The pre and post-QE3 “specuphoria” that lifted certain assets quite nicely during the past quarter continued to show signs that it is disspating (at least until Fed President Evans stoked the bulls with visions of QE3 lasting through 2013) as “reality” catches up with overly bullish market participants. “Reality” as applicable to the markets means the situation in Europe, China, and the US. The fourth quarter began with modest losses in precious metals as well as the US dollar and the euro this morning.
Spot gold started the new month with a $3 loss and it was quoted at $1,768 per ounce in New York. Silver fell 20 cents to open near $34.31 the ounce. Indian physical demand related to upcoming festivals has still not materialized, but, on the other hand, scrap gold sales in that country are surging in an impressive fashion, courtesy of high gold prices and the weakening rupee.
Keralanext.com reports that “The Bombay Bullion Association (BBA) estimates the supply of recycled gold in India will hit 300 tonnes in 2012, up about five-fold from 2011 and the highest in more than a decade. India's scrap market in 2011 was only 58.5 tonnes, or 6% of total gold demand of 969 tonnes, but it is being boosted as consumers baulk against paying a 4% import tax and with the local price of gold near a record high of Rs 32,421 per 10 grams. Farmers in India are the biggest buyers of gold which they use as savings in the absence of a functional bank network. This year, because of a drought in parts of the country, they are having to cash in gold to pay off loans taken out to purchase fertiliser and seeds, which have in many areas failed to produce a crop.”
The potential for recycling hoarded bullion is staggering. India's 1.2 billion residents are estimated to have amassed up to about 21,000 tonnes of the yellow metal in the form of jewellery, coins and bars. This, according to an estimate from industry body the World Gold Council. The stash amounts to about two-and-a-half times the holdings of the US Treasury (8,100 tonnes give or take).
Standard Bank’s (SA) analysts noted this morning that there has been a “considerable slowing in [gold speculative] CFTC-reported long positions having been added in the post-QE3 announcement environment” and that “it takes very little to spur long liquidation.” A quick round of “QE math” shows that, indeed, the QE-related boost in gold prices has been steadily diminishing ever since such Fed accommodations began.
While gold gained about 16% prior to QE1 being launched and it also added about 18% thereafter, QE2 managed to add 12% to gold prices before it was announced in late 2010, but it boosted bullion values by only 1.2% during the ensuing three months. Cut to 2012: gold advanced by about 10% before last month’s Fed announcement and it has only risen 2.3% since that time. Vedant Mimani over at Atyant Capital Global Opportunities sums it up as follows: “This declining influence of QE3 on metal prices [shows that] the Federal Reserve’s monetary expansion is not translating into private-sector credit growth and materially effecting[sic] the real economy.”
A similar pattern was noted in the silver market’s spec positioning based on the latest CFTC reports. Only 130.9 tonnes of long bets were added and there was a “disconcerting increase in speculative shorts” –amounting to 133.3 tonnes. Platinum advanced $2 to $1,661 while palladium lost $5 to open at $632 per troy ounce. Rhodium climbed $25 to the $1,150 per ounce mark on the bid-side.
Speculative positioning in platinum and palladium appears to indicate growing confidence on the part of players that the recent gains can not only be maintained, but also perhaps be built upon, going forward. In the background, we noted crude oil falling 42 cents to $91.80 per barrel and copper losing 0.36%. Commodities specs slahsed thei bullish bets by the most in four months as the aformentioned QEuphoria continued to wear off last week.
Players are becoming concerned that QE3 will not be effective in averting a US economic slowdown, especially when the rest of the world is slowing at a worrisome pace. Aside from that, the roughly eleven percent Fed-induced appreciation in various commodities during last quarter has prompted more than one speculator to cash in some chips and to show investors that, notwithstanding the flat-to-down first half of the year performance, hey, we can still make some money (albeit not based on fundamentals).One technically-based school of (Elliott Wave) thought feels that a few solid closings above the $1,800 mark in gold could prompt a run to new all-time highs somewhere above $1,920.
Others see major difficulties in gold maintaing high(er) prices for very long. Among the reasons being cited by Forex.com’s director of research, Kathleen Brooks, for such a “topping out” in bullion are: “De-leveraging and growth concerns in the euro zone, the [looming] fiscal cliff in the US, [eventual] stability in the euro zone, central banks becoming increasingly ineffective, and the fact that from a technical perspective gold is due a pull-back after so many years in an uptrend, also in the last five years the pace of annual gains has slowed, suggesting there is some caution entering the gold market. But the fundamental reasons, including deleveraging in the developed world and weak inflation pressures could also ease upward pressure on gold.”
The US dollar was down 0.37 at 79.83 on the trade-weighted index while the euro struggled to keep near $1.29 (it was last seen at $1.289). The gains eked out in European equity markets were tentative, at best, owing to China having posted the eleventh consecutive month of a slumping manufacturing sector activity. While the HSBC PMI was up to 47.9 from September’s 47.6 showing (the official reading of the PMI rose to 49.8 from 49.2), the bottom line is that the country’s new orders were down for the eleventh consecutive month and that new export orders fell at the steepest rate in 40 months.
The developments prompted several economists to project an annualized growth rate for the world’s second largest economy at only around the 7% level for this year. The PBOC appears to have run out of monetary stimulus ammo in the same fashion that some believe the Fed has also exhausted its rounds in the barrel. The Chinese central bank has already cut rates twice in the year-to-date.
For the time being, the focus shifts to the upcoming governmental transition in the country and to how the reshaped leadership will choose to deal with the still-slowing and downard-pointing flight pattern of the country’s economy. Clearly, the hope is that when a landing comes-as it always does after a soaring phase- it turns out to be less than”jarring” for everyone concerned. Meanwhile, mainland markets are closed for the “Golden Week” holiday.
Over in the Old World, the euro bounced slightly after having touched three-week lows. The lift was owed to regional manufacturing activity indicators coming in at slightly better levels than anticipated. However, there are plenty of remaining worries on tap –especially those related to the progress (or, rather, the lack thereof) that Spain is making as it inches closer and closer to a bailout.
Currency analysts believe that path of least resistance for the euro remains towards lower levels so long as Spain does not apply for a rescue. A possible further credit downgrade of Spain by Moody’s could force a request for a bailout. Fpr the time being, all that Moody’s has said is that the imminent recapitalization of Spanish banks is a “credit positive” but that it will ultimately be “insufficient.” Speaking of currencies and of analysts, guess which European “fiat” is fast-becoming the new Swiss franc (in terms of attractiveness and robustness)?
If Sweden’s krona is was not the answer you had in mind, well, you might wish to reconsider. Here is a country with a growing economy, a trade surplus, and a falling debt load; all of the necessary ingredients for a desirable currency to hold. The Swedish currency could appreciate another 3.5% to 4% against the US dollar if current trends continue. The krona could well take...the crown from the franc when it comes to safe-haven king. Unlike the Swiss franc however, the krona is not at risk of being stopped from appreciating by the country’s central bank (at least not at the present time). Viva Stockholm! Wait: that’s “Länge leve Sverige!”
Meanwhile, euro-regional unemployment rose to its highest level on record – 11.4% in August. The number repeated the levels recorded in June and in July. The records being kept date back to 1995 and they imply that more than 18.2 million people are without a job. One ING analyst believes that the situation is still worsening and that unemployment levels could increase further from here on. The problem appears no longer to be confined to the peripheral EU countries and it is showing signs of cropping up in the so-called “core” nations as well.
Other nations are hard at work trying to tackle the problem of burgeoning deficits. The “Socialist” solution presently being implemented in France could well produce the largest cut in that country’s public deficit in over thirty years while it could also bring France’s deficit down to 3% of GDP next year. In case Mr. Romney cares to glance at President Francois “Marshmallow” Hollande’s proposals, well, he might learn that they are anything but “soft” and/or spendthrift-y. Au contraire, the new French budget provides for raising the top tax rate for the nation’s most fortunate denizens from the current 41% to 75%. Take zat, Monsieur One Percent!
Speaking of certain nations, when it comes to the truly unfortunate ones, we have learned over the weekend that at least one application of windfall profits from surging gold prices will be of the very noble variety. Far from merely further lining the pockets of the lucky seller, the $3.8 billion in gains on the sale of the IMF’s (partial) gold holdings will go directly to the aid of poor countries. More than $2.7 billion of the windfall will be utilized to subsidize loans to nations in dire straits at zero percent interest. And some (still) say that the IMF is nothing but an evil organization that (along with the World Bank) only wants to propagate American and European hegemony…
Until next time,