Milling Rumors

Monday morning's markets saw a lower opening in gold but a tad higher values in the other components of the complex. Gold continued to be sold off and it lost $10.60 per ounce (to $1,735.70) out of the starting gate as risk appetite made a tentative reappearance among market participants, as it also did on Thursday and on Friday. The decline in the yellow metal took place despite a small (0.14) dip in the greenback on the trade-weighted index (to 74.38) but then again in the past several sessions there really has been a notably poor inverse correlation between bullion and the dollar.

The analytical team over at Standard Bank (SA) notes that "the sharp decline in gold speculative longs points to a market running out of momentum. With speculative long positions totaling 933.4 tonnes, gold looks vulnerable [and] it could see some price weakness in the near term."

Speaking of (similar) statistical facts, the CFTC reports (via Bloomberg) that speculative bets on further gains in the value of 18 various commodities have been decimated by the largest percentage in a year-and-a-half; nineteen, to be exact. Gold and silver were also heavily sold off in physical form by their speculative-minded ETF-invested owners, as we learned from recent tonnage flow tallies. The SPDR Gold Trust lost 12.7 tonnes from Thursday to Friday while the iShares Silver Trust's holdings dropped by nearly 67 tonnes.

Silver climbed 21 cents on the open, and was being quoted at $39.26 per ounce in New York on the bid-side. Not breaching the critical $37 level remains the white metal's priority #1 while bullish conditions are still considered as becoming valid only above the $42.29 mark. A similar-to-gold situation has developed in the silver market's positioning as well. The Standard Bank team remarks that "the massive decline in speculative longs for silver, coupled with a strong increase in short positions, points to increasingly bearish sentiment. If gold should come off in the short term, we could see silver hit harder."

Platinum fell $1 to open at the $1,791.00 mark per ounce while palladium was higher by $10 at $753.00 the ounce. The latter is still hovering only some $60 above its six-month nadir that was recorded near $695 the ounce. The speculative positioning tally in platinum reflects that which is also underway in the gold and silver sentiment. Standard Bank comments that "platinum's net speculative length has (also) decreased, ending five weeks of successive gains. With 222.40 oz shed, this is the largest loss since the end of June, when prices fell 4.0% week on week in just two weeks. The speculative market seems more bearish toward platinum, which could see the metal lose ground in the coming weeks."

However, recent price developments quite conceivably represent a rare opportunity to buy platinum cheaper than it has historically been in relation to gold. Over the past 20 years, the spot price of gold has rarely overtaken platinum's. The lowest the ratio between the two metals has fallen during that period was 0.93:1 in October 1992. Astute buyers have been returning to the platinum and palladium markets with more enthusiasm than they have shown for some time now. Potentially good news for the noble metals comes from the current situation in the car market, by the way.

Bloomberg reports that "there is an industry-wide shortage of used cars in the U.S., the product of manufacturing cuts amid slumping sales the last three years. That means some people have effectively been priced out of the used-car market and into brand-new models. As many as 500,000 new vehicles by mid-2012 may have been sold to people who would have [otherwise] bought used [ones]." Continued demand for fresh production vehicles implies more platinum/palladium/rhodium demand than previously estimated.

So, what really changed in the markets and among players' attitudes last week? Quite a lot, actually. For one, Italy, Spain, Belgium and France all banned short-selling of specific equities on Friday as they tried to address the problem of the "benefits that can be achieved from spreading false rumors" [like, say, that defaults or similar are around the corner] and similar speculative activities that have been routing the markets in recent weeks.

The French Finance Minister, Monsieur Baroin, declared that his country was "committed to ensuring financial stability and fighting against all forms of speculation." We can think of a market sector or two (wink, wink, nudge, nudge) where such a frenzy has been amply evident in recent weeks...A similar ban was in force on certain financial stocks in the fall of 2008 in the US as well.

Meanwhile, the Swiss National Bank was rumored to be all set to go with its plans to place a "target" for the value of the currency into effect. The SNB really wants speculators to stop stampeding into the country's currency and push it to parity with the euro. Trading room rumor has it that if the SNB manages to put things into motion, we could be facing a spectacular decline in the value of the "Swissie." The talked-about "target" is being estimated at 1.25 versus the euro.

On the other hand, if you are going to buy the rumor that the surprise decline of 7,000 claims for unemployment benefits did "the trick" for all of these markets last week, there are still some offered for sale ads for some very moist patches of Florida land available to consider... Jobs figures aside, Dr. Nouriel "Doom" Roubini places the odds of a global contraction at higher than 50/50 at the present time and warns that the next 90 days will be decisive in the matter.

Some parts of the world (see Greece which shrank 6.9% economically speaking in Q2) are already mired in contraction while other (see France which recorded zero growth in the same period) are apparently skirting such a paradigm. Economists warn that unless crude oil (currently at $85.62 pbbl) falls and falls hard (to, say, under 3% of GDP as an expense factor) the world risks recession. At $100 per barrel, black gold represents a 5% cost factor-to-GDP. Now, consider $100-to-$130 per barrel crude and "Dr. Doom" starts to make a lot of sense...

More evidence that something is palpably changing in these markets in terms of attitude (and positioning) comes from the fact that -and you are strongly advised to take note of this - foreign exchange traders have reduced their short bets against the US dollar by the largest amount of contracts yet on record.

This as the demand for U.S. Treasuries has recently soared skyward amid rising apprehensions that the global economic recovery may have hit a stumbling block.

While rumors were being spread in various hard money publications last week that gold's surge to new records was mirrored in a "mass-exodus" by everyone and his cousins from the greenback, the facts reveal that aggregate inflows into the U.S. dollar last week amounted to almost four times the average amount compared with the previous year, based on data supplied by Bank of New York Mellon Corp. which is the largest custodial bank in the world. This, while stocks took an epic drubbing that harked back to 2008.

As bad as the $3 trillion in recent losses in US equity values have been in terms of headline-making material, do consider the fact that amid all the bloodletting, corporate insiders have been quietly buying their own stock at the highest clip since the Dow reached its 12-year nadir in early 2009. Food for thought, that. These are the very people who have the inside knowledge of what their own shares ought to be worth, or will be worth down the road. No rumors needed; just the basic balance sheet facts.

Gold's steepest drop in nearly two months can also partially be explained by its previously heavily overbought conditions (its RSI near 84, 95% bullishness levels) and the emergence of good old-fashioned profit-taking. Additional justification may also be found in the CME raising margin requirements for playing in the golden casino. You may probably recall what that brought about in silver on May Day and thereafter.

But, at the end of the day, there are always those "pesky" charts and related metrics to contend with. Last week, some market watchers placed certain labels on gold's recently gone-parabolic chart trace.

Others were a bit more vocal and they reached for the alarm bell well before Thursday's initial declines.

And that was way before the trading desk chatter/rumor mill in NYC started alluding to at least one large GLD owner having to potentially liquidate some bullion holdings in order to meet margin calls in incurred elsewhere in the markets. The 12+ tonne offloading of gold tallied by the close of business on Friday might thus have some "context" after all...

By late last week however, even some long-time observers found it timely to come forth and ring the aforementioned bell, and even place precise mathematical parameters/projections in front of their audiences. There might be $100 left in gold's rally? Is anyone ready/willing/able to accept that proposition? Will they continue to take Dennis Gartman's pronouncements as contrarian signals despite his correct (if a tad early) call last a week earlier?

Will they now also ignore Jim Rogers' advice (who, by-the-way, told one source on Friday that this gold market has him worried) to consider dirt (read: farmland) instead of more golden nuggets? Or will they keep chanting the JP Morgan gold price target despite its having been offered by the ultimate market "offender" whose intentions are rumored to be supposedly nefarious?

At this juncture, investors might take a look at some truly cogent, independent market analysis and ascertain that this latest set of events is not necessarily "the last stampede" by retail investors but perhaps something else altogether; a phenomenon brought to you courtesy of certain...other types of players (hint: four-letter word starting with "f" and the prefix "hedge"). Teaser factoid from the BNN video: retail metals investors may be selling more gold and silver coins than they are buying at this juncture; coin premiums indicate as much. That's no rumor; just look at the price tables.

Rumors that the S&P might be downgrading US debt may have been making the rounds inside over at the S&P before the actual announcement of the ratings change was made. It turns out that, according to Reuters, "The U.S. Securities and Exchange Commission (SEC) has asked rating agency Standard & Poor's (S&P) to disclose which employees knew of its decision to downgrade U.S. debt before it was announced last week, the Financial Times said, citing people familiar with the matter. The SEC's move is part of a preliminary examination into potential insider trading."

Nobody will accuse World Bank Chief Robert Zoellick of spreading rumors when they set out to quote his latest dark warning. Mr. Zoellick said-as relayed by the Financial Times-that "Investors have lost confidence in the economic leadership of several key countries," and warned: "Global markets are in a "new danger zone" as a result. ... "Frankly, markets are used to the United States playing a leading role in the economic system and leadership and so when they saw the 'Sturm und Drang' in Congress and with the executive, it made them uncertain about, well, does the United States really know where it's going? And is it going to get there?"

Based on the latest developments, if you need to know concrete answers to the above, you might just ask one Michelle Bachmann; she claims to know...

Until tomorrow...

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

About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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