The ECB doled out more than $700 billion in loans to over 800 banks this morning in what may have been its last gesture of "kindness" for a long time to come. While many are calling the latest ECB operation as a “liquidity injection” that smacks of an outright gift, we would be wise to note that the amounts in question are loans and that they have a three-year shelf-life. More importantly, it still remains to be seen if the banks will sit on the money like the Emperor penguins they have shown themselves to be on previous occasions, or will go and lend it in order to foster Europe’s economic recovery. That, for the moment, remains an open question.
Analysts at Standard Bank see it this way in their G10 Daily Report this morning: “There’s a big difference between stopping the rot and starting a recovery. The LTROs might have done the first, but they won’t do the second. Worse still, it is always possible that euro zone politicians shy away from the tough fiscal and institutional decisions that will be required to end this crisis, if they feel that the ECB’s cash is doing the job for them. We still believe that in spite of the successful conclusion of Greece’s second bailout and in spite of the new fiscal compact, the euro zone has not nearly gone far enough in getting to the heart of the debt crisis. What’s been addressed so far is the problem of high debt. It is necessary to do this but it is not sufficient to end the crisis.”
Counter-intuitively, or perhaps in another display of “sell the news” the euro did not make "major" moves in the wake of the LTRO, and neither did the US dollar. In fact, a hint of weakness was initially detected in the common currency. Veteran market observer Ned Schmidt notes in his latest Value View Gold Report that while we “Would like to say signs of intelligent life exist in the currency markets, alas that is not possible. At New Year’s Eve speculators had the highest short position on the euro ever recorded. As of last week, they had returned to being net buyers. [I am] Trying hard to understand that. Less than 8 weeks ago the euro was [supposed to be] going to zero, and now they are buying it.”
Certainly, albeit gold did open about $2.50 higher in New York, yesterday’s enthusiasm levels were nowhere near detectable in today’s initial action. In any event, we once again were confronted with abnormal concurrent headlines that observed gold trading at a five-month high and the DJIA closing above 13K for the first time since the crisis erupted in 2008. Chalk it up perhaps to month-end book-squaring and such, but within the first half hour of trading gold went into slightly negative price territory and appeared more comfortable with dipping to near $1,770 (down $15) rather than making a fresh assault on the $1,794 overhead resistance figure which many had anticipated to be demolished this week.
SEB Commodity Research advises that, at this juncture, and given their scaled-back gold forecast (to $1,800 from $2,050 for this year’s average): “Rallies above previous highs should be regarded as good selling opportunities and may well be proceeded by dips on risk aversion as gold has tended to move in – rather than out of – synchronization with risky assets since the summer of 2011, which is bad news for gold as a form of portfolio diversification.”
Another very interesting metric – one that could offer further signs that something is out of kilter in the gold market – was brought to light by analysts at Briefing Research yesterday. Kitco News reporter Debbie Carlson covered the story in-depth. The upshot of the BR findings is that value of the cumulative cube of above-ground gold (near 170,000 tonnes has risen to 13.2% of estimated nominal world GDP. The figure stands at nearly $10 trillion, but the percentage it represents on NWGDP is at its highest since 1981. The ratio peaked at 18.1% back in 1970. However, BR notes that the "normal average has been closer to 7.4% since 1970 and that 'would be equivalent to a gold price today of $999 per ounce, a decline of 44% from current prices.'" (Food for careful thought, in the event you care about such cyclical market "trivia" as "reversions to the mean.")
Silver was still running on speculative inertia and showed a 7 cent gain (to $37.00 per ounce) in the early part of the morning following yesterday’s massive gain that unfolded despite a fairly dismal US durable goods orders report. In the same Value View Gold Report that dissects the speculative action in the euro, analyst Ned Schmidt places silver under the microscope and finds that it “is again trading like an option on gold. [The] Price of silver has been moved irrationally higher by traders of futures and options. Every time they have done so with any market, selling has been the best strategy. Silver is now again at a price that should be used to sell it. [The] Current market is the third selling opportunity that has developed. Rarely does a market present itself in such a way. Ignoring that offering is unwise. Looking a gift horse in the mouth three times does not make a lot of sense.”
Platinum moved $10 higher this morning (it was quoted at $1,725 per ounce) and South Africa’s labor action difficulties are still providing background support to the noble metal. Palladium was off by $2 at $718 per ounce. That unique metal has moved about 6% higher over the past month, while platinum has shown a 9% gain. Compare either one to gold’s 2.6% advance on the month. Rhodium was unchanged at $1,745 per ounce. Crude oil added another fifty cents and traded at $107.07 per barrel. It is worth mentioning that spec fever aside, every $10 gain in the price of black gold tends to shave two-tenth of a percent off of US GDP. Everything has a price.