Robust July retail sales numbers gave rise to… selling by speculators in gold and silver on Tuesday. The US Commerce Department’s report showed that American retailers tallied a 0.8% jump in the sales of everything from cars to cement. Certain items experienced the best gains in sales since the first two months of this year.
The immediate fallout from the report was the dampening of the still-persistent and still high level of Fedspectations among investors and speculators. The US dollar hovered near the quite-important 82.50 pivot point on the trade-weighted index after the figures were released. Black gold added 50 cents on the retail news but the Dow remained flat at the close after slumping tech and bank shares sucked the life out of the earlier rally.
Then again, the dollar’s resilience was also boosted by yet another set of economic metrics that show the Europe is not doing well at all at this juncture. The euro was stuck just above the $1.23 level in the wake of data that revealed that the EU’s aggregate GDP slipped by 0.2% in QII. Germany bucked the trend, showing a 0.3% level of growth, while France’s GDP remained flat. Analysts characterized the findings as yet another indication that the eurozone is nearing its second recession in three years.
One more quarter of contraction following this reported one would satisfy the definition of the "R" word normally used by economists. The trouble on the horizon is the fact that certain economists do not expect Germany and/or France to be able to go against the tide for much longer, it at all. France has already logged three trimester of nil growth in GDP. Then again, there’s Greece; it recorded a 6.2% GDP shrinkage in the second quarter. Italy simply extended its year-old double-dip with a 0.7% quarterly contraction.
You can kind of begin to see, why, given the rest of the world’s current state, the US and its currency are presenting a reasonably attractive alternative for global investors, upcoming "fiscal cliff" and such notwithstanding. For a captivating read on the US dollar’s near-term prospects we urge you to read Marketwatch contributor Avi Gilburt’s EW-based opinion. Mr. Gilburt forecasts a "fake-out" dip in the US currency in the fall — one which he defines as "the last pullback in the dollar and the last rally in the metals for years to come." Many, says Mr. Gilburt, will however become convinced that the bear market in the greenback "is back to stay." Precisely the time to take an opposite market stance, he believes.
On the other hand, the Street Authority’s David Goodboy cuts right to the ‘chase’ and identifies the other two factors which might prove some expectant metals’ bulls incorrect; physical consumer demand and official sector purchases. Mr. Goodboy of course names the US dollar and the Fed’s possible reluctance to ease as well as the fact that a potential QE3 is basically already baked into current prices as the basic reasons not to expect moonshots in gold or silver. However, adding the fact that Indian demand for example is down 50-60% year-on-year since March and that central bank purchases are 41% lower for the first quarter of 2012 than they were last year has Mr. Goodboy convinced of a new pattern under development in these markets.
Looking at the charts, Mr. Goodboy relays that "Technically, the bullish picture for gold becomes even direr. Using the SPDR Gold Trust ETF, you can see that after hitting a high of around $190 in August 2011, prices have fallen back and printed a giant double top on the weekly chart. The weekly double top is in the $170 range and was formed in November 2011 and February 2012. Price fell off the double top in April 2012, broke down through the 50-week moving average using $150 as technical support. Double tops are considered very bearish patterns by technical analysts. This becomes particularly true when the time frame is extended to the weekly length."
The metals markets opened to the downside for the midweek session this morning. A 0.28% advance in the US dollar and a 0.36% slip in crude oil contributed to early selling pressure. Spot gold prices dipped under Tuesday’s lows and touched $1,588 per ounce prior to the opening bell. Spot silver declined 31 cents to trade near $27.50 the ounce. The pullbacks was less severe in platinum which fell $2 to $1,391 per ounce. Palladium dropped $3 to $573 the ounce. Rhodium was static at $1,080 on the bid. In the background, the euro traded under the $1.23 level and copper fell 0.40%.
The battle for the $1,600 level will likely continue into Friday but the jury is out on the eventual winners. In the interim, no doubt, a lot of bullish noise will be made over the fact that Messrs. Soros and Paulson have added to their gold positions of late. Conveniently, the same sources will forget the fact that they roundly vilified Mr. Soros not that long ago when he labeled gold as the "ultimate asset bubble." Also conveniently neglected from being mentioned will be the fact that Vinik Asset Management and Eton Park Capital both liquidated their entire gold ETF stakes during the last quarter. The total sold by the two funds is over 3 million shares. Eton Park was originally one of the top investors in the gold ETF since 2008, Reuters reported. The point is, that, where some folks see a bargain, other see less of one, or have already met their market objectives and are moving on to "greener" pastures. Thus, the polarized-as-can-be gold market rolls on…
Tuesday’s US retail sales data, when combined with the recent US June payrolls report diminishes the odds that the Fed will feel compelled to unleash another round of monetary easing at its September FOMC meeting. That situation does not sit well with the spec players who have been making a very good living from playing (the long-side) in certain assets that have benefited or might benefit from QE. For example, gold slid to just above $1,590 per ounce (lowest level in over a week) in the wake of the statistical news release and it remained down by double-digits at just under the pivotal $1,600 mark in the afternoon hours. It finished the session with a spot-bid at $1,599 the ounce and with a net loss of $11.00 on the day.
Silver remained under $28 for most of the trading day yesterday and albeit it did not lose too much in value (it closed unchanged) the $27.70-$28.50 resistance areas is proving to be… resistant to the assaults intended to take it out, at least at this juncture. Hedge funds and silver stock investors continue to be anything but bullish on the white metal; in fact they are the least optimistic on its price prospects in nearly four years. Speculators have slashed their long bets on silver by 72% since late February and the metal has fallen by 29% since that time and by 44% since the near-$50 peak it posted in April of 2011.
The principal problem for silver at this time is the fact that 53% of its demand comes from industrial users and those are the very sources which analysts deem will not step up to the silver plate and use it in the amounts that might have been hoped for by the bulls previously. Thus, at least in 2012, silver has been behaving more like its base cousin (copper) rather than its richer uncle (gold). However, of all the metals being tracked by Bloomberg, silver remains the most volatile. We have noted here in the past that the risk entailed in silver ownership has historically been roughly twice that of owning gold while its returns have been as unpredictable as they have (on occasion) spectacular.
Trouble continues to be the order of the day over in the platinum-group metals’ niche as well. It is unfortunate that we must report that nine people have died in violent encounters at producer Lonmin’s Western Platinum operations. Two policemen are among the victims. The incident is said to be the deadliest one in South Africa’s platinum industry thus far and it has forced Lonmin to shut down its South African operations as of last night. Back in January, Impala Platinum shut down the world’s largest platinum mine for a month-and-a-half in the wake of three similarly violence-induced deaths. The PGM sector is caught between the sharp declines in global market prices for the noble metals and the rising levels of violence among union militants at various production facilities.
Bloomberg News reports that "desperate" platinum producers are resorting to the bond markets for financial survival at this point. Northam Platinum announced that it has drafted plans to sell 2 billion rand worth of bonds. The deadly combination of plummeting profits and soaring costs is forcing some of the biggest names in the business to seek unorthodox means of securing cash. Angloplat’s debt has doubled no nearly 11 billion rand in the first half of 2012 and the firm reported its first loss in 13 years while it also suspended dividends.
With such a background, finding willing (read: courageous enough) lenders might be a tall order for these firms.
"Producers are stuck between a rock and a hard place in that there’s a surplus of platinum supply on the market while you’re facing continual price and cost pressures," Clinton Duncan of Avior Research said. "You burn cash or you have to shut down until the situation turns around and in order to do that you’ve got to have a flexible labour market, which South Africa doesn’t really have at the moment."
However, speaking of PGM surpluses and/or shortages, there are some projections to bear in mind as we go forward. HSBC Securities noted last week that platinum’s 2011 surplus of 687,000 ounces is forecast to shrink to 325,000 ounces this year and to 102,000 ounces next year. Reduced mine supply will play a pivotal role in the narrowing of the surplus as numerous platinum miners are extracting the metal for substantially more than the current market price and it is thought that they might curtail production going forward.
While HSBC Securities forecasts lower annual average price for palladium in 2012, 2013 and 2014, it also opines that it expects the market to "rally from current low levels." We mentioned here the other day that the palladium market was in an oversupply paradigm of roughly 1.2 million ounces in 2011. That overhang is thought to soon morph into a shortage of 544,000 ounces for the current year and a possible deficit of over 930,000 ounces next year.
HSBC believes that palladium’s average 2013 price could be near $750 per ounce and it envisions $800 palladium for 2014. Of course, the $64K question for many would-be investors is whether gold (not anywhere near its production costs) will gain 38% faster or with more justification than palladium (for many miners currently under production costs) might over the next 24 months. We say, spread the $64K and consider diversifying a metals-based portfolio. This writer will cover some of these ideas in an upcoming Kitco Coffee-Break Webinar. End of shameless self-promotion segment.
In fact, make that: the end of today’s piece.
Senior Metals Analyst — Kitco Metals
Senior Metal Analyst
Kitco Metals Inc.
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