete debasement of German parliamentary protocols. In essence, Ms. Merkel is likely to run into political difficulties as a result of her no longer apparently trying to protect German taxpayers. The list of doubts about the accord grows longer by the hour.

For example, one of the key bullet points of the Brussels post-summit announcement alluded to the formation a new supervisory agency whose job it will be to avert problems of the type that are plaguing Europe’s lenders at this time. While the concept sounds constructive, the reality is that… it is but a concept; a statement of intent, if you will. We already know that, once upon a time, not that long ago, another supra-European supervisory body diagnosed as "healthy" many a bank that turned out "terminally ill" and is now begging to be recapitalized.

Investors are already pondering the matter and have expressed sincere doubts. Where is the guarantee that the new/improved regulator will succeed where others have failed? Should this, then, be called a "major breakthrough proposal?" Maybe, just maybe — but it might need to hand out business cards that say" ECB Governance Agency" as little else would come to match that kind of power and respect.

In addition to those doubts still nagging global investors, certain other… uncertainties are also stemming from the EU summit. While the European Stability Mechanism will now be able to inject funds into banks in Spain, that’s where the… euro stops. Some say that the most notable achievement of the summit in Brussels was the agreement to resurrect the capital-starved banks of Spain. However, the maximum amount in rescue funds at the disposal of the ESM is half a trillion euros. Hello, ECB!

What happens when banks in other nations ask for similar life-preservers? No one has a clue. The ESM also retains its preferred creditor status when it comes to loans made to nations other than Spain. Again, some things have changed, but not the entire ball of euro-wax. And that is likely to continue, since Germany remains staunchly in the camp that says "Nein!" to the issuance of a common bond behind which stand the guarantees of all EU member nations. This saga has many as yet unwritten chapters. We suggest being prepared for a long road ahead (years) to be a wise choice.

Speaking of the ECB, its Thursday meeting is seen by the majority of market watchers as yielding a quarter-point rate cut to a record low of 0.75%. Other technicians envision the ECB getting rates as low as 0.50% by year-end. Jump-starting the EU’s economies could however entail the purchase of more sovereign debt or a long-term refi campaign. While the possible imminent rate cut is not likely to be very euro-friendly, the other strategies mentioned above are seen as potentially beneficial to the beleaguered currency. To be fair, Friday’s jump in the euro was the largest one since October but the currency still suffered a 5.1% decline in Q2. Calls for an eventual $1.20 euro level have not been rescinded by bearish analysts.

This may be an abbreviated trading week, but it will not be lacking in market-impactful ‘drama.’ Aside from the Thursday ECB (and BOE) rate-setting meetings we will also get quite a few closely-watched US economic data sets. Tomorrow will see the release of May factory orders and auto sales numbers for June. Then, on the same day as the BOE/ECB meetings, we will get the ADP private employment report and the ISM services index reading.

Finally, on Friday the pivotal US June employment report from the US Labor Department will be parsed by market players. Europe’s similar stats turned in a dismal report this morning. Eleven percent of the workforce over there is out of work. Thus, maybe it’s just as well that Wall Street’s various players get to relax, reboot, and enjoy hot dogs and fireworks on Wednesday, as they might be watching (and some of them also creating)a whole new set of "pyrotechnics" during the last two trading days.

In the meantime, we wish our Canadian audiences a Happy Canada Day and to all of our friends across the border, a Happy Fourth of July! Fire up those BBQs! We will take advantage of the calendar double-header by making it a three-peat, meat-laden cookout around here… cholesterol readings be damned.

Until Friday,

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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