Following a $44+ slide to near two-month lows and a further overnight dip to lows near $1,650 gold prices attempted to stage a modicum of stabilization and recovery this morning, mainly on the back of a slightly weaker US dollar. Europe continues to present a vexing and continuing problem for the yellow metal despite the fact that Spain managed to sell a tad more debt than had been anticipated at an auction this morning and despite the fact that German economic data came in above expectations as well.
The principal structural issues plaguing the region remain very much rooted and are unnerving investors without any letup. The single best reflection of the turmoil for the moment remains the euro's inability to get convincingly back above the $1.32 mark and the concurrent quest for greenbacks among the aforementioned anxiety-ridden investing crowd. That crowd has been liquidating stocks and commodities at a fast and furious clip on days when the mood turns gloomier than gloomy and the fear factor dominates.
Lingering liquidations were still in sight as the precious metals markets opened for business in New York this morning. Gold spot prices fell $1 to start at $1,664.30 the ounce while silver dipped two pennies to open at $31.27 on the bid-side. Don't look now, but there is at least another market observer (and participant with positions, we might add) who allows for the possibility that the 11-year-old gold bull market could be drawing to a close. Economist and trader Dennis Gartman will take a lot of "incoming" from certain camps for his seemingly heretical views at this juncture. He does not appear to be perturbed by that prospect. Here is why, in his own, plain English:
"Since the early autumn here in the Northern Hemisphere gold has failed to make a new high. Each high has been progressively lower than the previous high, and now we've confirmation that the new interim low is lower than the previous low. We have the beginnings of a real bear market, and the death of a bull." Yes, you may still be hearing "it is but a flesh wound" type of statements from chartists who would point to the lack of "damage" on the long-term gold price trace up to now.
But, where is there an accounting for the psychological damage that has been inflicted since September? Nowhere. Okay, perhaps there is such an accounting in Gartman's most recent writing: "So much damage has been done to the psychology of the market in the past week and so many late longs have been caught off guard that we think wholesale liquidation, and perhaps forced liquidation, shall be the outcome." Heavily PR-flavored propaganda from certain vested-interest quarters wants to point to ETF gold accumulations as a harbinger of mega-high gold prices next year and beyond.
Not so fast, opines Mr. Gartman: ""Buying of that sort should have sent gold prices soaring. One of the oldest rules of trading is simply this: a market that cannot or does not respond to bullish news is a bearish market not a bullish one." We might add to that the fact that the intensification of the European crisis - the wet dream of fiat currency morticians everywhere - should have been the single most perfect storm to allow for $2K gold this quarter. What happened?
This morning, platinum advanced $5 to $1,491 and palladium showed no change with a quoted bid at $658 the ounce. Rhodium fell nearly 7% to $1,425 this morning. Background price indicators flashed a half-percent loss in copper and a 0.62% gain in black gold. The dollar was off by 0.10 on the trade-weighted index with a quote at 79.55 at last check. All eyes that are not fixated on Europe (not many) will be on the Fed's last meeting of the year today. The remainder of the market crowd will be parsing US retail sales figures and business inventory data. A slew of other metrics of importance will come their way on Thursday, including those related to US industrial production for November.
Thursday's numbers will also contain initial jobless claims filings numbers. The US labor front continues to show rather encouraging trends. Based on a survey of U.S. employers by human resources firm ManPowerGroup, the US Q1 net employment is expected to grow 9% from a year ago, which would amount to nine straight quarters of employment growth and an improvement from the 7% year-over-year rise in Q4. For the moment, better employment conditions are also making for (slightly) better retail sales. American consumers loaded up on autos and electronics last month but did not frequent eating and drinking establishments too much.
Today's FOMC gathering is likely to yield little more than a bit of fine-tuning of its newly created communications policy and could also show a Fed that has turned a notch more optimistic on the prospects for the US economy. While no major announcement is expected at the 2:15 hour, we might be treated to some details on how the central bank plans to project short-term interest rates in 2012. The actual strategy for doing so could be presented in about six weeks after the Fed's next meeting. However, the US central bank could have a big lump of coal on offer today for those who categorically assured the rest of us that QE3 was a "done deal" and that bond-buying sprees were going to be a part of 2012's Fed agenda.
The reason the Fed might just turn into the Grinch who stole such bold predictions of never-ending easing is not hard to find; it is the overall tenor of recent US economic metrics. In fact, the string of statistics related to the general health of the American economy is starkly at odds with the majority of economists' predictions. Such expectations have missed the actual mark by the most in nine months, according to the so-called Citigroup Economic Surprise Index. No need to rehash all of the improved readings here, but among the highlights of same would be the November unemployment level (lowest in two years) and the level of manufacturing activity (best in five months).
Actually, the US economy - according to the Wall Street Journal - is exhibiting the fastest rate of growth in this final quarter of 2011 since Q2 of last year. While Europe remains a worry item for the US, Q4 growth projections have been upwardly revised by firms such as Goldman Sachs, T. Rowe Price, and Nomura Global Economics. It is still entirely possible that the first quarter of the coming year will come in with growth metrics below those of the current quarter, but the way 2012 is shaping up has surprised more than one economist and has been one of the contributing factors to the dollar's recent vigor (Europe largely being the other).
Such improvement in key US economic metrics has prompted some to suspect that the Fed may not only not pull a QE3 "rabbit" out of Santa's hat today, or in January, but that it will possibly shift its hitherto believed to be "carved in stone" interest rate pledge before the middle of 2012. You can surely bet that the Fed's distancing itself from the commitment to keep rates ultra-low through mid 2013 one year ahead of that time will have an effect on markets and investor psychology. You already know who and what has thrived in the three years during which the Fed has basically been at or near zero, interest rate-wise. The "zero interest rate party" crowd might have to rethink its propaganda literature and come up with new ways to frighten and/or embolden their readers.
Speaking of being emboldened, would-be President Newt Gingrich is certainly that, now that he is dominating the ever-shrinking field of GOP candidates for the job. Never mind that participating in Donald Trump's "debate" (aka a ratings "extravaganza") or calling Palestinians an "invented" people could still come back to haunt the man, there is one potential issue to consider - one that involves taxes and the US budget deficit. In a nutshell, the Gingrich tax plan could add 1.3 trillion dollars to the US' budget gap by 2105 (so much for balancing the Gingrich administration's books).
A study by the non-partisan Tax Policy Center reveals that Mr. G's plan to slash the top individual tax rate and eliminate cap gains and estate taxes could make the revenue side of the government's budget fall some 35% (!) below the current year's levels. The analysis prompted one senior official at the TPC to remark that the Gingrich plan "blows a huge hole in the deficit." Meanwhile, the Gingrich camp is counting on the plan creating economic growth and "dramatic" job creation.
Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.