In The Lead – Super? Mario?

by Jon Nadler, Kitco Metals Inc. on July 27, 2012 · 0 comments

Precious Metals CommentaryThursday’s question du jour was: How do you move the euro back from the ($1.20) brink? The answer was relatively simple: just announce that you are ECB President Mario Draghi and say that

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough."

Well, "it" was good enough for a1.05% move up in the euro, a 0.99% move down in the dollar, and a 209-point rally in the Dow.

Short-term speculative euphoria of the magnitude that the "Super Mario" remarks made in London gave rise to had not been seen since the last "be-all / end-all" EU summit some weeks ago. Of course, we all know how that optimism weathered the ensuing days of market turmoil and bond vigilante assaults. It remains to be seen whether the ECB will need to scoop up some Spanish or Italian bonds or whether it will intervene in some other ways to make Mr. Draghi’s pledge more than the pep talk that some see it as being.

At any rate, something had to be said and/or done, and it came at an opportune time as far as the markets were concerned. The euro appeared all set to show a sub-$1.20 print overnight and Italy’s sovereign rating was cut to CCC+ by Egan-Jones. Only 7% of FX players remained bullish on the euro as of two nights ago.

The situation had prompted German Finance Minister Wolfgang Schaeuble to accuse bond traders of being "all wrong in driving up Spanish borrowing costs to unsustainable levels."

It is a fair assumption to make that all sorts of late-night telephone calls were made to and from certain European high offices in connection with the direction things were headed into during the week. However, now that the declarations have been made, there is still the issue of time frames during which action needs to be taken and the perennial question of whether or not the markets will treat the statements as meaning "business" this time around.

Not everyone sees a rosy outcome down the road, or an easy path to a resolution, and this is not just because the month of vacations in Europe looms ahead. Critique of the Draghi pledge ranges from "jawboning" to "lipstick on a… PIIG" to "all talk." Dartmouth College Professor David Blanchflower characterized the Draghi comments as "sounding like panic."

Bloomberg figures that Super Mario now"has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. The Bundesbank reiterated its opposition to bond purchases today."

Besides, the promise made by Mr. Draghi was to defend the euro, and there was no mention of who might or might not remain in the eurozone system. For what it’s worth, Citigroup gives 90% odds of Greece bidding good-bye to the euro (and the zone) within 12 to 18 months. Meanwhile, it has been said that Spain has discussed a bailout with Germany, and that the unemployment rate has risen to 24.6% as of the latest count. For now, however, you might wish to circle the date of September 12 on your market calendar. Not much is slated or likely to take place prior to that time.

Precious metals did not fare too badly on the day either; gold added 0.70% to finish at $1,616 and silver climbed by 20 cents to close at $27.54 per ounce. Platinum advanced $5 and palladium rose by four dollars. If the market responses by precious metals and crude oil (up only 0.60%) were not quite as eye-popping as the aforementioned currency market and DJIA developments, perhaps they could be attributed to the fact that the US Labor Department reported a large decline in the number of unemployment claims (to 353,000) last week.

That report, along with the announcement of the fact that US durable-goods orders climbed by 1.6% for a second month in a row, contributed to a bit of a scaling back of QE-related expectations. Of course, today, all eyes are on the GDP figures and they will surely be on the Fed next week. More on both of those topics will follow below.

The final trading session of the week opened higher in metals as participants continued to bet that Mr. Draghi’s words will translate into action and that the GDP numbers will be the final motivating factor for the Fed to take action next week. Spot gold opened at $1,630 and silver at $27.79 on the bid-side. Platinum held above the $1,400 level with a gain of $12 to $1,413 and palladium advanced $5 to $575 per ounce. Crude oil rose 33 cents but copper picked up 1.4%. The euro cleared the $1.23 level while the US dollar slipped 0.23 to 82.64 on the index.

Economists expected US GDP to come in at the 1.3% level for the second quarter but at the same time they anticipated that the BEA would revise previous data of this type upwards for last year. A number of metrics that have been available could lead to such re-writing of economic history; among them, the fact that more jobs were created last year than previously estimated, and that gross domestic income outperformed gross domestic product. In fact, GDI is projected to have grown at a rate of 2.8% for the first 11 months of last year as compared to the 2.4% growth rate that was tallied for GDP.

The actual figure for second quarter US GDP came in at 1.5%. That was above the previously mentioned consensus but it was still a decline from the previous trimester’s 1.9% rate of expansion. Gold futures immediately pared their initial gains in the wake of the GDP number and threatened to turn flat-to-negative on the day. That’s what we mean by how closely intertwined the market is and has been when it comes to emotions and speculation surrounding the Fed and its on-again off-again QE hand-outs. But, fear not, there still next week.

Of course, now, with the Fed meeting coming up, the crystal ball-gazing has once again resulted in the predictions that the US central bank will finally give the markets something to ‘bite’ into and run away with risk-taking as a result. Most of the shop talk among traders is indicative of them sensing that the Fed will perhaps offer to buy some mortgage-backed securities and/or that it will extend its rate guidance language to cover not only 2014 but some portion of 2015 as well. How much such possible action might boost gold or the Dow or oil remains to be seen, but there are several schools of thought that see the Fed’s final ‘give’ as turning out to be… a dud. Here is why:

While earlier versions of QE did have an impact on mortgage rates, today, the banks appear reluctant to increase capacity and thus the effects of lower rates might not be properly shared with the borrowing public. In addition, one of the principal aims of QE programs has been to induce the public to buy stocks and other risk assets. However, today, with the investing public on a large-scale global quest for yield, additional QE is unnecessary.

CNN Money notes that "some argue that with rates already hovering near zero, any action by the Fed will have little to no effect on the economy. The biggest risk is, it doesn’t work, and the market concludes the Fed is losing its impact.” said Eric Lascelles, chief economist for RBC Global Asset Management.

In addition to more asset purchases, Bernanke has laid out a few other options for stimulus, but those too could have limited results. We shall see what kind of a day, good or bad, August 1st turns out to be.

It was not a very good day however in the mining niche on Thursday. Again. Goldcorp Inc. reported a tumble in QII earnings in the wake of operational difficulties and soaring cash costs in its Mexico and Canada-based Penasquito and Red Lake mines. The firm reported doubled gold cash costs of $370 an ounce and sales of only 532,000 ounces. Profits fell to $268 million on the quarter. Top global gold miner Barrick advised of a 35% drop in quarterly profit and a similar batch of bad news on rising costs pertaining to its Pascua-Lama mine in South America. Barrick reported cash costs of $613 per ounce of gold.

Meanwhile, gold is trading at roughly 2.5 times higher than the above-mentioned cash costs and investors in mining shares are licking some deep financial wounds at a time when they should be laughing all the way to the bank. Some specialists have warned that unless miners get their cost-control pencils nice and sharp the blood-letting will continue unmitigated. It might just be a good idea for some of these firms’ CEOs to cease making public forecasts for multi-thousand dollar gold prices and commence focusing on making their own shares shine irrespective of where gold is, or will be.

Trouble of another type is plaguing another large gold and copper miner. Newmont‘s near-$5 billion Minas Congas project (the biggest foreign investment in Peru’s history if we discount Senor Pizarro’s long ago mission) has run into such strong opposition that the Humala government has itself run into trouble. One third of Peru’s denizens do not want their nation’s underground treasures to be owned by overseas firms. Minas Congas is estimated to be eventually able to produce nearly 200 tonnes of gold worth almost ten billion dollars. The press anticipates that President Humala might have to touch on the sticky issue in his address to the nation on Saturday (ironically, Peruvian Independence Day).

When it comes to gold and gold mining investments going sour, one could query John Paulson how he currently feels about the large hoard of such assets that he has amassed in anticipation of stellar profits to come. Mr. Paulson has been hard at work trying to repair the damage in his Advantage and Gold funds this year. The latest hit to performance has come from the 33% slump that the shares of NovaGold (13% owned by Mr. Paulson’s hedge fund) experienced on Thursday. Prior to that estimated $64 million loss related to Nova, Mr. Paulson’s investments in AngloGold Ashanti had recorded a 22% decline this year on top of a 14% whack in 2011. He may have also have posted a paper loss of $2.56 million on shares of Barrick on Thursday.

Finally, for some more weekend reading, here is one of the most cogent observations and best conclusive statements in recent times about so-called gold manipulation. It was posted on SeekingAlpha this week by regular contributor Vince Martin. While Mr. Martin’s supply of invective-laden e-mails might well surge after he has written such ‘heretical’ sentences, we can only say "Kudos!" and applaud his keen (and valid) take on the thorny topic:

"The belief in a coordinated manipulation of gold — which is destined to fail as its predecessor the London Gold Pool did, and result in massive short-covering and an exponential increase in gold prices — is erroneous, and dangerous. It creates expectations which most likely cannot be met, resulting in an over-attachment to gold (and gold miner equities) and, potentially, dangerously ill-conceived portfolio allocation."

This, we have (sadly) seen in ample supply over the past decade.

Mr. Martin’s advice?

"Whether investing in physical gold, or through ETFs such as the SPDR Gold Trust (GLD) — another target of manipulation theories — or in mining stocks through the Market Vectors Gold Miners (GDX) or Junior Gold Miners (GDXJ), or individual purchases, investors must understand that gold is a historically volatile, emotionally driven, and complex market. There is a bull case for gold, and a bear case for gold; but neither involves greedy bankers and evil government officials in a worldwide cabal to fleece the common man."

Have yourselves a very pleasant weekend and get some Dramamine for next week – it promises to be a choppy one in the markets, summer doldrums notwithstanding.

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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