Beijing to the Dollar: Who [Still] Loves Ya, Baby?

New York spot precious metals dealings opened with relatively small losses on this last day of June, and appeared to be in search of fresh drivers to countervail ebbing interest and participation by speculators and professionals. Market participants were already showing signs of heading out the door early to gear up for the long holiday weekend. Following yesterday's 155-to-138 vote of approval for additional austerity measures in the Greek Parliament, the focus shifts to the second round of voting on the measures.

These follow-up votes are supposed to finally secure the release of the next installment of the 110 billion euro-large rescue package that Greece was granted last year by the EU/IMF duo. Anti-austerity protests appeared to be waning in parts of Athens and market pundits expect the second round of votes to also succeed in passing the belt-tightening programs. In the final analysis however, the dreaded "D"-event was averted by Greece and the EU community is at least temporarily taking easier financial breaths.

The euro rallied in the wake of Wednesday's voting but there is a growing realization on the EU that what might have been accomplished at this juncture is the buying of time and the assurance of declining living standards in Greece for years to come. Speaking of living standards, we note this morning that China has cut taxes for low-level wage earners in an effort to allay the deleterious effects of high inflation levels and in order to secure social stability.

While we do not wish to say that it might be ineffective, redundant, or too little/too late, the tax move by Chinese authorities may actually turn out to be little more than comfort for a certain class of wage earners. There are increasing signs that the country's economy is already cooling, and that the inflation dragon might somehow choke under its own weight after the PBoC set fiscal and monetary tightening measures into motion.

The country's Manufacturing PMI index fell to 50.1 this month; teetering on the halfway pivot-point. Growth in China's money supply has fallen in half on a year-on-year basis, domestic bank loans have fallen 25% and the Shanghai Composite Index has lost 10% since the middle of April. Such patterns have prompted some analysts to project a hard landing for the Chinese economy. Chief among such less-than-enthusiastic China-oriented forecasts is the one the author and economist Gary Shilling has offered up.

As regards the aforementioned projections, certain ultra-bullish gold bugs who expect the flat lining of the US dollar's vital signs to come about any minute now, might take note of the following passage in Mr. Shilling's analysis of China and its massive reserve holdings:

"China also won't be selling its $1 trillion in reserves of US Treasuries in great amounts, as some have feared. The Chinese are well aware that doing so would be disastrous for their economy, because the resulting nosedive in Treasury prices and the dollar would decimate the value of China's remaining holdings of US debt and other assets. A global depression might well ensue, with China and other export-dependent countries as the biggest losers."

As the euro gained in the wake of the Greek lawmakers' voting results, the US dollar gave up some ground and was still off by 0.10 this morning, trading near the 74.50 mark on the trade-weighted index. Following the dissipation of the mini-"europhoria" that we witnessed yesterday, the common currency began to drift a tad lower today but then again, so did the dollar.

The drift to lower levels in the greenback engendered small gains in WTI crude oil (up 30 cents to $95.07 per barrel) and boosted certain base metals a tad. Spot dealings in copper for example, were showing a 0.53% gain this morning as risk appetite made a modest return in the markets. As the week winds down, the appetite for anything beyond BBQ-flavored foods and the accompanying brews, will prove much more difficult to ignite than your average pile of charcoal briquettes. The trade already appears to be looking for July 5 in terms of hoping for "real" market action.

This morning's US Labor Department report showed that only 1,000 fewer claims were filed in the reporting week that ended June 25. The aggregate number came in at 428,000 and it was higher than the anticipated 420,000 claims that economists had projected to be filed on the period. On the other hand, continuing claims fell by 12,000 in the week that ended on June 18 but still underscored difficult progress levels in the American jobs scene.

Spot gold trading opened with a loss of $3.80 per ounce and the bid-side quote was indicated at $1,512.00 in New York. Silver fell 4 cents to start the Thursday session off at the $35.07 per ounce level. Gold and silver were seen correcting their recent slides with yesterday's technical bounces but Elliott Wave analysis continues to expect larger-scale declines in the yellow and the white metal to resume soon and bring prices to significantly lower levels. As things stand right now, gold bullion appears set to conclude a second month of declines (1.5% in June and 1.8% in May) but will likely still notch a quarterly gain (its 11th).

Specifically, the EW team expects gold to possibly target value zones that extend from "well below $1,400" to a possible $1,307.80 low. Silver could, in turn, be drawn to lows in the low $20s if the current wave pattern analysis turns out to be correct. Only a rise above the $37.90 level would negate the bearish stance in the market and allow for silver to rise towards $40+ in the process.

For the time being, the white metal remains in what EW labels a "stair-step decline" that has featured lower lows and lower highs since late in May. Silver bullion - by contrast to gold - will likely record a quarterly decline of a much larger order of magnitude (7%) and is heading for its first quarterly loss in ten. This divergence between the white and the yellow metal does not bode well, in the opinion of certain metals' markets watchers.

Platinum and palladium offered little in the way of major price action this morning; the former fell $7 to $1,717.00 and the latter gained $8 to open at the $755.00 level. Rhodium continued steady at the $1,925.00 mark per ounce. While general market fundamentals remain supportive in the noble metals' complex, we do need to note that Chinese passenger vehicle sales have only shown a 3% increase in the month of April vis-`a-vis one year ago. Last year, that country's car sales roared 33% higher amid strong incentives and a general lift in domestic personal wealth.

As regards the aforementioned positive fundamentals (unlike those visible in gold and in silver) in the PGM complex, it is worth mentioning a few components that have made the rounds in the market press lately. In the lead, we note a recent comment by Impala Platinum CEO David Brown. Mr. Brown opines that growth in the global platinum sector is at risk due to the on-going debate about the possible nationalization of South Africa's mines.

As well, the platinum market faces the threat of the "indigenization" of the industry in Zimbabwe; a subject that is also making the rounds in the industry at present. 80% of the worlds' platinum mines are found in the region that might be affected by such transitions in ownership. For the time being however, our good friends at CPM Group New York are tracking an increase in the supply of the noble metal; its first in three years' time.

CPM noted that there was a 2.1% rise in platinum supplies in 2010; the market saw inflows of 6.47 million ounces of the noble metal from mine production. Supplies of platinum had fallen for three years in a row prior to last year. The total supply of platinum to the market was 7.4 million ounces; that represented a near-5% bump over 2009. CPM expects platinum supplies to rise once again in 2011 - probably by about 6%+ or to up to 7.9 million ounces. Meanwhile, total platinum demand is projected to rise to 7.34 million ounces this year, leaving a roughly 600,000-ounce surplus in the marketplace. We will have palladium statistics for you in tomorrow's article. You might wish to visit www.cpmgroup.com for additional details.

Until then,

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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