Commodities slid Thursday as the US dollar reversed course from a one-year low. Gold peaked early to $1,021 an ounce, but crashed down below $1,000 to stop at a two-week low. Silver retreated 3.6 percent, platinum declined 1.5 percent, and crude oil plunged 4.5 percent. US stocks dipped for a second consecutive day.
New York precious metals figures follow:
Silver for December delivery plunged 61 cents to $16.300 an ounce.
Gold for December delivery declined $15.50, or 1.5 percent, to $998.90 an ounce.
- October platinum lost $19.30 to $1,308.50 an ounce.
The most notable bullion quote of the day follows:
"When the [gold] push failed to penetrate the $1020 level with any conviction this time around, some of the profit-taking buttons apparently lit up with more energy than had been seen in previous such sell-offs last week," wrote Jon Nadler, senior analyst at Kitco Metals, Inc.
"Options expiry is also to be factored into the action today. Of course, a $3 loss in oil prices helped cement gold’s intra-day fate as well. But, the overriding factor moving bullion prices under the $1K level after about a week of closings above it, was – no surprise the greenback." [Click to read Nadler’s full commentary.]
In London bullion, the benchmark gold price was fixed earlier in the day to $1,009.70 an ounce, which was a 55 cent decline. Silver was at $16.76 an ounce for a 34 cent loss. Platinum was set lower by $7.00 to $1,318.00 an ounce.
Gold, considered a hedge during times of high inflation and economic uncertainty, tends to follow oil and move opposite to the U.S. dollar. A rising greenback makes dollar-denominated commodities, like bullion, more expensive for holders of other world currencies.
Oil and gasoline prices
Oil tumbled for the second straight day and to a two-month low "as sales of existing homes unexpectedly slumped, bolstering skepticism about the speed of the economy’s recovery from the recession," wrote Mark Shenk of Bloomberg.
"We knew at some point the market was most certainly going to break out of its ever-narrowing pattern," Darin Newsom, senior analyst at commodities information provider DTN, was quoted on MarketWatch. "We saw a downside breakout below $67, and it is likely we will see a pull back to $59."
New York crude-oil for November delivery plummeted $3.09 to $65.89 a barrel.
The national average for unleaded gasoline declined six-tenths of a cent to $2.534 a gallon, according to AAA fuel data. The price is 1.6 cents lower than last week, 8.9 cents down from a month back, and $1.18 less than a year ago.
U.S. stocks fell for day two "as a surprise drop in existing home sales and tumbling commodity prices gave investors a reason to sell into a rally that pushed the major gauges to one-year highs," Alexandra Twin of CNNMoney.com.
"The housing number today probably threw some gasoline on the fire," John Kosar, market technician and president of Asbury Research in Chicago, was quoted on Reuters. "It’s not only that the recovery is fragile, but the other important story is just how far the market has come, so fast. The Fed statement was a little bit sobering."
The Dow Jones industrial average fell 41.11 points, or 0.42 percent, to 9,707.44. The S&P 500 Index declined 10.09 points, or 0.95 percent, to 1,050.78. The Nasdaq Composite lost 23.81 points, or 1.12 percent, to 2,107.61.
The post-meeting statement by the US central bank contained additional key acknowledgements as well, such as the ‘we believe in the on-going economic recovery’ mantra, and the obligatory ‘tribute’ to the inflation hawks within its ranks (we think this was a contentious meeting with a split voting body of hawks and doves). For example, it is understood that the Fed is considering borrowing money from money market mutual funds via reverse repos as one way to drain liquidity from the system.
The overriding theme of this meeting however, was the continuing obsession with the ‘slack’ in the US economy and the minimal (if any) threat that-at this time- inflation poses to the system. Thus, for the moment, one can expect the Fed to watch capacity utilization with a much keener eye than it will keep on TIPS as a barometer of what is actually happening out there. That said, when the latter shows a sea-change, the interest rate (and other) triggers will be pulled. As of now, they are simply armed and ready.
The immediate reaction to the Fed gathering’s textual summary in the dollar and commodity markets was mixed, at best. Here are some excerpts of media and analysts’ comments made in the minutes that followed:
"Commodities are taking it on the chin and dragging down stocks," said Art Hogan, the New York-based chief market analyst at Jefferies & Co. "Some participants are looking at the recent rally and saying we need to see a pullback before putting money to work on either market."
"The dollar erased its decline as the decision to end its $1.45 trillion in purchases of mortgage-backed securities and housing agency debt three months later than previously scheduled indicated the recovery won’t be as robust as expected."
"It looks like even though nothing is new, and the dollar weakness can continue, the market may have been a little long on foreign currencies," said Laurent Desbois, president in Montreal of Fjord Capital."
As can be seen by the above, we had fits and starts for the few remaining afternoon hours in the dollar, commodities, and equities. The dollar fell, the dollar rose, gold rose, gold fell. Equities lost ground in Asia, except they rose in Japan. Copper and oil fell, while Treasuries showed little change. Some confusion, but well-justified, when one considers that the Fed at once offered the prospect of continuing low interest rates while diagnosing the ‘green shoots’ as still subject to early frost, as opposed to the late frost it was worried about this spring. These green shoots may turn out to belong to some annual plant variety.
"With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." – with these few, but carefully chosen words, the Fed set into motion…more of the same. Dollar weakness, yes, but also a dampened enthusiasm for the type of recent risk-taking that has been based on perceptions of a much more robust recovery than the one the Fed describes at this time.
At any rate, the mild confusion and indecisive patterns following the Fed’s statement all but dissipated overnight, and this morning’s market action revealed a continuation of the attempts to push gold to higher ground on the back of the dollar’s inability to get very much above the 76-mark on the index. Although oil and copper lost ground as the economic recovery suffers from localized (US) anemia, the legion of gold longs (tenfold more than that of the shorts) continued to aim the cannons towards a) the 1023 level recently touched for a moment, and b) the 1034 level first etched into history books on 03.17.08
New York bullion dealings opened with a $8.10 gain in gold, which was quoted at $1016.30 per ounce basis spot bid against a 0.15 decline in the US dollar on the index (to 76.24) and a 1.4785 tick against the euro. Crude oil dropped 50 cents to trade at $68.46 and showed additional evidence of (slowly) eroding support. Silver added 15 cents on the open, starting off at $16.90 per ounce. Platinum rose $5 to $1324 while palladium recovered a bit, climbing $3 to $296 per troy ounce.
When the push failed to penetrate the $1020 level with any conviction this time around, some of the profit-taking buttons apparently lit up with more energy than had been seen in previous such sell-offs last week. Options expiry is also to be factored into the action today. Of course, a $3 loss in oil prices helped cement gold’s intra-day fate as well. But, the overriding factor moving bullion prices under the $1K level after about a week of closings above it, was – no surprise the greenback. Again. It covered more than one full point’s worth of ground since the Fed statement 24 hours ago. Back to 77.01 on the index. Counterintuitive? You betcha. But the ‘oversold’ was more of a betcha, evidently.
Thus, we tracked a $16 drop in gold by 14:00 hours NY time. The spot price fell to recent support at $992.00 after touching lows near $989.70 per ounce. The critical question for the day remains whether or not gold can scratch its way back to the four-digit level and still close above it. That answer will have to wait until after this article is posted, and we can better sum up the mood for you in the morning.
Silver fell a hefty 55 cents (see the article above on just why this should be) to the $16.20 level. Platinum dropped a large-ish $24 per ounce, to get to the $1295 level. We think the metal got caught up in the surfing-sized wake generated by gold lately, and fund buying may have pushed it beyond the $1250- $1300 comfort zone seen previously. The Fed reading of persisting weak economic conditions did not add to speculative confidence as regards automotive demand, especially in this post cash-for-clunkers period. Car dealers are back to hot dogs and balloons promos – and not just on weekends. Palladium recorded only a marginal $1 loss, at $292.00 per ounce.
A drop in unemployment claims (unexpected) and a drop in the sales of existing US homes (also unexpected) proved to be sizeable enough triggers for declines in most assets on Thursday. The sour home sales data validated the Fed reluctance to yank the IV from the patient just yet. While the patient is no longer in the ICU room, the recovery room has it own set of life-support systems which require further use. At this point, a more public version of the car stimulus program, as applies to the inventory of homes might be in order. Not that we can count on one.
In any case, the Dow did not have a sunny day on such news, but then -as mentioned- neither did oil or gold or copper (off 3.37%) to $66.10 per barrel. Oil, in fact, fell to a one-month low on the US housing news. Not that the market was not ripe of a correction after the $72 levels is saw recently.
India’s Commodity Online interviewed Commerzbank analyst Eugen Weinberg yesterday, and posed two questions to him in the hours just ahead of the Fed meeting:
1. The markets are awaiting the Federal Reserve’s meeting today; what really are they expecting from it and how will it impact the market?
Last week there were rumours that some of the Fed governors were really thinking about a hike in the interest rates during today’s meeting; I think it is too early, these expectations will not be fulfilled and that might impact the dollar even further. That, might bring the dollar even under more pressure, but, I think that the rise of dollar is imminent because it has sold out at the moment and that would impact also the gold prices because the stronger dollar will be associated with global gold prices going forward.
1. There has been a lot of build-up in non-commercial traders [gold] long positions. Is there a worry amongst investors that there could be an unwinding of the position now?
It’s definitely a very large concern because the number of speculative longs at COMEX is almost 10 times higher than the number of outstanding short positions and this is a big concern and a big danger for the market because those are weak hands and should unwinding come – I think the trigger for the unwinding would be the strength of the US dollar- we will see a strong slump in the gold price, probably moving to somewhere between 900 and 960 dollars going forward."
How will the gyrations in gold affect ‘poor man’s gold?’ – Well, the jury that is VM Group – part of BNP Paribas opines that basically, we just need to think of silver as gold on steroids, or gold to the n-th power. In both directions, that is:
Whether the gold price eases or moves higher, silver will likely do the same, but to a greater degree, analysts at VM Group said in a report on Wednesday. "Silver is singing to gold that old refrain: ‘anything you can do, I can do better," VM comments in the September issue of its BNP Paribas Fortis/VM Group Metals Monthly report.
So if gold shifts higher, then silver will continue to outperform." However, if gold goes down, "so will silver, and by more". VM expects a retreat in silver prices in the short term, but then further gains in the medium term, as gold resumes its upward path. "Whether silver can take out its 2008 high of over $20/oz is debatable, however; at current relative prices it will probably require a gold price in excess of $1,100/oz," the VM analysts said. "Not impossible, but unlikely to be seen in a hurry.
In the three weeks to September 17, gold’s dollar price climbed 8%, while silver rose an "astonishing" 22,3%, to $17,38/oz over the same period. This reduced the gold/silver ratio down to 58,57, the most it has been in favour of silver since mid-August 2008. However, compared with the March 2008, when gold last rose above $1 000/oz, silver is still relatively undervalued – it was above $20/oz at that time.
The explanation is that this time last year silver plunged, when an outright global economic depression appeared a real possibility, and it has yet to fully recover," VM said. In a report on Wednesday, RBC analysts Michael Curran and Cailey Barker also predict that gold and silver prices will pull back over the next month or two, followed by renewed strength later in the year. The believe silver will likely retreat to the $14/oz to $15/oz range, but could reclaim the $20/oz level in the next round of strength, if gold tests the $1,050 level. RBC maintained a silver price forecast of $13,25/oz for 2009 and $13,50/oz for 2010. "While our 2009 forecast looks a little light, as year-to-date spot silver has averaged $13,60/oz, we are waiting to see if our forecast of a pullback in the next month or so proves accurate," the analysts said."
Certainly more accurate and more plausible than the recent silly talk about the dollar becoming the next carry trade (we covered this non-starter and its risks just a day or two ago), or the urgent revelation of an ‘admission’ by the US gov’t. that it is involved in sinister gold price suppression schemes. Sure, and gold was able to get to $1K anyway, because, you know, the barbarians are at the gate. A denial, seen as an admission. After all, what are urban myth sites for ? Who knows what’s next? Perhaps, a ‘hotline’ report that gold didn’t really fall today. It actually rose in someone’s mind. As it always should, every day. Regardless of background conditions, or what the Kitco ticker displays.Jon Nadler
Kitco Bullion Dealers Montreal
Kitco Metals Inc.
Websites: www.kitco.com and www.kitco.cn