Declining Metal, Commodity Influence for QE3?

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.

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