Metals update for May 19

Wild-and-woolly does not begin to describe the action in the markets following yesterday afternoon’s announcement that Germany would no longer tolerate nudity, certainly not among the short-sellers of euro-flavored assets such as bonds and bank shares. Stocks and commodities took a severe hit after the ban was announced and, while gold rallied initially, the sheer number of players who suddenly had to cover trading losses and market margin calls in other assets overwhelmed bullion and it too, succumbed to the mounting selling pressure, falling to an overnight low of $1201.20 per ounce.
Germany’s Chancellor Angela Merkel drew a line in the markets’ sand and declared that naked short-selling was a threat, and that the euro was at risk and that Germany would act alone against ‘destructive’ agents in financial markets. "The lack of rules and limits can make behavior in financial markets driven purely by the profit motive destructive and lead to an existential threat to financial stability in Europe and even the world," Merkel told lawmakers in Berlin today. "The market alone won't correct these mistakes," Merkel said.

Thus far, it appears that Ms. Merkel’s enforcement troops will have to go at this ban on their own, as France and other would-be allies did not jump on the ‘bandwagon’ just yet. Sellers (naked or not) were still visible overnight, as the euro dipped to a four-year low near 1.21 and as market participants bit back with a vengeance, dubbing the Chancellor’s actions as ‘desperation.’

New York metals trading opened with sharp losses across the complex, with platinum and palladium (more so) pacing the decline in percentage terms. Gold fell $18.90 to open at $1204.10 spot bid, in an extension of the correction that materialized on Tuesday but was then negated by the afternoon rally.

Support in gold is thought to be found between the broader $1180-1200 band and resistance has now materialized in the $1220-1230 area. The dukefest of the specs versus governments will define the action as we head into pre-weekend book-squaring time.

Nonetheless, German ‘bazookas’ and lines in the sand may prove insufficient and more might be needed, says Harvard’s Prof. Kenneth Rogoff. He argues that one solution would be to temporarily allow certain countries to leave the euro and rejoin the union after they carry out some thorough house-cleaning.

Silver dropped 50-cents out of the gate this morning, starting the session at $18.50 per ounce. Platinum slid $51 per ounce, opening at $1616.00 while palladium lost nearly 6% or $28 to reach a low of $469.00 at the open.

Rhodium slipped $10 to the $2740.00 mark. Oil prices also headed lower, with crude losing 80 cents to drop to the $68.62 level as the dollar gave back 0.26 on the index (last seen at 87.09) and as the euro hung on by a thread above the 1.22 level. This morning’s market focus is indeed on the noble metals niche. An in-depth look offers a mixed bag of good as well as not-so-good news on the automotive front. Analysts at Standard Bank (SA) have just forwarded us data the reveals that “auto sales in the large economies have slowed from the highs reached in March.”

However, the Standard Bank team also finds that “looking at the 4 big auto markets (US, Japan, China and Europe), on a year-on-year basis, auto sales still match levels seen before the economic slowdown of late 2008.”

Now, for the regional break-downs, as relayed by the SB team: 1) China’s auto sales in April posted a 35% year-on-year increase. Auto sales in China registered 1.55 million units in April. Month-on-month, the auto sales look weak(er), with a 10% decline from the figures seen in March, and the dominant driver in the m/m decline in April sales was (likely) due to seasonal factors.

2) At an aggregate level, auto sales in these four large markets reached 3.8m units in April. That is 16% higher than the April 2009 figure but 18% lower month-on-month. As with China, March is (typically) the strongest month for auto sales in Japan, the US and Europe. Strong sales in March followed by lower sales in April have consistently been the case over the past 10 years. Even in these markets a m/m decline in April sales is largely seasonal.

3) However, the SB team does note “with some concern” that this year’s April month-to-month decline in European new car registrations has been the largest m/m decline for any April in at least 10 years. In April new car registrations were down 21.9% in Europe.

4) Standard Bank is looking for a marginal rebound in m/m auto sales throughout May in Europe and Japan. Should this not transpire, we would become more concerned about the strength of PGM demand from the auto sector. Looking at past seasonal sales patterns, May is also set to see a m/m decline in Chinese auto sales. However, a m/m decline of larger than 10% may indicate a slowdown in demand greater than the usual seasonal factors.

Finally this morning, an unexpected drop in US consumer prices dented US stock futures ahead of the Dow’s opening. More importantly, the roundup of inflationary gauge figures revealed that core CPI – the figure which excludes food and energy prices in order to get a better view of underlying inflation -- was –according to Marketwatch- “unchanged in April, lowering the year-over-year increase in core inflation to 0.9%, the lowest rate since January 1966.” Inflation? What inflation? Depends on whose newsletters you happen to read.

Look for more concerted EU missiles to be lined up against nekkid sellers. You do not mess with officialdom, now that it is (finally) awake. But, try they will.

“Above all, accept randomness. Accept that the world is opaque, majestically unknown and unknowable. From its depths emerge the black swans that can destroy us or make us free. Right now they’re killing us, so remember to shave. But we can tinker our way out of it. It’s what we do best.” –Nassim Nicholas Taleb author, “The Black Swan: The Impact of the Highly Improbable.”

Happy (Careful) Trading.

Jon Nadler

Senior Analyst, Kitco Metals Inc.North America

Websites: www.kitco.com and www.kitco.cn

Blog: http://www.kitco.com/ind/index.html#nadler

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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