If there was any previous doubt about the fact that many an asset market was over-dependent on a continuation of easy money policies by the Fed, well, that confirmation came over the past 24 hours. August gold prices cratered by over 3.0% on Thursday ($50.30 an ounce) after the Fed offered only a modicum of an accommodation gesture on Wednesday and the yellow metal appears on course to set its largest weekly decline since last December at this juncture.
As regards the shattered Fedspectations on Wednesday, certain commentators did not waste time in trotting out a fresh batch of future QE3 visions in order to offer some moral support to their badly shaken followers. However, as ever-dissenting Richmond Fed President Jeffery Lacker pointed out, even the current extension of Operation Twist for half a year is unlikely to spark inflation or to be of significant help to the economy of the USA. St. Louis Fed President James Bullard notes that a possible QE3 would have a very high hurdle in terms of the required negative economic metrics that might bring about its implementation.
Thus, for the time being, such expectations for QE3 will remain at odds with the reality in metals prices. A third QE remains a very distant prospect and it should not be the principal motivator for the bullish gold players out there to begin with, as QEs I and II have proven that hyperinflation does not necessarily follow such monetary policies. The Great Disinflation has in fact been with us since around 1985 and no amount of scaremongering hard money newsletter chatter about the imminent materialization of the Weimar Republic in Washington can disregard that hard reality.
On the year-on-year Kitco price change chart the yellow metal is now only ahead by 1.25% while in year-to-date terms it is actually down by 2.6% per ounce. The support levels that $1,550 and $1,525 are thought to offer will be closely watched in coming sessions and previous supports at $1,580 and at $1,600 have once again turned into overhead resistance markers. Black gold also underwent the largest decline (4%) since the end of last year with its dip to $78-and-change.
The deep decline seen yesterday underscored the fallacy of the perma-bull argument that gold is always a safe harbor type of asset. To wit, the mélange of downgrades of fifteen big banks by Moody’s should have been the catalyst for precisely the opposite of what took place in gold. Evidently, when the selling of assets reaches a fear-motivated, liquidity-aiming fever pitch, gold and silver (as well as oil) represent a resort that many do avail themselves of, as they did on Thursday. The euro, which had benefited a tad from the Greek elections and the G-20 meeting suffered its largest loss of the month as it too proved that one cannot stand in the way of the greenback when it roars down the track on such safe-haven quest-induced steam.
This morning’s spot price lows touched the $1,558 mark in gold while silver, which lost well over 4% on Thursday, came to within a few pennies of breaching its $26.50 support level and touched its lows for the year. One look at yesterday’s near-1% rally by the US dollar on the trade-weighted index (the largest in three months) is sufficient to account for some of the damage that was inflicted in the precious metals’ complex.
On the other hand the fact that commodities have entered a bear market did not escape some traders and neither did the fact that China’s manufacturing activity levels worsened this month and dipped to a seven-month low according to HSBC’s preliminary “flash” PMI. The readings coming from the European economic region did not offer any comfort either as that area’s manufacturing activity fell to a three-year low this month. Thus, most “stuff” fell on Thursday. Cotton traders certainly did not like the … feel of the commodity yesterday, as it plunged 6.9%. Coffee specs, on the other hand, perked up as the magic beans posted the only gains (along with natgas) in the commodity complex yesterday.
New York spot metals dealings opened mixed this morning, with gold trying to add a few dollars ($3.30) and trying climb out of the $1,560s but with the remainder of the complex still showing mild losses in value. The advance basically evaporated by the 9 o’clock hour in New York and gold tilted into red price ticker territory once again. Silver declined by 6 cents to $26.68 per ounce, while platinum dropped to $1,433 losing $2 in the process. CNBC relays the fact that monthly Swiss imports of raw and powdered platinum from South Africa, which is the source of nearly four out of five ounces of world supply of the noble metal, fell to their lowest in more than two years in May.
Palladium eased by $4 to $603 the ounce. Analysts at Standard Bank (SA) note that the “drop in Platinum Group Metals has been limited somewhat by another round of headlines highlighting the difficulties facing South African miners. Aquarius, the world’s fourth-largest producer of the metal, announced the suspension of its Everest mine (producing about 56k ozs. and 31k ozs. of platinum and palladium respectively). Royal Bafokeng announced that it would be delaying its capital expansion plans. The dollar was still up by 0.12% on the index, trading at 82.37 at last check.
Physical gold offtake remained lackluster, with CNBC also reporting that traders in India, the world's biggest consumer of the yellow metal, kept to the sidelines despite gold’s price free-fall, as they are apparently seeking a bigger eventual retreat in spot prices. The rupee's fall to a record low against the dollar kept local prices high however and local traders continued their disposals of gold inventory that were already being seen last week amid record local prices. Part of the current rush to sell gold is also motivated by the need to raise cash for agricultural supplies ahead of sowing season. As mentioned the other day, India’s farmers are keeping a wary eye on the thus far subpar monsoon rainfall as well.
Europe’s key leaders are meeting today in Rome to once again try to address that which the IMF has now labeled as being at a “critical” juncture; the debt debacle. The IMF said that the euro is now under “acute stress.” The Associated Press reports that the gathering of Germany, France, Italy and Spain caps an intense week for Europe, one “in which markets have been roiled on fears that the region's governments will not come up with adequate measures to fight the debt crisis and that Spain and Italy might soon need bailouts that the rest of the eurozone could not afford.”
And yet, there is still a certain unmistakably “European flavor” to all of this mega-money mess. Yes, the world of finance may be imploding all around them, but the EU’s leaders do have their…priorities in order, so to speak. We reported last week the Spanish PM Rajoy flew to Poland to watch a soccer match and support his country’s players immediately after Spanish banks had announced a need for a large cash injection. This morning, Germany’s Ms. Merkel moved the E-4 meeting up by a few hours in order to be able to…fly to Poland to watch her country’s players take on Greece’s. That should be as epic a battle as the one being waged between the two countries on the financial field. Goal!
We leave you now with your weekend’s entertainment as a present. Our good friend, TheStreet.com’s Gregg Greenberg has rounded up the five dumbest things seen and/or heard on Wall Street and he lists them here. They might not have to do much with gold or silver, but they are certainly worth a few minutes of your time if you have some of your own money walking the cobblestones on that particular downtown New York Street.
Have a nice weekend. Join me on Bloomberg Radio’s Surveillance today at 9:30 NY time for an in-depth look at the Fed-gold situation and a run-down of background fundamentals in the metals markets. End of shameless self-promotion. We now return you to your regularly scheduled life.