In the Lead – Monaco Market Monitions


Bullion BarsGold’s steepest fall in nearly two months took place on Thursday as the commodities’ sector also took its largest hit in values in the same timeframe.

The causes of the sell-off were cited as US dollar strength and the announcement by the International Energy Agency that a release of 60 million barrels of black gold was in the planning in order to mitigate any possible shortfall in the commodity.

Under the IEA-coordinated plan the US will release 30 million barrels of crude from its SPR stash. Some analysts have characterized the sizeable release by as many as 18 nations not so much as an effort to make up lost Libyan supplies but as an attempt to bring oil prices to levels that do not pose a risk to the rather fragile situation manifest in the global economy at the present time.

In any case, the combination of a rising dollar and the fast-tanking price of crude brought about a situation where gold’s flag formation broke out to the downside following a false start on Wednesday ahead of the FOMC meeting and Bernanke press conference. The S&P GSCI index lost 4.7% on Thursday and that was the largest decline in value since the dark days of early May.

Black gold had posted losses on the order of 5.5% at one point during the trading day yesterday. On the other hand, there are many Asian countries which are quite thrilled with the declines in oil as they have been waging a pitched battle against inflation in the wake of soaring energy prices. That which OPEC was not able to bring to the markets from its meeting tables in Vienna recently, the IEA took care of, in one fell, surprising swoop, on Thursday.

There is, in all of this, a potentially larger and more ominous issue to consider for speculators; the fact that the "rave" in the commodity space may be very near the time when the bouncer shoves the last few remaining revelers towards the exit doors of the nightclub which has hitherto been more crowded than fire officials might ever permit it to be. Various hedge fund illuminati meeting in Monaco this week were heard to be saying that the price of gold, copper and other metals and commodities may have seen their tops.

Caviar-munching and champagne-sipping fund managers uttered "heretical" words such as "Gold at $1,500 is now a speculation. It’s no longer a store of value. Everyone apart from the U.S. has got rising interest rates, and economic growth is probably going to slow.”

Friday morning’s trading action saw more follow-through selling in the precious metals’ complex after gold posted overnight lows at the $1,515.00 mark and silver fell as low as $34.47 per ounce. Albeit there was a bit of stabilization being attempted (gold opened with only a minor, 50-cent decline near $1,520.00) the continuing gains in the US dollar (up 0.12 at 75.39 on the index) and the fallout from the EU’s promise to help Greece avert a meltdown kept the tilt in the market pointed to the downside for the time being. The "damage-control" PR machinery went into full swing overnight as commodity maven Marc Faber reiterated his nth call for picking up some more bullion on such price declines.

Meanwhile, the yellow metal fell to under its 50-day moving average (now tracing near $1,521) for the first time since February.

Elliott Wave analyst Mike Drakulich recently (June 13) noted that “If you see a sustained [gold] rally through $1,539 the bearish counts starts losing credibility, opening the door for gold to make a new high. “Not $200 or $300 [higher], but probably towards $1,600 and then I’d still be looking for a final fifth wave. Bottom line for gold? “The intermediate term risk/reward on the upside is poor. From here there is $50-75 on the upside and $200/300 on the downside.”

Silver dropped 50 cents at the open, trading at $34.81 on the bid-side in New York. The $34.20 mark remains critical to maintain lest the white metal were to head significantly lower in the event of a breach.Platinum and palladium also continued to exhibit price weakness this morning; the former dropped $13 to start off at $1,690.00 per ounce, while the latter fell $10 to the $733.00 mark per troy ounce. No change was reported in rhodium, still bid at $1,950.00 the ounce. In the background, crude oil was marking time at the $90.78 level per barrel, still off by 20 cents but showing some incipient signs of a possible leveling off.

Over in Europe, the aforementioned pledge not to allow Greece to sink into the Aegean Sea helped the mood in the markets a bit. Another announcement of a different nature was also made this morning; that of the appointment of Mario Draghi to head up the ECB following Mr. Trichet’s stint that ends on the first of November. The appointment announcement’s timing was seen as a bit of "reinforcement" to the united stand that European leaders appear to be taking on matters financial at such a difficult time as the present. The ECB received praise for its track record of maintaining price stability in Europe since the advent of the common currency.

Price stability was also on the mind of China’s Premier Wen as he boldly declared that his efforts to slay the inflation dragon have been at least partially successful. Okay, one or two heads have been chopped off the price munching monster following a string of hikes in bank reserve requirements and interest rate increases, but — at least according to some analysts — it is too early to declare victory against the beast.

In fact, BofA economist Ting Lu opines that: "Readers [of Mr. Wen’s words] should take the editorial with a "grain of salt. Despite these positive messages from Wen, it could be wrong to expect the Chinese government to change its policy stance soon."

The published pep-talk commentary by Mr. Wen was entitled "How China is winning the fight against inflation." Winning. No comments were available from Mr. Sheen.

Of course, China also has another problem on its hands; one that might still come to play a role in the commodities’ markets as we move forward. Societe Generale analysts sounded the alarm on China’s boom in construction, saying that the indicators are flashing "stall."

SocGen noted that "We believe the current pace of construction activity is unsustainable and a painful adjustment will come sooner or later."

The French bank’s analysts took their cues from a recent decline in the demand for cement and for earth-moving machinery that has been noted in China. Recall that China has taken some 55% of global cement supplies as recently as last year. Also last year, the country’s builders put the finishing touches on more than 1.8 billion sq meters of new residential space, which – according to Marketwatch- is more than the entire housing stock of Spain. When the boom is lowered on that boom, we can safely assume that a whole lot less cement, copper, aluminium, glass, etc. will be demanded by China. You have been warned by SocGen.

As for US growth, it appears that- despite the widely reported "soft-patch" stories- the American economy chugged along at a not too horrible 1.9% pace in the first quarter of this year. The US real GDP was revised 0.10% upwards by the Commerce Department this morning. Albeit economists remain wary about what the number might turn out to be for the second quarter (following the devastating quake in Japan and the supply-chain disruptions it engendered), the expectation still is that US GDP might come in at the 2.3% level for the period. Meanwhile, the Commerce Department also reported that US durable goods orders rebounded in May, and did so by 1.9% after having declined by 2.7% in April.

Until Monday, please have yourself a great, sun-filled weekend; it’s the first one of the summer, officially.

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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