Rating agency Moody’s decision to leave Spain’s “investment grade” status unchanged on the eve of another EU summit brought a sigh of relief to certain speculative factions this morning. Albeit Spain did manage to dodge the downgrade to “junk” bullet, its current Baa3 grade and “negative outlook” by Moody’s will continue to weigh heavily on the minds of the “Europtimists” as we go forward.
As if that were not enough, the IMF’s Chief Economist, Olivier Blanchard, has made certain comments to Italian paper Corriere della Sera that are being interpreted as a prelude to Italy asking for “assistance” next. When and if Spain asks for a bailout, the immediate fallout will be a surge in speculation about just who might be next. Odds-makers give Italy the dubious distinction of being the odds-on favorite at this juncture.
Precious metals (with the exception of gold) headed a tad higher as the midweek session got underway in New York this morning. Spot gold was trading about $2 lower and was seen trying to maintain above the $1,740-$1,745 zone on the bid-side while spot silver initially eked out a two-penny gain to trade at $32.97 on the bid only to later also trade lower and nearer to the $32.90 mark. Platinum and palladium remained in the ‘green’ with the former showing an $11 gain at $1,652 per ounce and the latter rising $3 to the $642.00 per ounce level. No changes were noted in rhodium at $1,275 per ounce.
In the market background, copper was off by 0.32%, black gold traded 25 cents higher ($92.34) and the Dow was down by 38 points. The US dollar climbed back up above the 79 level on the trade-weighted index in the wake of a data release that showed US housing starts up by 15% last month – to a four-year (!) high. US housing and its fate is still seen by many an economist as holding one of the key…keys to the country’s economic recovery. Homebuilder sentiment, meanwhile, is running at a six-year high as of the last poll.
Late Monday’s EW snapshot analysis of gold opined that with the decline to under the Sept. 26 low gold broke the succession of higher highs and higher lows that has been manifest since May. EW says that gold has changed from trend up to trend down and that the initial support is now likely to be found at $1,693 per ounce – i.e., the 38.2% Fibonacci retracement level of the rally from the May 2012 low at $1,527.
Amid signs that Indian gold demand is faltering at a critical time, the World Gold Council is taking steps to stimulate purchases in the country that is pivotal to global physical demand. We will leave it up to others to judge the suitability of a non-profit trade promotion organization directly becoming involved in a scheme to offer a 7% discount on the purchase of gold coins in partnership with India Post and large financial house Reliance Money. However, the imminence of a string of auspicious gold-buying days (Oct. 24, Nov. 11, and Nov. 13) and the reluctance by locals to buy gold at or near recent gold values cannot be coincidental when it comes to the discount offer that runs from today to the end of the year.
Meanwhile, the world’s historically largest gold buyer upped tariff values on gold and on silver as of Tuesday. While the tariff value is the base price upon which customs duties are levied (in order to avert under-invoicing), the move once again underscore official efforts to curb gold imports – a posture that has been on display since the very beginning of this year in India. Gold imports are the second largest Indian import item (by value) after black gold, and they are seen as major contributors to the country’s burgeoning current account deficit. In that context, the announcement by the Central Board of Excise and Duty does not come as a big surprise.
Something, on the other hand, that might come as a large surprise (to some, anyway) is the fact that China might not turn out to be the huge buyer of gold that folks are asserting it will. HSBC market analysts note that – based on the 29% drop in mainland August gold imports from Hong Kong – “China’s near-term appetite for gold appears to be waning as bullion imports from Hong Kong slow.” There is, however, more to this story than just the perception that gold inventories on the mainland are saturated.
CLSA strategist Russell Napier warns that China’s cooling “could have grave consequences for the gold price.” The slowdown in the world’s second largest economy – and its impact not just on gold but on most other commodities as well – is a topic we have attempted to consistently bring to your attention for the better part of the past 18 months. Mr. Napier bases his caution on the fact that China has been the single most critical factor in global money creation over the past five years.
Those who still try to tell us bedtime stories about how Messrs. Obama, Bernanke and Geithner are down there in a basement near 1500 Pennsylvania Ave., two-tenths of a mile away from the White House, feverishly printing trillions of little green bucks in non-stop fashion, might wish to take note of the actual reality that it is in fact China that has been responsible for 40% of all the “fresh” money that has been created globally since 2007.
Now, however, the economic powerhouse that China has been is showing signs that double-digit growth is not carved in stone for decades to come. Along with the brakes being (perhaps unintentionally) applied to its economy, China is creating less money, and it is looking at lower inflation (maybe deflation) and perhaps higher real rates. That combination, according to Mr. Napier is not conducive to stratospheric gold prices or to China buying thousands of tonnes of the yellow metal either.
While still on the subject of China, let us look at another potential problem for metals as a result of what is going on there. The situation concerns platinum demand. The analytical team over at Standard Bank (SA) noted this morning that while the labor strife in South Africa is still a major watch item for platinum supply side equations, so is the Chinese demand (or lack thereof) for same.
The team writes that:
“The customs data shows China’s platinum imports for 2012 were off to a weak start but picked up substantially in May to August. YTD China has imported 1.8m ozs. of platinum, compared to 1.68m ozs. in 2011. While the absolute number of ounces of platinum and palladium imported into China so far this year is important to us, our main interest lies with the behaviour of imports relative to the price.
“With the platinum price rallying from $1,400 to $1,700 in January and staying above $1,600 until the start of May, platinum imports into China fell well below levels seen in 2009-2011. However, when the platinum price dropped towards $1,400 in May, imports into China picked up substantially. The rising stronger imports of platinum in China continued right through August.
“The key question to us is whether platinum demand will continue to remain robust in September and October in the face of supply disruptions and higher prices. We believe that import demand for platinum is likely to wane. This view is based on the fact that the import demand is jewellery-driven, not by concerns over metal shortages. As a result, higher prices should once again result in less demand for platinum. Therefore, we believe that platinum will find it difficult to maintain rallies above $1,700 in Q4.”
As for silver, the most recent EW update notes that the white metal’s decline to a low of $32.53 – coming at a time when net retail speculative long positions were as high as they have been since August of last year (!) and large spec net longs were at levels actually higher than the top in April of 2011– implies that “there is no stronger warning of a rally failure and important top than seeing funds reach a prior buying extreme before prices reach new highs.” The next support level in silver, according to EW, rests at the$31.89 per ounce 38.2% retracement level, with “greater bearish potential” also in the cards (see: $26.11 which was the late June low).
Until next time,