A third day of losses was in store for gold as the deepening "Euroxiety" took hold of the markets and wiped away most remaining traces of last week’s "Europhoria." The yellow metal opened the midweek session with a drop of $9 and was quoted at $1,772 the ounce on the bid-side. Albeit bullion appears to remain confined to the $1,750-$1,800 value zone the possibility of sharp moves in either direction is on the rise given the apparent increase in the number and decibel level of various market alarms that are ringing this morning.
The head-scratcher of the day/week/month is what gold is doing under the $1,900 or even the $1,800 levels with the crisis in Europe undergoing its most intense phase and with the Old World facing what Angela Merkel has called its "biggest challenge since WWII." Hint: look no further perhaps than them dollar bills in your pocket, as they now remain the "lesser of all evils" for some — make that: for many.
Silver fell 23 cents and opened at $34.34 the ounce while platinum lost $10 to start at $1,628 and palladium slipped $9 to the $655 level. Rhodium was unchanged at $1,675 per ounce. In the background, the US dollar advanced modestly on the index but overcame the 78 mark while the euro flashed a $1.3484 quote making traders apprehensive. Crude oil gave back only about 25 cents of Tuesday’s gains and traded at $99.15 per barrel.
Copper, on the other hand, dropped by 1.66% as concerns about Europe weighed on the orange metal’s traders’ minds. Dow futures did not look too good either, in wake of a warning from the Bank of England that the global economy might yet sustain a hit if the crisis in Europe is not resolved. Such declarations are among the last that a commodity spec wants to hear right about now…
Markets remain anxiety-ridden and the principal reason behind such a mood is the persistent rise in Italian government bond yields — they were back up above the critical 7% pivot point once again on Tuesday, despite the "Mario effect" that was supposed to temper the market. In fact, the ECB did cave to American pressure to do something/anything to stanch the bond market hemorrhage and bought some Italian instruments this morning. ECB officials were quick to underline the fact that a one-off buying sortie is not tantamount to a policy change and/or to the advent of perpetual money-printing however.
Moreover, the angst appears to be taking on some "Swine Flu" (yes, that was an attempt at a pun on the PIIGS) attributes; it is now fast spilling over and contaminating the markets of Spain and even France. Spanish bond yields touched 6.3% for the ten-year instruments. The 7% figure equates the "bailout candidate" label to many market observers. Currency traders had seen the $1.35 level in the euro as its own "Maginot Line" — strong, but still vulnerable to a blitzkrieg by the bond vigilante storm troopers. As regards Italy, newly installed PM (and now also Finance Minister) Mario Monti feels "absolutely convinced" that his country will overcome the debt crisis. "Super" Mario is set to unveil his new government within just hours. Observers cannot wait.
Speaking of those who observe the markets and the economies, the Europeans are about to get pretty testy with rating agencies. In the view of many, the "rating game" has engendered quite a bit of the volatility we presently see in the sovereign debt market and it has also bumped up borrowing costs. Last week’s S&P gaffe that erroneously led some to believe that France had lost one of its three "A"s was possibly the proverbial camel back-breaking straw.
An EU commission of regulators has drafted legislation that would (among other things) permit investors to sue for damages in the event there would be proof that a rating agency was negligent in some way. The top three such firms (S&P, Moody’s and Fitch’s) have taken plenty of "incoming" in recent months as regards their declarations about the rating of the US, and many have correctly reminded audiences that the same agencies were all too eager to bless certain parties before and during the so-called "subprime crisis." Let’s see what the response will be to the EU’s "Rate This!" challenge.
Backlash such as this from the EU should not come as very much of a surprise at this juncture. Some of the ‘heat’ the markets are feeling is the direct result of a string of recent downgrades, warnings, and opinion coming from the ratings space. Meanwhile, a warning of a different kind, about a different system, was issued by the IMF yesterday. For several weeks now we have tried to bring you stories relating to the rise of the unofficial lending sector in China. The IMF has now finished its first review of China’s banking system and it did not have too many comforting words to say about it.
The review cites ‘financial sector vulnerabilities’ and ‘domestic bank asset quality’ along with ‘high real estate prices’ and ‘the credit boom’ as items to be concerned about, even if the country’s 17 largest banks appear sufficiently strong to endure certain shocks that might occur. The IMF recommended interest rate reforms, a freer trading environment for the yuan, and continued monitoring of the Chinese banking system.
Suffice it to say that some of the nervousness in certain markets is also manifest as a result of economic barometer readings such as the ones coming out of Europe lately. The Old World basically experienced no growth in the quarter that just passed. The region’s GDP eked out only a 0.2% rate of expansion despite fairly robust, isolated metrics that showed the economies of France and Germany advancing at 0.4 and 0.5 percent respectively.
What the figures imply is that while the aforementioned countries did not do too poorly at all, the shrinkages that Greece (at 0.4%), Portugal (at 0.4%), and Italy (at 0.2%) experienced constituted a large enough drag to result in the final overall number that economists are fretting over. Europe is essentially skirting (or might already be in) a recession. Not everyone is afraid however that the Eurocrisis is about to push the global economy into another contraction, even if the EU does experience such a phase.
Thus, a quote at $1.354 for the euro that was seen on Tuesday and this morning’s breach of the $1.35 key value marker (when combined with rising bond yields for Italy) did not come as a big shock to too many traders. But, hey, just because the euro backed away from the $1.40 area and is struggling to keep above the $1.35 mark does not mean it has been the worst performer of 2011. No, that dubious distinction belongs to… the Canadian loonie.
Surprised? So are many who saw Canada’s dollar as the beacon of shining trading and profit hope amid all of the world’s embattled currencies. Well, it turns out that while everyone was distracted with the euro’s value (and fate) the CAD under-performed the euro (!), the British pound, the Aussie $, and the rest of the G-10 currencies as well. Chalk this one up as well among those "Whodathunkit?" items that keep piling up lately.
Another item on that same list of head-scratchers is the sale of the roughly 34 tonnes of gold from one place one would have thought was not likely to do so any time soon; the Paulson & Co. basket of assets. It was one thing for George Soros to liquidate his bullion stash after having labeled the metal as the ‘ultimate bubble.’ It was also another thing for Mr. Mindich’s Eton Park to sell its entire ‘stack’ of 813,000 SPDR Gold Trust shares (2.52 tonnes). But Paulson & Co.? The largest holder (at one point 31.5 million shares) of the gold ETF???
What gives? Well, with that kind of sold tonnage hitting the market in Q3, the price of gold… gives, evidently. We won’t bother you with the slew of damage-control flavored commentaries that followed in the wake of the Paulson sale — some are downright desperate-sounding. We will however reiterate that such a circumstantial ‘mobilization’ of part or all of one’s gold — coming at a time when the rest of the portfolio is bleeding profusely- is precisely why one buys and holds bullion to begin with. Let’s just hope that the Paulson portfolio does not suffer additional damage of the kind it incurred thus far in 2011. If it does, rather than Mr. Paulson "reversing’ his decision — as some fervently hope — he might be forced to reach for another third or two of the formerly largest gold pile know to fund-dom.
Said it once, let’s say it again: Gold is not an investment. Gold is an insurance policy and a portfolio allocation device and damage-mitigator. Add it to a diversified pie of assets and you are likely to get a slight enhancement on the overall return and a slight decrease in volatility (though not of late, mind you). In a ‘worst case’ scenario (see Paulson’s BofA bets gone sour) it can serve as a wound-healer as well. But let’s stop there and not get carried away with the ‘end of the financial universe as we know it’ propositions. They are not likely to get any closer to reality than asteroid 2005 YU55 got to our planet eight days ago.
While the recession-flavored jitters we see in connection with Europe do appear to have ebbed somewhat when it comes to the US, one cannot discount the danger that a contracting Europe might yet pose to its economy; the region is still the second largest outlet for US exports. However, the relatively better economic shape that the US is perceived to be in helped the commodities’ complex attract the highest level of betting in nearly two months. What has changed since September? Read on.
More than $2 billion has flowed into commodity-based funds in the week that ended November 9 as speculators began shifting away from Euro-centric pessimism and towards US-flavored optimism. Such a brighter outlook was in part validated by several economic metrics that became available on Tuesday. First, the level of US consumer confidence came in at above what had been anticipated. Then, a similar thing happened as regards US retail sales — they were up by 0.5% in October, in large part on account of autos and electronics moving into consumers’ hands. Finally, the Empire State Index (of manufacturing activity) jumped above the zero line indicating expansion.
All of the above unfolded against a background of an also larger-than-expected (0.3%) drop in producer prices, reported yesterday, and a drop in US consumer prices of 0.1% reported this morning. The combination of all of these positive readings has led some to scale back previous projections of a ready-to-ease Fed. In fact, Dallas Fed President Fisher remarked on Monday that he sees an American economy that is "poised for growth" and that he therefore does not see a pressing need for further accommodation by the Fed.
Mr. Fisher’s general take on such matters was echoed by St. Louis Fed President Bullard who said that easing should only be triggered if in fact there is a sizeable deterioration in the American economy. Mr. Bullard also cautioned that Fed asset purchases must be "employed carefully" if they are to be employed at all. He is on record as having mixed feelings about "Operation Twist." On October 24 he said the O.T.’s efficacy is "unclear."
Until tomorrow, all else remains… mucky. Keep the Kleenex handy.
Senior Metals Analyst — Kitco Metals
Kitco Metals Inc.
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