Gold prices remained near three-month highs around $1,780 overnight and early this morning as a similarly-sounding achievement was also noted in its most recent tandem trading partner-the euro. The common currency hovered near ten-week highs above $1.34 despite an EU projection of a recession to take place in the region this year and despite earlier contraction-oriented readings in European manufacturing activity.
The recent speculative pop in crude oil prices (courtesy of Mr. Ahmadinejad’s antics and those of the specs) threatens to add…fuel to the aforementioned economic brush fire in the Old World and perhaps even beyond. The topic of $5 gas and how it might reflect an Obama “regime” failure (!) has become cheap fodder for Presidential debates and has engendered Bachmann-flavored utopian utterings such as Mr. Gingrich’s promise of $2 gas in America (but first install me in the White House, please). Truly, a case of bad acting.
On the other hand, to say that “all is clear” for the euro (and in that context for gold) is most likely quite premature at this juncture. Marketwatch reports that "uncertainty over Greece could reemerge" to undercut the shared currency. “Over the near term, upcoming votes in various countries on the second Greek bailout deal will provoke some nervousness while Greek reform implementation risks will also act to dampen euro sentiment,” wrote strategists at Credit Agricole.” We’ve seen that movie before…
At this point, the pressure remains high not only on Greece to "perform" following its receipt of the Eurogroup’s second bag of money, but also on the IMF. The institution is seen as having to commit a whole lot more cash in order to avert certain economic outcomes (already manifest) in the European theatre. China and Japan have both signaled that they are willing to help (hey, half a billion European consumers are at stake in this game) but Ms. Lagarde will have to be more than…guarded when it comes to signaling that perhaps as much as $500 billion in additional lending resources is still needed by her institution.
In any case, the euro’s most recent advance has of course come at the expense of the hitherto resilient US dollar and the latter’s slippage to the 78.50 mark on the index has helped spark the "risk-on" trades once again over the past four trading sessions. Next week, the second three-year LTRO (long-term refinancing operation) by the ECB will take place and it remains to be seen how much money will be taken by the region’s banks this time around, following their demand for nearly half a trillion euros last December.
That this has been a week during which the spec and momentum funds bought pretty much everything they could get their greedy little hands on remains fairly obvious at this juncture. Certainly, a barrel of crude trading above $108 is playing an assistive role to gold’s ascent and copper being up 1% does not hurt matters either. However, historically speaking, with gold making robust advances, one would not be also reading about the S&P 500 trading near a ten-month high, or about the Dow Jones Industrial Average reaching its best level since May of 2008 (13,000!), but quite the opposite. This, however, appears to be the new "normal" for the time being.
Spot gold traded at $1,779 in the early minutes of Friday action and then gave back about $5 falling to $1,774 amid early book-squaring and some profit-taking, while silver gave back only about one nickel to be quoted near the $35.30 bid level per ounce. Conspicuously absent from gold’s recent momentum-technical-speculative-flavored rally is…physical demand for the metal. Kitco News reported this morning on UBS analyst Edel Tully as being taken aback by the "overall weakness in physical demand" and remarking that US gold coin sales are off “dramatically, to 16,000 ounces from January’s 127,000 ounce volume.”
Also speaking of physical gold demand (or the lack thereof), Standard Bank (SA) analysts caution that they “do not expect Indian seasonal demand to provide the support in Q2:12, as it has in the past owing to a) a weaker rupee, b) a higher interest rate environment, and c) based on anecdotal evidence that local gold inventories are sufficient for now.”
Ms. Tully then confirmed suspicions that “gold’s short-term destiny appears to be in the hands of the speculative community.” Earlier in the week, HSBC analyst Jim Steel noted that gold’s gains came amid an absence of fresh negative economic and/or geopolitical developments. One’s caution radar should be spinning heavily when headlines such as these are out in abundance. Well, what goes for gold, goes exponentially for silver. We will leave it at that for the moment. Resistance in silver extends from $35.50 to the $38.00 per ounce level on the charts.
However, the statement that has been applied to the stock market this week by one UBS analyst – “Many of the people who missed out on the initial rally are likely to be chasing the market and pushing up the market another leg.” – will very likely, or already is, applicable to the precious metals complex as well. Never mind that the 13,000 Dow has already prompted market watchers to warn that an 8% to 10% pullback could imminently be in the cards. The index opened nearly flat and traded near 12,995 this morning.
Platinum and palladium each dropped by $8 early this morning and they traded at $1,720 and at $716 respectively, per ounce, on the offered side of spot. The gold-platinum discount has now narrowed to $60 and South African labor action continues to cast a cloud of doubt on noble metal output from the country’s major producers. Impala Platinum has lost over 80,000 ounces of platinum production and there are estimates that the total lost platinum supply could reach well over four metric tonnes before any settlement is reached in the disputes. One more victim was reported following a police beating at the world’s largest platinum mine – Rustenburg – this morning.
Do note, as well, that the most recent advance in gold prices comes against a background that not only lacks the advent of the much-promised (by hyperinflation-oriented newsletters) QE3 by the Fed, but actually against statements such as these, coming from…the Fed: “Wall Street analysts are engaging in "wishful thinking" when they forecast more Fed asset purchases.” – uttered by Dallas Fed President Richard Fisher yesterday.
In fact, the US central bank is more likely to do…nothing for the moment, and it perhaps could (according to another Fed President – Mr. Bullard) do some fresh “reviewing” of its ultra-easy monetary policy, given improving US economic metrics. Consumer comfort rose to four-year highs yesterday, while unemployment claims remained at a four-year low. Most importantly, the prime suspect that ignited the US crisis in the first place-housing- appears to be on the mend; this time for real.
Deutsche Bank opines that “judging from the new and existing home sales data, we now believe that the housing sector has finally entered recovery mode.” New home sales data is due at 10:00 AM EST today as is the UMichigan sentiment indicator for February. Expectations were that homes sales in January may have risen to a nine-month high.
And now, the Oscar for best performance in a supporting role (to gold) this week goes to…wait, it’s a tie! Crude oil and the euro share the statuette. The prize for best direction goes to the hedge funds that bought everything available to buy. The best movie of the year is – no surprise – the shoo-in candidate: “Europe Under Siege” but already in the running for next year is “The [New] China Syndrome.”
Have a nice weekend,
Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.