German Chancellor Angela Merkel dashed hopes for a quick, and, especially, all-encompassing resolution to the dragged-out European debt crisis this morning. In a Berlin briefing held today, Ms. Merkel’s spokesman warned over-eager market speculators that the search for a meaningful end to the turmoil will "surely extend well into next year." You will recall how much volatility has been manifest of late in all asset classes based on every nuance of every statement coming out of Fraulein Merkel’s or Monsieur Sarkozy’s quarters.
The weekend summit of the G-20 did not yield more than basic accords on the need to avoid a Greek default and of avoiding contagion by bolstering the financial sector. The only concrete outcome of the meeting was the setting of the date of October 23 for another summit (that of European leaders) at which a plan to address the issues will need to be unveiled. Thus, the markets and their crisis-fatigued participants were forced to go back to guessing and to positioning themselves for more of the same; uncertainty, volatility, and a quest for shelter from the financial storm. One of the recipients of said quest was, this morning yet again, the US dollar (last seen above the 77-mark on the trade-weighted index).
Friday’s optimism-based bets in the commodities’ complex was dealt a bit of a setback this morning as Ms. Merkel’s caution-laden statements yielded the realization that nothing as regards Europe’s woes can take place right away, and that even if it did, the offered solutions cannot be comprehensive. Crude oil was one of the victims of this setback and souring mood; it fell from its highest level in one month and traded under the $87 per barrel level this morning.
While gold and other precious metals did stage a bit of an opening advance, such gains were relatively muted and were being seen as capped by not only the stronger dollar but by the lingering uncertainty about economic conditions in the wake of the aforementioned prolonged eurozone crisis. Bloomberg News’ editorial on the European situation written this morning lays out a three-part must-have scenario to be laid out by the time the G-20 meet again in Cannes on November 3rd.
The list is brief, but to the point. It requires that Europe’s leaders a) "must discard the illusion that certain euro-area governments, particularly Greece, can afford to pay their debts. B) they must also provide a realistic accounting of how much Europe’s banks will lose when those governments default. c) finally, they must offer financial guarantees large enough to convince markets that the defaults and the losses will be final."
Spot dealings in New York saw an opening gain of $5.80 in the yellow metal and traders quoted the bid-side in gold at $1,685 the ounce. Bullion narrowed those opening gains within the first sixty minutes of trading action however, and bids were offered nearer the $1,680 area. While a sprint towards $1,700-$1,725 ought not to be ruled out during coming trading sessions this week, the approach to such levels could be fraught with profit-taking selling.
The risk of a renewed slippage towards lower support levels in gold also remains present however, should the greenback pick up more safe-haven type of bids before the European October 23 summit. Support however is anticipated to hold at one or another lower level, as late next week the markets approach another kind of ‘deadline’ which has traditionally offered some relief; the start of Indian festival days.
Controversy continues to swirl in the world of commodities’ trading and it is only expected to swell further amid news that the regulatory bodies in the US are — this week-putting the finishing touches on their toughest efforts to date to crack down hard on the volatility in the oil and metals’ markets. The flames of extreme price gyrations have been fanned by intense speculative activity in recent months and years and have resulted (among other things) by gold shedding some of its historic, asset preservation and safe-haven attributes.
After four long and intense years of debating, Wall Street is bracing for the advent of CFTC-originated rules that will, for example, restrict the number of contracts a trader is allowed to hold. Don’t look now, but the impending regulations have the potential to seriously alter the landscape (not to mention price tags) in many a commodity that has hitherto been the subject of orgiastic buying (and, on occasion, selling) sprees. Taming runaway commodity price gains has become a favorite pastime among politicians who seek to pacify their constituents as well as lessen the levels of inflation that such speculative bubbles have leaked into the economy. As for the debates on all of this, well, they are bound to continue as well.
Barely one month old, a new book from Chart Prophet LLC’s Chief Investment Strategist Yoni Jacobs is stirring up quite a storm of controversy of its own, in certain circles.
Among many other things, the author argues that "the addition of jobs in the mining industry points to over-inflated prices in the underlying metals. It makes sense why mining would benefit more than the other industries, since rising gold and silver prices have boosted profitability in the sector. But with mining being the only industry gaining jobs since December 2007, signs of over-speculation are evident."
After laying out all of the cogent reasons why gold has risen as far as it has, and why the asset is a store of value and a hedge of various types, Mr. Jacobs also opines that, given the current extreme valuation paradigm, the:
"soaring expectations by both mining companies and investors will not be met. World markets are entering recessions, commodity prices and demand are falling, the US Dollar is strengthening, and deflation is more likely than inflation. Due to these conditions, gold and other metals will fall. The excess hiring in the mining industry is therefore a sign of over-speculation, over-enthusiasm, and over-confidence in gold, silver, and other metals."
Silver started off with a rise of 19 cents at $32.35 but it too lost the edge it had in early dealings and fell into negative territory within the initial hour of trading in New York. Platinum and palladium opened with double-digit gains and managed to hang on to them as of this report’s filing time. The former advanced $19 on the open, to the $1,571 mark per ounce, while the latter climbed $12 to the $633 level the troy ounce.
Rhodium remained unchanged at the $1,625 bid quote this morning. CFTC positioning reports continue to indicate that specs are tilting towards the bearish side in the noble metals’ group despite last week’s improvement in the net long crowd’s size. ETF selling was still manifest in palladium, holdings of which in that space eroded by 69,000 ounces to 460,000 ozs. — a new low for 2011. In automotive news, the UAW appeared to draw closer to executing a four-year labor agreement with Ford Motor as 62% of its membership has voted in favor of the deal.
Meanwhile, net speculative length in gold bumped higher in the latest CFTC reporting period but it remains well below last year’s average weekly figure. Most of the change in the reporting metrics was attributable to a decrease in short positions rather than to additions of fresh long ones. In other commodity news, copper prices initially rose by a modest 0.30% but then fell by nearly 1% later in the session and US equity futures fell a tad in the wake of not-so-hot US Empire State manufacturing data. The Dow drifted 135 points lower by mid-morning as investors digested last week’s late rally and scaled back on their degree of optimism along with European equities that gave up part of their own gains after the Merkel briefing.
Senior Metals Analyst — Kitco Metals
Kitco Metals Inc.
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