In The Lead – Welcome! You’ve Got Bail (or not)!


Bullion BarsThe on-going saga of the Greek bailout that is or is not a bailout remained the principal attraction for the financial media’s attention this morning. Sources say that Greek bonds will continue to be accepted as collateral for money market operations "unless all the major ratings agencies commence using the "default" word. Several banks in the eurozone were set to meet tomorrow to discuss the impasse regarding the restructuring of Greek sovereign debt that is presently at hand.

Still, the French-originated "roadmap" that was proposed last week, was the most likely one to remain at the core of any agreement to possibly be reached this week by the affected parties. Meanwhile, Moody’s rating agency has warned that said banks’ rolling over of Greek debt into 30-year would in fact prompt it to downgrade Greece to "selective default." Thus, the current situation is taking on an overtone of basically turning into a war of semantics between the bankers and the ratings agencies.

Gold prices finally gained sufficient ground after three down sessions to recapture the $1,500.00 mark (just barely) as the new, abbreviated trading week got underway in New York this morning. The yellow metal’s overnight gains had been achieved on account of the US dollar touching three-week lows against the euro and due to continuing uncertainties surrounding the Greek debt situation. As well, some bargain hunting had manifested in the market following the contact with six-week low prices that gold had achieved last week following some sharp sell-offs.

Spot bullion dealing opened Tuesday’s trading session with a gain of $7.80 per ounce in gold. The bid-side indication for the yellow metal was $1,504.10 per ounce. Friday’s Elliott Wave short-term update allows for gold to climb somewhat above $1,515.00 prior to commencing a third wave lower towards the $1,400.00 target. Silver climbed 60 cents to open at $34.75 per ounce. Platinum and palladium gained ground as well, with the former rising by $3 to the $1,723.00 mark and the latter opening higher by the same amount, at the $761.00 per ounce level.

No change was noted in rhodium at $1,925.00 per troy ounce. Automotive news this morning was positive for the noble metals’ complex; GM just reported its highest ever sales activity in China for the first half of this year. The auto giant tallied sales of 1.27 million vehicles in that country for the reporting period.

Friday’s automotive news was however not-so-hot for PGM speculators; the US markets tallied only an annualized 11.4 million vehicular sales level as opposed to the anticipated 12 million annualized units.

The CFTC however reported that fund managers and other specs have dramatically (by 18%) cut their net-long exposure in the futures market as of the end of the latest reporting period (ended June 28). The July 1st release of the CFTC’s market snapshot analysis revealed that net speculative length in gold fell by a whopping 142.2. tonnes, highlighting the potential for further bouts of liquidation in the metal.

Technical analysis offered by long-time Kitco commentaries’ contributor Merv Burak notes the unfolding of a head-and-shoulders pattern in gold; one that anticipates a direction that targets the $1,400.00 value zone. Veteran market observer Ned Schmidt continues to peg "far value" in gold at the mid-$800 zone.

Of course, not everyone agrees that gold will remain at that level, or that it might be headed even lower after more than a decade of basically non-stop gains. In fact, one commodity analyst offers a diametrically opposing view on the matter. Bloomberg relays the fact that one Ronald Stoeferle (commodity analyst at Erste Group Bank AG) has declared

that "the [yellow] metal is still "far away" from a mania and investors should own more gold. Gold will rise to $2,000 in 12 months. Every trend ends in euphoria and excess and that’s what’s going to lead us to $2,300 an ounce, which is the inflation-adjusted all-time high."

Well, there you go; evenly-sized $600-700+ risk/reward potential parameters in gold.

Confused as to which way to bet? You are not alone.

While arguing that some [core insurance] exposure to gold is, indeed, a prudent tack for most investors (and we would certainly concur with that angle), the executive director of Swiss & Global Asset Management cautions that such investors better consider currency fluctuations into the asset allocation equation as returns in gold are subject to "erosion" if the metal position is not hedged against changes in cross-currency rates. For example, an un-hedged euro investor underperformed his or her hedged counterpart by 10% since the start of this year. An un-hedged gold investor is likeliest to suffer the effects of an adverse move between the US dollar and his or her home currency; this, as gold has been historically priced in dollars.

The situation was equally reduction-oriented (17%) in the net-length in silver positioning among the specs. Silver’s length fell by 670 tonnes and its short positions’ tally experienced a large jump. In fact, when it comes to silver, the general sentiment and the shaping up of the futures markets’ positioning basically underscore the white metal’s lack of support for current prices on both the fundamentals’ front as well as the technical one.

The analytical team at Standard Bank (SA) basically concludes that "the market has turned bearish on silver’s prospects." The aforementioned Merv Burak technical snapshot places silver in the ‘bearish’ box on all three counts: short, medium, as well as long-term. That said, the shortened trading week might offer some perhaps overdue short-term ‘relief’ to recently battered metals specs.

Standard Bank’s team also remarks that:

"ahead of the ECB decision this Thursday, we could see heightened euro dollar volatility which in turn will see increased price movements in commodity markets.

Precious metals, mostly gold and silver, will be particularly susceptible, given that a weaker dollar enhances their attractiveness as a safe-haven asset. The market largely anticipates a hike in rates which, given that this should support the euro, could benefit precious metals."

To be fair, the reduction in bullish positions in precious metals was not unique to that niche; the CFTC reported that spec funds have also cut back their bets of a similar nature across the board in commodities, and to levels that are now at a one-year low. Apprehensions related to global growth (or the lack thereof to be more precise) has led such gamblers to scale back on net-long positions in 18 separate commodities by 15%.

The second quarter of 2011 has in fact seen a near 8% slump in the S&P GSCI Index of 24 raw materials. Bets on corn and wheat showed ebbing enthusiasm for higher prices down the road, while crude oil (which lost 7.1% last month) showed a shrinking margin of remaining bullish-flavored bets still on the books. This morning, however, brought joy to black gold specs as the commodity got a near-$2 lift and touched the near-$97 per barrel mark.

As we noted in several instances here last week, China has a potential problem or two on its hands. Real estate bubbles, overheating inflation conditions and the not-so-small problem of… problem loans. Our skepticism on the latter was confirmed this morning by Moody’s Investor Services (man, this firm is in ‘heavy rotation in the headlines lately!). The agency said that the "scale of problem loans at Chinese banks could be closer to the "bleaker" range of estimates." Moody’s feels that somewhere between 8 and 12 percent of the loans that have been made by Chinese banks could eventually be labeled "non-performing" as opposed to the previously estimated 5 to 8 percent. Oops.

In other Chinese-oriented news, the most recent statement by the PBOC has opened the door to near-certainty that an interest rate hike could be in the offing, to come perhaps as soon as this weekend. As a result of the anticipation of the hike, the yuan was… down against the dollar this morning. Yes, down. The implication is that a rate hike is intended to slow the economy. The same anticipation also impacted the Aussie dollar today. Monetary tightening by the PBOC is seen as having a potentially deleterious effect on the demand for that which Australia has become famous for, owing to China’s boom; raw materials.

Chinese authorities continue to remain unhappy about the trends seen in inflation. Consumer prices showed a 5.5% rise in May; the largest bump in three years. The next set of inflation data from China is due on the 15th of this month.

Until tomorrow, "File’s Done!" and "Good-Bye!"

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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