In The Lead – Dude, Where’s My Rally?


Precious Metals CommentaryNew York precious metals action opened with minor losses in gold and with mild advances in other metals, except for palladium, which continued it stunning two-day climb by adding 4% more to values in the spot price.

Gold fell $2 to the $1,747 mark while silver advanced 44 cents to the $33.25 level on the bid-side. The yellow metal hit a two-week high yesterday, buoyed by the spreading ‘Buy Everything!’ syndrome — one that made for the Dow’s best day of 2011 and its best session since early 2009 at the same time. What’s wrong with that picture? Most everything that one has come to historically rely upon…

Platinum added $5 to rise to $1,561 and palladium vaulted $24 higher to reach $634 per ounce. Rhodium remained quoted at $1,650 on the bid level per ounce. In the background the US dollar fell to the 78.25 figure on the trade-weighted index while crude oil hovered a few pennies under the century mark per barrel. Copper slipped modestly lower losing half a percent.

Yes, today’s title has been used once before, but… yesterday’s central bank action-based market euphoria dissipated just a tad overnight and this morning, though you would not know it from looking at certain metrics such as the Hang Seng Index having jumped the most since 2009 and a very impressive leap in the Aussie All Ordinaries. The heady vapors of the central bank action (some say ‘intervention’ by any other label) floated over into Asia but the warm afterglow of Wednesday’s asset buying orgy was not manifest in Europe this morning any longer. The same can be said for the US, where the Dow slipped nearer to the 12.000 mark after a tepid opening.

Contributing to the resurfacing malaise in Europe was the fact that Spain’s borrowing costs surged anew this morning with a notable leap in some three-year instruments which climbed from 3.6% in October to 5.18 this morning. This is not quite reflective of the levels of calm and confidence that the CCBA was seen as finally having induced in investors’ minds one day ago. That said, the auction managed to sell $5 billion worth of bonds due from 2015 to 2017 as investors are starting to perceive that ‘someone out there’ won’t leave them in the cold.

Just one day after what was thought to be a much longer-lasting paradigm of support from the official sector, European equities slipped, along with the common currency. The reason given for the turn-around was the fact that ECB chief "Super" Mario Draghi issued some quite caution-laden comment on the region’s economic prospects and its utterly dysfunctional bond markets. Mr. Draghi also appeared to underline the continuing independence of his institution (read: don’t count on us to fire up the printing press, capisci?).

Surely, Mr. Draghi might have been aware of certain realities when he made his market-tempering comments today. One such reality is the fact that Europe’s manufacturing sector shrank even faster than previously during November. The Markit Index, in fact, fell to a 28-month low last month and came in with a reading of 46.4-clearly in contraction territory. Declines in manufacturing activity and similar readings under the pivotal 50 figure were noted in the core of the region, in Germany and in France — the two nations upon which the union is so heavily dependent of late (and not just for economic growth).

On the other hand, the market players out in force yesterday very likely paid attention to another set of activity readings as well as they placed various bets this morning. The readings we are referring to came from China and they indicate a factory sector that is shrinking. Weakening demand in the wake of the European crisis resulted in the official PMI figure falling to 49 last month — also a number underscoring negative growth.

The penetration of the ‘boom-bust line) prompted one HSBC analyst to point to a ‘sharp deterioration in business conditions across the Chinese manufacturing sector.’ Others see a Chinese central bank that might be prompted to ease in some fashion in order to avert a hard(er) landing. Recall that China’s factory output is responsible for 40% of GDP. Commodity bulls are once again turning up the speed of their ‘radar sweeps.’

Over in the USA, the Fed’s Beige Book revealed moderate gains across eleven of the twelve districts that the central bank normally surveys. The exception occurred in the sector being monitored by the St. Louis Fed. Overall, the latest Fed report shows a US economy that is still above the recessionary ‘waterline’ and one that despite decent growth has not brought about a notable decline in unemployment levels. The Labor Department’s official jobs report comes tomorrow. In the interim, we have the small bump higher in the latest weekly jobless claims filings; 6,000 more applications for benefits were reported by the aforementioned US agency. The number is roughly 10,000 filings higher than economists’ consensus projections.

Speaking of projections bullish and otherwise, consider the latest ones coming from the desk of Goldman Sachs. The firm recommended US bank stocks, junk bonds, commodities and Japanese equities for the current year’s top picks when it peered into its crystal ball for 2011. Results from the real world have come in as follows: US bank stocks — down 26%. The S&P 500-down 18%. The Nikkei — down 16%. Commodities-up a ‘whopping’ 1%… As of yesterday, Goldman recommends going short European high-yield corporate debt. It also likes gold for 2012 (as of Nov. 14 when it advised rolling long gold positions). Contrarians: take note.

On the other hand, something to also take note of when it comes to the yellow metal is its behavior as a risk asset for most of the current year. Under ‘normal’ historical conditions gold should have vaulted significantly, and significantly higher. Remember: a ‘safe-haven’ is an asset that goes against the grain and rises when conventional assets suffer. One Seeking Alpha contributor describes the ‘failure of flight to safe-haven in gold during the self-destruction of the euro’ as a ‘dagger in the heart of conventional gold valuation.’ The rest of the post is worthwhile reading as well, as it contains cogent analysis of gold’s underlying fundamentals.

The most intense phase of gold’s migration from safe-haven asset to risk asset has taken place since late September.

The author (‘One Eyed Guide’ — evidently still in possession of 50% of his sight) notes that "The apparent disconnect of gold from "financial stress" (the trigger for "flight to safely" purchases) cannot be called a hiccup – If there is no safe-haven mechanism that will drive gold higher then, the top could be in, and prudent investors should reduce gold holdings."

That, of course, depends on just how much someone has allocated to gold in recent years.

By our definition of ‘prudent’ an investor ought to hold on tightly to that core 10% insurance position. It is not something to let go of, even in the wake of what we have seen this year; market meltdowns, possible top in gold, etc. Insurance policies on your life are not something you hope to cash in on, hopefully ever. Yes, that fateful day may come yet, but in the interim, if someone convinced you that 30% or 50% of 80% in the metal is what is ‘prudent’ well, you might consider a) the source, b) their motivation, and c) the degree to which you have made your portfolio much riskier than you might be comfortable with, in the process.

Until tomorrow,

Jon Nadler
Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication. and

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