Weaker Metals Blamed on French Results

The electoral ouster of French President Sarkozy sent the euro into quite a tailspin on Sunday evening and that development helped the US dollar push aggressively towards the 80.00 mark on the trade-weighted index. The breach of the $1.30 level against the greenback by the sliding (to a three-month low) euro made the opening quotes in precious metals fall into the red column fairly swiftly. Declining metals prices were accompanied by a near 3% fall in the Nikkei Average, a slide in crude oil to four-month lows, and by a generalized retreat in risk-taking sentiment.

Spot gold bullion traded at lows near the $1,635 level in Sunday night trading, while the news from Paris also engendered bid-side quotes at near $29.90 for silver. Considering the fact that the second largest economy in the EU has just been handed over to Socialist control (for the first time in 17 years), and that the advent of Mr. Hollande’s tenure is likely to give rise to deeper rifts with previously stated German economic and budget deficit policies, the damage to the euro was relatively contained.

Albeit somewhat more stable, the metals markets opened to the downside in gold and in silver and with modest advances in platinum and palladium on Monday morning in New York. The action reflected a decline in the US dollar after last night’s surge to the round resistance level and the return by the euro to a level just above the $1.30 pivot point.

Spot gold lost $5 on the open to start the new week with a bid at $1,637 the ounce. Silver fell 20 cents to the $30.14 mark per ounce. Platinum climbed $5 to $1,528 while palladium rose $2 to $651 the ounce. No changes were noted in rhodium at $1,350 per ounce. In the background, crude oil was hovering under the $98 level per barrel down about 0.75%.

The most recently available CFTC positioning reports indicate that net speculative length in the yellow metal remains feeble amid lacking bullish confidence. In silver, the longs shed some more tonnage but so did the shorts, which could at first blush appear positive. However the substantially large short position of nearly 1,600 tonnes continues to reflect a similar lack of confidence in the white metal’s ability to stage a serious recovery and is, in the words of analysts at Standard Banks (SA) “a cause for concern.”

Platinum speculators built up hefty new long positions but their move was still being countervailed by a relatively sizeable short position being held by similar players who hold opposite convictions. Palladium positioning continued to improve but the longs still have some way to go before they can convince more players that there is cause of favoring platinum’s close relative in terms of a short-to-medium term play.

Most analysts concur with that view as certain car markets, despite being slower than they were last year, continue to consume robust amounts of the noble metal. Consider for a moment, the fact that a new car hits the road in China every 2.3 seconds (!) on average. Palladium is indispensable in that process.

That said, commodity speculators do get it wrong, on more than just one occasion. For example, as a group, hedge funds lifted their bullish commodity bets for the first time in a month-and-a-half just prior to the complex experiencing its largest…drop since last October. Oops. Meanwhile, investors pulled $357 million out of commodity funds by last Wednesday and they pulled $349 million out of precious metals.

Then again, such bets-gone-sour are not the exclusive domain of hedge funds. Retail investors have been pummeled by holding on to a wide range of gold mining shares. The old view that the miners offer “leverage” to the price of the yellow metal they mine has actually turned out to be true of late; in the opposite direction, that is. While gold lost nearly 10% since February’s high, the mining shares have fallen by some 21%. Marketwatch’s Peter Brimelow writes that “lagging gold shares have been the albatross following the great post-millennium gold bull market. Gold stocks have historically been tremendous money makers in bull markets and a rebound has been several times forecast.” Frankly, we have lost count of how many “several times” represents at this juncture. But, one of these days, who knows?

For mega-investor John Paulson that day cannot come soon enough. In April, his Advantage Plus fund lost 6.7% as the cratering in gold mining shares made its impact felt. Mr. Paulson is pedaling hard, trying to reverse the spectacular (record) losses he incurred last year. Commenting on the divergence between bullion and the miners, Mr. Paulson could only underscore the obvious as he addressed investors via a letter that must have been difficult to compose: “This disconnect has caused a large discrepancy between the gold spot price and the implied valuation of gold through gold equities.”

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