Although precious metals attempted to bounce back from Friday’s sell-offs on Monday, they resumed their downward path with a vengeance this morning. Tripped up by a significantly stronger US dollar, spot gold prices fell to a fresh six-week low only $5 above the pivotal $1,700 mark and lost nearly $25 in the process. The yellow metal fell under its 50-day moving average of $1,724 per ounce.
EW late Monday analysis opined that albeit gold could rebound towards $1,730-$1,750 an ounce, such a path is not a given and that the odds of a renewed visit to sub $1,700 levels are increasing as the trend has shifted recently. Silver dropped by over 90 cents in early Tuesday trading and it neared $31.50 in the cash market. Background markets showed the US dollar up 0.60% at 80.01 (!) on the index (a flight to good old cash), crude oil down $1.40 at $87.25 and copper off by 1.1%
Physical demand in India remains characterized as “subdued” as locals are speculating that the stronger greenback will curb the appetite for gold and silver as an alternative investment. As the country is now in the midst of festival season such reluctance to jump in and buy cannot be seen as a good omen for this year’s total Indian gold tonnage demand. The noble metals were not spared the drubbing either, as platinum lost $33 and broke to well under the $1,600 level to reach $1,571 per ounce, while palladium declined $26 to touch $598 on the bid-side. Rhodium was unchanged at $1,250 the ounce.
The above-mentioned hefty declines in precious metals values occurred despite the FOMC meeting which concludes tomorrow; a meeting that some still see as resulting in an announcement of some type of expansion of the Fed’s recently announced QE3 program (whether in the type of assets to be purchased, or in its duration). Others believe that given the most recent string of positive US economic indicators the Fed will leave well enough alone and make only cliché statements about its intended course of action.
The past couple of weeks have offered a sufficient amount of good US economic news on various fronts (labor, manufacturing, and housing) to bring into question the possibility that the Fed may have acted without “cause” last month and that it may have to depart from its accommodative stance sooner rather than later.
This morning it was revealed that US home values climbed by 1.3% in September; that would be their biggest gain since before the US house of cards collapsed after 2006. A decline in Spanish bonds and a warning that Greece may run out of money while tensions related to its austerity package are rising, all added to the malaise being seen among market participants. Spain’s economy contracted for a fifth consecutive quarter and bailout chatter continues to fill various trading (and political office) rooms in Europe. The net result was that commodities erased their year-to-date gains following a 0.6% slump in the S&P GSCI gauge earlier today.
In the case of gold, the analytical team over at Standard Bank (SA) describes current market participants’ sentiment (and actual spec positioning) as follows:
“Investor uncertainty over the ability of QE3 to support prices and/or the longevity of Fed’s open-ended commitment to easing is weighing on gold. This has now been acutely manifest in futures market positioning. After eight weeks of consecutive increases, net speculative length for Comex gold has fallen, losing 58.5 tonnes this past week.” As has been noted here all year long, and most recently by analysts at ForexPros.com, “moves in the gold price this year have largely tracked shifting expectations as to whether the U.S. central bank would pump more money into the financial system.”
Another sign that traders feel that most central banks have come to the end of the road in terms of what they can do to further stimulate various economies is seen in the $4 trillion-per-day foreign exchange market where the hitherto profitable carry trade has experienced a sharp contraction in activity (and profits). Average daily trading volumes in FX have fallen by 39% last month vis a vis year-ago levels. One would think that selling low or no-cost borrowed US dollars to buy, say, Brazilian reais (whose target interest rate is 7.25%) would be a nice “carry.” Instead, such a bet has lost money and “carried” many a wrong-way bettor into a state of chagrin as the Brazilian currency took a nosedive this year.
Speaking of currencies that plunge, we are obligated to report that the American one – you know; the reserve currency that was supposed to be deceased by now according to the vast majority of hard money newsletter publishers – is alive and well. This however does not mean that folks are not wise to seek various hedges against the buck (at least for a small portion of their asset basket) in the event that unforeseen circumstances bring potential declines in its value.
Of course, gold immediately jumps to mind for many, and there is no argument that a 6% up to 10% (15% if you feel flush or extremely anxiety-ridden about that “hyperinflation” which also refuses to show up in the headlines) could be a prudent way to go about such protection. There are however – in the opinion of Investment Daily’s Roger Conrad – at least four superior US dollar hedges also available to you if you feel the need for dollar-insurance.
First off, Mr. Conrad mentions the…loonie. O, Canada! Yes, our currency, says Mr. Conrad, will generally follow energy prices higher and despite occasional setbacks against its US sister, our buck could offer better shelter than your buck. Ditto the Aussie one – it has been a “major winner” against the greenback during the past decade. And, yes, even the currently beleaguered euro could stage a comeback and outperform the US fiat. Recall that a decade ago the common currency of the Old World was worth 90 cents and that it traded near $1.60 just four years ago. Mr. Conrad also proposes taking a look at various dividend-yielding equities from the aforementioned countries as well.
While on the topic of stocks, let us not forget good old US ones. As it turns out (at least up to this moment in 2012) US stocks (see: the S&P 500) are leading every major asset class in performance. In fact, American stocks are outperforming every other competing asset for the first time in 17 years this year. To wit: the S&P has posted a 15.2% YTD gain while, for example, emerging market equities, gold, and US Treasuries have recorded gains of only 11.8, 10.9, and 2.6 percent respectively.
Contrary to the ever-present market doomsday predictions being offered in certain newsletters, Wall Street strategists opine that we might witness new highs in the S&P in 2013. How high is "high?" – take the 1,585 level as a possibility. Of course, on the road to such potential summits, one will also have to contend with days such as today – as of this writing, Wall Street was on track to post a sharply lower opening owing to “earnings-watch Tuesday.” Bellwether DuPont’s earnings hit the skids and others such as UPS, Xerox and Radio Shack did not fare too well either.
Still, the Dow – near 13,350 – is more than twice as high as it was in the dark days of 2009 and is only some 700+ points away from its all-time peak. It must also be mentioned that tandem gains in the Dow and in gold – very much on display since 2009 – are not the normal order of the day in the investment universe. Gold is supposed to offer shelter from a sharply declining stock market, from a sharply falling dollar, from alarmingly high inflation rates. None of these have been an issue and therefore certain rhetorical questions need to be posed. But we will leave those for another day…
Until next time,
