It’s All Greek to Us All

Gold’s worst loss on over one month showed signs of continuing to deepen as markets opened for trading in New York this morning. Albeit during the overnight hours gold prices managed to bump some $10 higher in a recovery attempt, the uncertainty manifest in the European news flows on Monday kept the selling pressure on in the precious metals and commodities’ complex and speculators opted to take temporary shelter under the “green” umbrella of the US dollar (up 0.52% on the index).

European leaders appear to be losing patience with Greece at this juncture and have more or less issued an ultimatum for it to cut a deal that implies further belt-tightening measures, or “else.” The deadline set for noon is almost certain to pass without any ground-breaking announcements to be contained in any news release to come afterwards. Whilst we know not what “else” means at this point (a Greece-less eurozone?), the fact that Greek party leaders are refusing to push through private sector wage cuts for example, is not sitting well with the country’s international creditors. Meanwhile, the clock tick towards March 20th-the day when Greece needs to pay nearly 15 billion euros’ worth of bond redemptions.

Greece’s debt-to-GDP ratio has risen to 159% in Q3 of 2011, despite a solid 24 months’ worth of austerity measures having been put into place. The country’s jobless rate is hovering near the 20% mark while the economy is thought to be shrinking at the rate of about 6% per annum. For comparison purposes, the debt/GDP ratios are about 100% for the US and 200% for Japan. Their economic growth however is not recording a serious contraction on the aforementioned level. Try to ask your denizens for further wage cuts and higher taxes at this juncture. Still wondering why deadlines imposed by Ms. Merkel & Co. come and go unfulfilled?

The prospects of a disorderly Greek default thus continue to remain on the horizon and they have pressured the euro as well as European equity markets lower this morning. Of late, the euro, risk assets, and gold have been going steady and thus we get to this morning’s opening bell(s) in New York - not ringing a very cheery tune. Spot dealings opened near the morning low of $1,713 (down about $12) in the yellow metal and near $33.05 (down 60 cents) in the white one.

Standard Bank (SA) analysts opine that as regards the growth in net speculative longs in gold last week,given that these moves were largely as a result of the Fed’s dovish announcement and that before these moves the futures market remained cautious of gold’s prospects, we still would not be surprised to see a pull-back.” Bullish percentages among gold players had reached to near the 92 level last week; a high water mark of speculative confidence not seen since… the tops gold touched in September.

Platinum prices lost $14 per ounce to trade at $1,607 on the bid-side and palladium fell $12 to the $694 mark per ounce. Both noble metals showed notable improvements in their speculative net-long positioning, according to the latest CFTC trading data. In the background, copper lost 1.5% and crude oil declined 0.90% as the aforementioned appetite for things risky took a breather on the heels of the European situation. The Dow fell about 50 points in the first half-hour of trading action.

Players were also seen awaiting the outcome of various central bank meetings (ECB and UK) this week and of further statistics on the health of regional economies before taking the commodity plunge. Nevertheless, the speculative crowd appears to be heavily leaning towards bets that the global economy will smile favorably upon them. That rosy scenario may turn out to be not very likely if Europe continues on its current path. Read on.

More than on news analysis is currently focusing on the relationship between Greece, the eurozone, and China. A virtual collapse in the Chinese economy (more than 4% in GDP) could follow on the heels of aggravated trouble in the Old World. To put it bluntly, if a place like Greece- which has virtually no manufacturing- goes into a tailspin, the demand for finished goods could evaporate and deal quite a blow to the world’s most efficient manufacturer- China.

Little wonder then, that the IMF came out this morning and “urged” China to prepare to “sharply stimulate” its economy in the event that European growth suffers a worse-than-anticipated blow. The IMF said that China has the reserves to help it build a buffer against the eurozone storm, but even those buffers may not be sufficient in the event that something more dramatic happens in the region. Greece, for example, is the weakest nation in the eurozone; its $305 billion GDP is more closely linked to China than it would appear at first glance. The IMF cut its Chinese GDP forecast to 8.2% from a previous target of 9% for the year today.

There is also something on the domestic front that is presently worrying China watchers however; the behavior of shoppers ahead of the Year of the Dragon. Let’s call it ‘reluctant’ for the time being. While pre-holiday sales on the mainland did exhibit a 16% gain to roughly $75 billion this year, the fact that locals were not very eager to consume jewellery, watches, diamonds, and beauty products with the gusto they had formerly exhibited (you, know, when their condos appreciated every hour, on the hour). The pre New Year’s shopping period in China is roughly the equivalent of what happens in the malls of America between Thanksgiving and Christmas.

The recent drops in real estate values have clearly put a damper on consumer spending patterns and the trend is anything but something to ignore. Sixty out of China’s 100 tracked urban markets experienced a fifth month of declining housing values and this prompted the spenders mentioned above to pull in their purse strings. Mind you, things are not a whole lot better over in Hong Kong, either.

Home prices and transactions there are falling at a precipitous rate. To wit: the total number of home sales collapsed by 56% in January, to the lowest level since 2008. Local home prices are now down 6% from their peak reached in June last year, yet bigger declines could still be in the cards. Barclays Capital forecasts Hong Kong property prices to be 25% lower than currently, by 2013.

Speaking of America, its central bank remains at odds with…itself on what to do about zero, or near-zero interest rate levels. One of the Fed’s policymakers, James Bullard (he of the St. Louis arm) said in a speech in Chicago today that the maintenance of such an interest rate environment for much longer could have “counterproductive” consequences. As savers (older Americans) are being taken to the financial woodshed by the ultra-low rates and as young working folks are unable to take advantage of same due to high joblessness levels, the situation –if it extends by years to come- could turn into a “looming disaster.”

This concludes today’s episode of “disaster roundup” and we have not even begun to mention Syria, the Nevada caucus and would-be Chief Executive Romney’s China stance, the deep-freeze in Europe, and the “de-laminating” 787 “Dreamliner.”

Until tomorrow, take cover…

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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