Rhodium fell $25 to $1,275 per ounce. Pre-long-weekend book-squaring — and not just in precious metals — was beginning to become manifest as participants began tallying up the week that was.
Stock index futures, crude oil, and even the US dollar were mainly flat-lining ahead of the US holiday period. As our good friend George Gero of RBC Capital puts it, this morning the "path of least resistance is wait-and-see." Still, the greenback was above 82.35 on the index and the euro was mired around $1.252 against it.
Gold is now headed for an approximately 2% loss on the week after four sessions of price declines.
BNP analysts said that (and you have heard it here before) "Market sentiment on gold is fragile at the moment. There have been tentative rebounds, but so far bullish momentum has yet to materialize. A shift to a more accommodative monetary policy stance may be needed to sustain a gold bull rally."
Perhaps pinning hopes on more QE is not the most desirable thing for the bulls to be doing at the moment, but they appear to have painted themselves into this "Fed-dependent" corner.
Following Wednesday’s price wash-out, Thursday’s attempted rebound in gold prices was eventually truncated and gave way to further selling. Albeit gold did not swoon to the same low near $1,633 that was manifest on Tuesday, the yellow metal did dart across a fairly wide intra-day range that extended from $1,550 to $1,579 and the choppiness turned intense on occasion.
The trading day actually offered more in the way of bearish background news for the metals rather than bullish ones but various hedge funds at play made for a few episodes of counter-intuitive moves. That is not to say that the hope that some central bank would offer some kind of QE did not play into the trading session; it did, but is eventually dissipated as no official sector voice was heard offering up a fresh helping of "easy money."
A late afternoon TV transmission featuring Italy’s PM Mario Monti did encourage the bulls just a tad as Mr. Monti said that Greece is not likely to pull a "Grexit" and that the world might soon be able to get its hands on euro-bonds. We’ll have to see what Ms. Merkel has to say about all of that. For the time being, the perception is that, given the possible market and economic costs to other nations, the Greek and EU leadership will do their utmost to keep the status quo in place for as long as it is still possible.
Fear not however; a plethora of hard-money newsletter obits have already been mass-emailed to readers replete with titles such as "Death of the Euro" and "The End of Greece." One year ago the titles read: "Death of the Dollar" and "The End of America." Wait; they still do, about every other week, on average. Some things never change, only the flavors are remixed.
Consider the euro at a fresh 22-month low (and fast-approaching $1.25), consider the HSBC China flash manufacturing and later the bank lending report, and consider German sentiment readings. Such news flows kept the flow of funds into the dollar robust for yet another day and helped propel the US currency to above the 82.30 mark on the trade-weighted index. As a result, almost everything else that would offer an alternative declined in value once again on Wednesday.
Wednesday afternoon’s sharp drop to within $6.50 of the critical support figure that was touched last week at under the $1,527 level constituted an almost total about-face of the Thursday/Friday rally that lifted gold to the $1,600 psychological ceiling and it brought with it news that the largest gold ETF lost some 17 metric tonnes in balances. That’s roughly $874.5 million worth of gold flowing out in a single day, and while the figure may not sound like much to some, in the gold ETF niche, at this time, it certainly is notable.
To wit: gold-oriented ETFs actually absorbed only 51 tonnes of bullion in QI of this year, down from 95 tons in QIV of last year. That statistic puts the loss of those 17 tonnes into perspective; i.e., it was meaningful, to say the least. Up to this juncture, the bull camp has argued that the exchange-traded niche appeared to be "sticky" and that holders of gold remained loyal to the asset. Apparently, that perception might be due for a slight revision.
Last weekend’s speech by Chinese Premier Wen showed a good deal of concern about the emergent slowdown in his country’s economy. Yesterday’s preliminary manufacturing activity metrics more than validated such worries on the part of China’s leadership. The HSBC PMI fell to 48.7 this month after already having shown a state of contraction in April (@ 49.3). Exports were a big component of the problem as they showed a reversal into contraction after April’s reading.
Another problem that presents a potential worry for the markets is the fact that China’s banks will likely miss their lending targets for the first time in seven years. The 33% decline in loans and the shortfall in lending activity vis a vis official targets are contributing to keeping the talk of a "harder soft-landing" alive and are also keeping bullish commodity speculators on the defensive. China’s banks might only dole out 7 trillion yuan to borrowers this year, and that is well under the government’s goal of about 8.5 trillion yuan.
On the US economic metrics front, Wednesday’s tally offered some fairly positive facts and figures for investors to digest. The trouble, if any, is the fact that none of the statistics are likely to compel the Fed to push the QE3 button at this juncture. First, it was noted that applications for unemployment benefits fell to 370,000 in the latest reporting week (ending May 19) and albeit the number was virtually flat, it was better than what polled economists had expected to hear about.
Something else that came in above expectations was the number of new US homes that were sold in April. American home buyers snapped up new abodes at an annualized rate of about 343,000 units as opposed to the anticipated figure of 332,000. The development prompted a reaffirmation of the fact that "the [US] housing market has turned a corner," and that "it bodes well for the economy." Existing homes also sold well in April, rising 3.4% to an annualized rate of over 4.6 million. At this point nearly ten US homes are being bought every minute of every day.
Speaking of the US labor market and how it is shaping up in this post-crisis environment, well, there are some who think we may not be far from the day when the Fed can feel that it has achieved one of its two mandates. Minneapolis Fed President Narayana Kocherlakota noted in a speech yesterday that the US is a lot closer to full employment than many believe and that the time has come for the Fed to start pushing towards a positive real interest rate environment.
Mr. Kocherlakota said that the current US inflation rate is indicating a spike in the maximum employment level and that the Fed needs to heed such a signal. Translation: full employment going forward might mean 7%+ unemployment and Mr. Bernanke should not delay raising rates in the hope that we can somehow get back to a 5 or 6 percent jobless rate. Sweden’s similar experience in the early 90’s bears this out, according to the Minneapolis Fed President.
Meanwhile, it was also reported on Wednesday that US durable goods orders eked out a 0.2% gain last month helped mainly by a $1.3 billion pop in auto demand (more on cars and noble metals, later). US exports have been close to stagnation for the past couple of months; however the country’s factory sector continues to point to growth. America’s flash manufacturing PMI did slow to 53.9 in May but remains in an expansion paradigm. The US is estimated to constitute about 25% of world GDP.
It is time now to delve into the PGM market once again and to analyze some of the most recent developments in this unique space. Clearly, PGM prices have taken a substantial hit along with the rest of the precious metals’ and the overall commodities’ complex. We have seen within about $50 and palladium only about $20 away from one-year lows as investor interest dissipated, short positions mushroomed in futures, and as ETFs have sold some of their physical holdings. Weak European and weakening Chinese auto sales have not helped matters either, nor did a slower level of Chinese platinum jewelry demand growth.
There is however enough detail within the PGM market that reveals not only certain interesting developments on many fronts but also contains the kernels that will come to later be regarded as the indicators of opportunity that investors usually seek so intently. For instance, the finding showing that imports of platinum into Switzerland (which is a platinum market clearing centre) have fallen to their lowest level in four years may well sound pretty negative at first blush, but it is actually an encouraging bit of news.
The reason that Swiss platinum imports have declined is attributable to lower levels of South African shipments of the noble metal. Output of platinum in South Africa’s mining sector has fallen owing to on-going labor strife and safety stoppages. Thus, April’s Swiss imports of platinum from that country fell to but one-third of the level that had been imported in March (just over one metric tonne). Overall, Switzerland imported just shy of one tonne of platinum in April while it exported 3.7 tonnes of the same. That kind of math could make for interesting developments down the road.
Let’s look at where the ETF players have been active in this niche. For an in-depth, factual summary of the current state of the PGM market, you would be well-advised to view this video clip of CPM Group analyst Erica Rannestad’s recent seminar presentation in New York. Among many other things, Ms. Rannestad reports that platinum holdings have declined since mid-March but following last year’s heavy, profit-taking-based palladium selling, they have (perhaps not so quietly) been rising since the start of this year. The perception that Russia’s supplies are drying up could certainly be at play here.
Reuters Africa relays that "Sales of surplus material from Russian government stockpiles have been a swing factor in recent years in determining the balance of supply and demand in the palladium market. Sales are expected to dwindle to around 250,000 ounces this year from over 1 million ounces in previous years, according to refiner Johnson Matthey, which produces an annual review of the platinum group metals market."
Moreover, rhodium ETF holdings have doubled from last year.
The supply/demand picture in platinum shows that it is expected that the metal’s supply will decline by 1.7% in 2012 owing to the aforementioned labor issues in South Africa. The medium-term price projections indicate that platinum could show a better than 6% advance in annual average value in the coming year. Palladium’s supply is also expected to decline, by about 1%. The market is also anticipated to fall into a small deficit for the first time since the year 2000.
The eventual exhaustion of Russian official stockpiles will contribute to that paradigm. Prices are expected to rise in 2013 and more forcefully so than platinum’s. Rhodium market weakness has been attributed to weaker automotive demand but a rebound is foreseen in the latter half of 2012 and into 2014. The rhodium market’s surplus is also in the process of shrinking.
We close the week out with a long and happy ending-less story about gold mining and its "side-effects" to the Colombian mining town of Segovia. As we have often noted here, there is another "price" to an ounce of gold than that which we all obsess about every other minute on our iPads and Blackberries. It is a price worth factoring in even though there is apparently little that most of us can do anything about.
Have a nice weekend.
Senior Metals Analyst — Kitco Metals
Senior Metal Analyst
Kitco Metals Inc.
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