The US dollar traded at a near two-month high overnight, eating into gold's attractiveness as a substitute holding and prompting some additional long liquidation in the metal. Lows in bullion prices during the evening hours were recorded near $1,330.00 per ounce as some participants opted to book profits following several days of declines without a turn-around. Pre year-end book-squaring, thinning player participation and "window-dressing" efforts may make the type of volatility in this market a feature to have to live with for the next six weeks.
Gold prices opened mildly higher following three brutal sessions of incessant selling. Spot gold was quoted at $1,342.70 per ounce - a gain of $3.30-amid light, scattered buying. Traders will focus on US CPI data (showing core inflation flat for a third straight month - a continuing case of "what inflation?") and on housing starts numbers (down to an 18-month low, but permits showed a gain) before the action gets underway in the Dow. Sino/Irish jitters sent the equity index tumbling on Tuesday; it ended with a 178-point loss. Once again, the stand-out trading feature is the correlation in...everything that tracks the dollar's gyrations. Thank you, Fed.
Silver started the midweek session with an 18 cent gain and a spot bid quote of $25.61 the ounce. Platinum was down $2 (at $1,639.00) but palladium was higher by the same amount (at $644.00 the ounce) while rhodium was off $40 with a quote per ounce at $2,350.00 this morning. Crude oil did not manage to show gains however; it was down 34 cents at the round figure: $82 per barrel. Copper lost 1.3% in early trading. Blame the dollar, blame China.
Most of the US dollar's gains came on the heels of still-present apprehensions about China's current and future actions intended to stave off higher inflation levels and on mounting worries that Ireland's debt woes will depress the European common currency any further (they have already pushed the euro to seven-week lows against the US currency). Commodities have been ultra-sensitive to the US dollar's movements; first, in the wake of QE2, and now, amid signs that the greenback has some room to run given current global realities.
At the moment, there are definitely some who question whether the rebound in the US currency is transitory, or the beginning of the undoing of the reflation trade that blossomed since Mr. Bernanke first hinted at QE2 back in August.
What is not in doubt is the fact that the Fed's actions have made possible a runaway gravy-train ride for most assets (even normally not correlated ones) up to this week. If only euphoric speculators had factored in the China...factor, or the fact that the Irish "situation" may play into the hands of those who loaded up on some dollars at near 77 on the index...
Indeed, China did take steps aimed at slaying the inflation dragon before it grows additional heads, this very morning. The government announced that it will activate measures limiting food price gains and distribute additional fuel supplies (whose prices are already under such limitations).
As for Ireland, the indecision continues. Dublin has not made any substantive gestures indicating a willingness to accept a rescue package from the EU/IMF. Will efforts to clean things up be limited to Irish banks, or will a broader measure be forced upon the entire nation? Stay tuned. It should only be a matter of days, if not hours. Meanwhile, the Fed - already under attack for its latest accommodation - is facing "incoming" on the political front. Republican lawmakers have openly lambasted the US central bank. The recent GOP election victories may indicate that life for the Fed - going ahead - may not be all that pleasant.
A recent proposal by Republican Sen. Bob Corker (Tenn.) and others aims to curtail the Fed's "twin" mandate (price stability and full employment) to a "solo" one; price stability only. The proposals have engendered theories ranging from a projection that QE2 will actually fall short of its full $600 billion scope, to predictions that there will never be a QE3 in the pipeline. All of this is potentially dollar-positive and falls right in line with the take offered by Ned Schmidt's Value View Gold Report well before the early November elections, and, certainly in ample detail, thereafter.
Other proposals emanating from Washington are starting to sound like Europe/Canada coming to the US shores, at least, in fiscal spirit. Namely, a Presidential panel on addressing the pressing deficit issues in the US has raised the idea that America needs a VAT/GST type of consumption tax that is broad-based.
It may all come down to a choice between higher personal income tax (and maybe taxes on savings) versus an all-encompassing tax on consuming. In all likelihood, the necessity to make such a choice is but a matter of time, as there are only a limited number of sides from which to attack the growing US budget shortfall. With defense (still over 50% of the expenditure side of things) being apparently "off the table" it may well be such new means of making ends meet that become the flavor of the day.
Time once again to glance at the latest set of gold supply/demand statistics as offered by the World Gold Council and GFMS. The third quarter was certainly a turbulent one for gold prices. However, certain fundamentals-related trends continued their previous patterns while others showed notable change.
Total gold supply was up 18% on the quarter, amounting to 1,028 tonnes. The gain was driven by a hefty 9% rise in mine output (vis a vis Q2) and by a still surging supply of scrap gold (up 41% versus Q3 of 2009 but slightly down from Q2 of this year). Q3's 702 tonnes of mine production were some 22% higher than the tonnage coming from the same source as recently as in Q1 of 2008. Not exactly "peak gold."
Mostly good news on the demand side for the yellow metal was noted on the quarter. With the exception of ETF "and similar" as well as "other investment" demand, the categories of gold consumption (jewelry, industrial, bars & coins) all showed some improvement vis a vis the same quarter of 2009, as well as compared to Q2 of this year.
The notable countertrend developments came in the ETF niche and "other retail" category. ETF demand slumped from 291 tonnes in Q2 2010 to 39 tonnes last quarter (the European crisis did not sink Europe). Other retail investment fell 18% from Q2's 51 tonnes (once again, as the summer debt crisis clouds dissipated).
Picture time for the above data:
Jon Nadler is senior analyst with Kitco Bullion Dealers in Montreal.